Given the recent history of events, policymakers are increasingly—and justifiably—focused on building economic resilience. But if the trend continues, we could see a broad retreat from global rules of engagement and, with it, a significant reversal of the gains from economic integration.

Let’s take a closer look at how far we have gone down that route already.

New trade restrictions have increased sharply—more than tripling since 2019—while financial sanctions have also expanded. The geopolitical risk index has spiked since 2022 following Russia’s invasion of Ukraine.

And private sector concerns about fragmentation—gauged by the number of mentions in corporate earnings calls—have surged.

Despite these trends, there are not yet clear signs of deglobalization at the aggregate level. But under the surface, there are increasing signs of fragmentation. Trade and investment flows are being redirected along geopolitical lines.

What about the implications of geopolitics for global trade relations more broadly?


Consider a world divided into three blocs: a U.S. leaning bloc, a China leaning bloc, and a bloc of nonaligned countries.

The path forward will depend on policymakers. They may accept rerouting of trade and FDI in order to preserve some of the gains of economic integration. Or they may continue to raise barriers for cross-border trade and investment, further breaking both direct and indirect links between politically distant countries.

Despite increased geopolitical risks, the latest data show that the U.S. dollar remains dominant. According to SWIFT, it accounts for over 80 percent of trade finance, likely because much of commodity trade continues to be invoiced and settled in dollars.

Trade is the main channel through which fragmentation could reshape the global economy. Imposing restrictions on trade would diminish the efficiency gains from specialization, limit economies of scale, and reduce competition.

The capacity of trade to incentivize within-industry reallocation and generate productivity gains would be stifled. Less trade would also imply less knowledge diffusion, a key benefit of integration, which could also be reduced by fragmentation of cross-border direct investment.

Adhering to existing legal frameworks is also critical for maintaining trust between countries and in the international monetary system.

While rebuilding trust is difficult and may take time, it is critical to avoid the worst outcomes in a rapidly fragmenting world. It is well worth it to preserve some of the enormous gains from economic integration that have made the world more prosperous and more secure.