Dubai, UAE — Trade and financial fragmentation is no longer confined to strategic competition between major geopolitical rivals. New restrictions on trade, investment and capital flows are increasingly affecting long-standing allies, raising concerns that divisions in the global economy are becoming more deeply entrenched.
A report published by the World Economic Forum (WEF) and consulting firm Oliver Wyman found that fragmentation accelerated through 2025 and 2026 as governments expanded tariffs, investment controls and other economic security measures.
While earlier concerns focused on tensions between blocs led by the United States and China, the report said the latest measures increasingly involve traditionally aligned economies, including the European Union, Canada, Japan and South Korea.
The shift marks what the report described as a broader structural transformation of the global economic system, with businesses facing rising uncertainty over supply chains, investment decisions and market access.
Economic Costs Begin to Mount
The report estimates that current fragmentation policies are already costing the global economy between $213 billion and $307 billion annually.
Those costs are being felt through higher prices, weaker trade flows and reduced efficiency across international markets. The analysis found that existing measures are adding between 0.2 and 0.3 percentage points to global inflation, further squeezing household purchasing power.
The impact extends into labour markets. In the United States, real wages are estimated to be 0.33% lower for low-skilled workers, 0.49% lower for medium-skilled workers and 0.66% lower for high-skilled workers than they would otherwise be.
Business leaders interviewed for the report said the greatest challenge is growing unpredictability around tariffs, sanctions and industrial policies, which complicates long-term planning and investment decisions.
“If current trends continue, uncertainty rather than efficiency may become the defining feature of global commerce,” the report warned.
A More Severe Scenario
The WEF’s modelling suggests the economic consequences could become significantly larger if fragmentation deepens.
Under a severe escalation scenario, global economic output could decline by as much as $6.9 trillion, equivalent to 6.4% of global GDP. Such losses would exceed the annual output of every economy in the world except the United States and China.
The findings suggest that fragmentation is no longer merely a geopolitical issue but an increasingly important macroeconomic risk capable of reshaping trade patterns, capital allocation and growth prospects for years to come.
Financial markets have so far remained resilient, according to the report, but policymakers face mounting pressure to preserve confidence in cross-border financial systems as geopolitical tensions persist.
Emerging Markets Face the Greatest Risks
The report found that emerging markets and developing economies are likely to bear a disproportionate share of the burden.
Countries outside the major geopolitical blocs could experience output losses of 10.7% under an extreme fragmentation scenario, compared with a global average decline of 6.4%.
Many developing economies rely heavily on foreign capital and cross-border financing, making them more vulnerable to disruptions in international financial flows.
Africa illustrates both the risks and potential opportunities. While a fragmented financial system could make development funding more expensive and less predictable, regional initiatives such as the African Continental Free Trade Area (AfCFTA) and the Pan-African Payment and Settlement System (PAPSS) offer mechanisms to strengthen resilience and reduce dependence on external financial networks.
The continent could also benefit from longer-term trends, including population growth and rising demand for critical minerals used in energy transition technologies.
Seeking Guardrails
The report argues that fragmentation is unlikely to be reversed in the near future, but policymakers can take steps to reduce its economic damage.
Among its recommendations are establishing common safeguards for the international financial system, improving transparency around the use of economic sanctions and trade restrictions, preserving interoperability between payment systems and supporting regional integration initiatives.
The report also calls for greater policy predictability to help businesses manage investment decisions and maintain cross-border financial activity.
For policymakers, the challenge will be balancing national security concerns with the need to preserve an international economic system that has underpinned decades of growth.
As governments increasingly turn to economic tools to pursue strategic objectives, the report suggests the costs of fragmentation may ultimately extend far beyond the countries directly involved in geopolitical disputes.
