There is substantial empirical evidence that the global system of trade is fragmenting. The bigger question is how far the fragmentation will spread, and whether it becomes adaptive or harmful. No business can afford to ignore the potential consequences.
Since the 1990s, regional trade agreements proliferated rapidly. Almost all members of the global trading system belong to at least one. This has unfortunately led to a mix of overlapping rules and standards, as well as often granting preferential treatment to ‘insiders’. This has been slowly weakening the global principle of non-discrimination.
Recent developments also show strain in the global system. The World Trade Organisation’s dispute settlement system appears paralysed by contemporary actions, undermining enforcement. Reform deadlock is moving countries towards plurilateral or regional alternatives. Bilateral deals are effectively undermining core global tenets. This suggests fragmentation is not just structural, but institutional.
Geopolitics and Trade – how global disruption is redrawing trade patterns
"Trade is increasingly being built on geopolitical alignment. Deterioration in political relations has already reduced global trade volumes. Events such as the Ukraine/Russia war and US/China tensions are contributing to bloc-like trade patterns, and so-called friend-shoring."
Trade liberalisation is also becoming increasingly selective, where countries integrate strongly with some partners, but not with others. While the world is not deglobalizing entirely, there is significant evidence that it is becoming unevenly connected.
Trade Creation v Trade Diversion effects
Fragmentation produces two profound effects: • Trade creation, represented by increased trade within blocs • Trade diversion, characterised by less trade with outsiders The balance between these two determines long-term outcomes.
- Scenario 1 – Economic impact of moderate trade fragmentation If we assume moderate fragmentation, the effects are likely to be slower, with positive global trade growth, more complex rules and a rise in compliance costs, regional reorganisation of supply chains, and a continued role for global institutions, albeit potentially a weaker one. The result is a form of multi-layered globalisation rather than a breakdown.
- Scenario 2 – Economic blocs of deep global trade fragmentation A higher risk scenario is where there is deep fragmentation into rival blocs. This could lead to significant efficiency losses due to less specialisation and duplication of supply chains, a reduction in technology transfer and innovation-sharing, lower global GDP, and disproportionate harm to developing countries. This scenario is characterised by Cold War-like economic blocs leading to reduced global welfare.
- Scenario 3 – A hybrid model of the integration of regional and global trade Between these extremes is a hybrid model that represents probably the most likely scenario. Under this system, regional agreements can act as building blocks for future global rules, new areas such as digital trade and climate rules can advance faster regionally, and the global system becomes more modular and flexible. There is historic evidence of regional trade agreements pioneering rules that are later adopted globally. The outcome of this scenario is that fragmentation becomes a transitional phase rather than a permanent issue.
Key trends and fundamental changes
Across the scenarios, several apparently durable trends are emerging. These fundamental changes include:
- Higher transaction and compliance costs
Multiple overlapping trade agreements create more rules, standards and bureaucracy.
- Recasting of supply chains
We are witnessing a movement away from global efficiency towards resilience and political alignment.
- Reduced universality
The erosion of most favoured nation principles means less predictability and fairness in trade rules.
- Increased importance of geopolitics
Trade flows are increasingly reflecting alliances rather than comparative advantage.
How should businesses respond to global trade fragmentation
As the lowest-cost global sourcing model becomes increasingly risky, businesses need to adapt. Suppliers should be diversified across multiple countries and not just one region. China plus and region plus strategies are becoming increasingly critical. Opportunities also exist around onshoring, nearshoring and friendshoring. Fragmentation raises the risk of tariffs, sanctions, or sudden disruptions. A slightly higher cost base might prevent catastrophic supply failure.
Instead of a single globalised system, businesses also need to focus on regionalised operations. This means separate production, compliance, and distribution by region, for example US, EU and Asia blocs. It also means adapting products to local regulations and standards, and requires the duplication of critical capabilities across regions. The effect is lower efficiency, but greater resilience, market access, and political insulation.
Navigating fragmentation means tackling rules of origin, tariff schedules, and regulatory standards. Smart firms will invest in advanced trade compliance systems, such a AI-assisted classification, and origin tracking. They will build in-house expertise around trade law and policy, and continuously monitor trade agreements and sanctions regimes. Compliance effectively becomes a strategic function, not just a legal obligation.
As trade is becoming increasingly linked to politics, businesses would be wise to model tariff shocks, sanctions or export controls, currency fragmentation, and market access restrictions. Geopolitics needs to be treated like financial risk, requiring companies to run stress tests and form contingency plans.
Businesses should also think in terms of regional, rather than global, trade ecosystems. Examples might include a North American supply chain, European supply chain, or Asia-Pacific supply chain. This could lead to operating parallel supply chains but with each optimised for a bloc.
Digital infrastructure and supply chain visibility
Fragmentation increases complexity and visibility becomes critical. That is where investment in digital infrastructure becomes vital. Key tools include real-time supply tracking, digital twins for scenario modelling, and use of blockchain or traceability tools for rules-of-origin compliance. These lead to faster responses to disruptions and regulatory changes.
Not all markets are likely to be equally accessible. Businesses will need to prioritise markets aligned with a company’s ‘home’ regulatory bloc. They might also consider evaluating exposure to politically sensitive regions, and partial exit from high-risk markets.
Relationships with governments and regulators are likely to become increasingly important, as policy directly influences market outcomes. Leading firms will engage in trade policy discussions via industry groups, monitor regulatory trends, and build government affairs capabilities.
As ‘just-in-time’ is displaced by ‘just-in-case’, businesses will need to ensure they do not overstock everything and focus on high-risk, high-impact components.
The Future - Balancing cost, resilience and geopolitical alignment in modern day trade
The old way was to focus on minimising cost at all times. The new reality is the need to balance cost, resilience, and geopolitical alignment. Companies that hold onto pure cost optimisation are likely to find themselves most exposed. Forward-thinking companies will be those treating fragmentation as permanent, investing early in flexibility and intelligence, and accepting some inefficiency in exchange for resilience.
Global trade has been built over many centuries, escalating across the late Victorian period, through the twentieth century and into the twenty first. For that to unravel is doubtful at the very least. However, the world is experiencing major change: political agreements are being realigned, geopolitical blocs are forming, armed conflicts are increasingly impacting global trade, and just-in-time supply models are coming under extreme strain.
All of this implies that although global trade is unlikely to collapse, it is likely to evolve towards a more regional, politically structured and complex system. The biggest risk is not fragmentation itself, but fragmentation into hostile blocs. If that happens, the costs in terms of lower growth, reduced innovation, and weaker global cooperation, could be substantial.
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