Financial fragmentation from geopolitical turbulence is reducing gross domestic product (GDP) worldwide growth by between US$213 billion and US$307 billion, according to new research by World Economic Forum (WEF) in collaboration with Oliver Wyman.

Further escalation of this fragmentation could severely worsen this damage, lowering economic output growth by up to 6.4% points and causing one-year economic output losses of up to US$6.9 trillion worldwide.

The impact of policy shifts will vary substantially by country, reflecting different degrees of exposure. In a scenario where fragmentation escalades, the most affected countries would be the “Neutrals”, which include Brazil, India, Indonesia, Mexico, Taiwan, and Turkey. This model suggests a division of the world into two fully severed floc, with the Neutrals being forced to choose a bloc.

In aggregate, these countries could see a 10.7% points hit to economic growth. In the long run, or approximately five years, firms would adapt to the policy changes by rerouting supply chains, mitigating the damage.

The research also reveal the impact of existing fragmentation and potential escalations on global rates of inflation. The current state is estimated to raise inflation by 0.2-0.3% points. The lower bound reflects estimates made using current effective tariff rates, while the upper bound reflects estimates based on higher signaled statutory tariff rates.

Under a very high fragmentation scenario, inflation would rise across all blocs, reaching as much as 6.1% points in the worst case.

Geopolitical uncertainty

In 2025 and 2026, the global policy environment shifted significantly, with finance, trade and economic policy becoming more intertwined. Countries raised barriers, and did so in unanticipated ways, increasing risks for firms and countries across the globe.

The US introduced a wide range of tariffs and other measures seeking to reduce bilateral deficits and eliminate other countries’ barriers to US exports. China was a major target of these efforts and retaliated, turning away from integration with the US and implementing its own restrictive policies.

At one point, tariffs between the US and China exceeded 100%, which would have effectively cut off trade between the world’s two largest economies. Meanwhile, China temporarily imposed first-of-their-kind export controls on rare earths, with economic ramifications for all countries, and tightened rules for Chinese companies listing in the US.

The WEF and Oliver Wyman report establishes a baseline estimate of the economic cost of these current trade and financial policies, and models the costs the world might face should trends accelerate further. It also introduces several new assumptions.

First, it incorporates restrictions among Western countries to reflect that the US has raised tariffs not only on its geopolitical rivals but also on European countries, Canada, Japan, South Korea and other allies. Retaliation from these countries has been limited, but some restrictions were imposed and more were readied, particularly the EU’s Anti-Coercion Instrument, a regulation that allows the bloc to respond to economic coercion by non-EU countries through measures such as tariffs, trade restrictions, or limits on market access.

Second, the scenarios assume that one of the main driver of fragmentation will be restrictive measures on trade between the US, the EU, other European countries, Japan, and their allies on one side, and China, Russia, and aligned countries on the other.

Furthermore, while the US and China still permit some trade in sensitive sectors such as semiconductors, AI, quantum computing and biotechnology, it is assumed this will cease if tensions escalate.

Recommendations to mitigate fragmentation

Against this backdrop, the report outlines a number of concrete steps policy-makers can take to mitigate these risks and trade disruption. It also shares actions private-sector firms can take to prepare their businesses to thrive despite ongoing volatility.

First, policy-makers should operationalize guardrails to mitigate unintended consequences of economic statecraft. They should align on a common set of guardrails through bilateral and multilateral forums such as the G20, and translate these principles into concrete steps to design national security measures that minimize collateral economic damage, reduce policy uncertainty, and foster a more stable environment for cross-border investment and innovation.

Furthermore, policy-makers should focus on maintaining the interoperability of underlying payment rails. They should encourage the adoption of common standards such as ISO 20022 data requirements to promote consistent data quality, implement the G20 Roadmap for Enhancing Cross-Border Payments, and pursuing a global regulatory framework for digital assets.

The report notes that while the US dollar remains dominant, currencies like the renminbi are gaining ground, driven by China’s active promotion of renminbi-denominated trade, overseas lending, central bank swap lines, and expansion of its Cross-Border Interbank Payment System (CIPS). Digital finance adds further complexity, as dollar-pegged stablecoins could simultaneously boost demand for dollar reserves, while eroding US oversight of cross-border payments.

The report also advises business leaders to build dedicated geopolitical risk-management capacity to understand their exposure through clients, counterparties, locations, and contractual relationships. They should also conduct enterprise scenario analysis to stress-test existing risk management frameworks, identify vulnerabilities, and uncover opportunities for optimization.

This comes as the East-West geoeconomic conflict continues to drive fragmentation, with persistent trade and investment restrictions, such as barriers affecting Chinese companies’ US stock listings and Chinese investment in US private equity. This creates elevated volatility that private financial institutions must navigate.

Finally, the report advocates a more granular perspective on the impact of fragmentation. While global-level guardrails on economic statecraft are valuable, this impact varies significantly by region.

In Europe, the fragmented state of capital markets makes the continent’s financial institutions and corporates less competitive amid geopolitical volatility. In Southeast Asia, the East-West competition threatens the economic model of these countries, which are tightly integrated into China-centered supply chains but also have substantial trade ties with the US and the West. In Africa, smaller and more open economies in this region are more vulnerable to shifts in capital and trade flows.

Featured image: Edited by Fintech News Switzerland, based on image by salmangraphics0839 via Magnific