The global economy is fragmenting into blocks of countries that are slapping each other with tariffs, restricting trade of crucial goods, and subsidizing their own industries to gain an unfair advantage against other nations. This is a remarkable change from just a couple of years ago when Russia and China joined the World Trade Organization, and globalization seemed unstoppable.

So, is fragmentation the future of the global economy?

And, if it is? Does that mean that we are heading for another recession or inflation spike in which grocery and gas prices again get out of control? Or could there actually be some unforeseen silver lining, especially if you invest in certain strategic sectors, or if your economy manages t o become a so-called connector economy? To answer these questions, I’ve immersed myself in the latest economic research on fragmentation, and how previous events like Brexit, Trump’s trade war against China, and Russia’s invasion of Ukraine can inform us about what a fragmented global economy will look like.

But, before we can understand the future of fragmentation, let’s first discuss how we got here, with a quick recap of

The previous eras of globalization & fragmentation

You see, if you go back in time, you will see that a pattern of seemingly unstoppable globalization and then damaging fragmentation is nothing new. It happened before. Specifically, the first golden age of globalization happened from 1870 to 1914, and as you can see here in this chart, it was characterized by relentlessly increasing trade, as a percentage of the global economy.

However, that era came crashing down when the first world war started, during which the global economy fragmented into an Allied and a Central power block. Then, after trade initially seemed to recover, it once again collapsed as countries increasingly introduced tariffs, trade barriers and subsidies for their own industries, in response to the great depression. This eventually got so bad that the world economy again fragmented into two blocks, the Allied and the Axis powers, which after some brief economic skirmishes, were quickly at each other throat for real during the second world war, reducing much of the global economy to ashes.

However, then, even though the world was again fragmented into two rivalling blocks, trade did increase quite a bit within the capitalist block and between unaligned countries during the Bretton Woods era of 1945 to 1980. And, while trade never quite reached the levels of the first golden era of globalization, the Bretton Woods era is still often referred to as the second wave of globalization, as trade did recover some of its earlier losses.

However, this wave paled in comparison to the third wave of globalization, which started in 1980, as the world unfragmented when China started opening up its economy. At the same time, the elections of Ronald Reagan and Margaret Thatcher ushered in an era in which politicians embraced free trade, free movement of money across borders, and the free movement of people. An so, unsurprisingly, trade as a percentage of global GDP soared, much higher than ever before, especially after previously communist economies like Eastern Europe and Russia opened up to the world. And, while such hyper globalization came at a price for Western workers, who saw good paying factory jobs move overseas, Western politicians were willing to pay that price, as they came to believe that an increasingly interconnected and equal global economy would mean that previously autocratic countries would become increasingly democratic, and unwilling to go to war, as they’d have too much to lose from something as destructive as war.

However, while this strategy seemed to have worked for Eastern Europe, which indeed became pretty democratic as it got wealthier, there were already some early signs that Russia and China wanted to make their economies less dependent on the West, rather than more. The first sign was that, when Russia annexed Crimea in 2014, it combined that with a ban on many Western food products, while it increased subsidies for Russian farms, which rapidly transformed Russia into an agricultural powerhouse. The second sign came soon after from China, when it introduced its “made in China 2025” policy in 2015, that again combined a lot of subsidies with already high restrictions on foreign firms to stimulate sectors where the Chinese wanted to depend less on the West like, like batteries, electric cars, and computer chips.

In economics, using subsidies, trade restrictions and tariffs to develop strategic industries is known as using industrial policies, and after seeing their success in Russia. But, especially in China, the United States felt that it had to respond with its own industrial policies. Firstly, under Trump, who introduced a lot of new Tariffs on Chinese goods in 2018, and secondly, under Biden, who introduced massive subsidy schemes for strategic sector s with his Inflation Reduction Act and Chips act in 2022.

Of course, these actions were met with responses from both rivals and allies, in the form of increased tariffs from China in 2018, and su bsidy programs from Europe in 2023.

Which means that today, we are no longer living in the era of globalization. But, rather in a new era of fragmentation, in which two new emerging blocks Allied and Axis countries have in place a lot of trade restrictions and tariffs against each other, while they all try to dominate strategic industries such as computer chips and renewable energy, by subsidizing their own companies, while restricting those of others.

And yet, despite all of these changes, the most important Allied and Axis economies are still deeply integrated. For example if we look at this graph from the World Trade Organization, we can see that there are basically three big trading blocks in the world right now. One in Europe centered around Germany, one in north America centered around the United States, and one in Asia, centered around China.

So, if fragmentation was to get much worse with China joining Russia in its isolation, that would be an extremely, extremely big shock to the global economy.

So, will that happen? Well, the scenario that experts have been worrying about the most is that China decides to invade Taiwan, which it has repeatedly threatened to do, and that the Allies will respond with similar sanctions that they used against Russia. Alternatively, if Donald Trump is elected this year, we would likely also see more fragmentation as he has threatened to raise Tariffs on Chinese products to 60%. But, even if these scenarios don’t come to pass, fragmentation is likely to continue as all major players are introducing more, not fewer, industrial policies that favor national companies, rather than a free global market.

But, does that mean that we are heading for a catastrophe in the form of a long recession and another big inflation spike, or could it be that this will be the biggest economic opportunity of a lifetime.

In other words,

What will fragmentation do to the global economy?

Well, according to economists at the IMF, there could at least be five major channels through which the global economy will be impacted. But, of course, as the future is uncertain, we cannot know for sure how important each these channels will be. However, given that we have already seen some fragmentation events like Brexit, the 2018 Trump trade war, and the 2022 rupture between Europe and Russia. The experience from these events might give us some clues about what might happen if global fragmentation continues.

The first channel that the IMF economists identified is trade. Simply put, if blocks of countries try to depend less on each other for trade, eventually, they will likely succeed, and trade less, or at least trade less than they otherwise would have. Then, if trade is more difficult, companies that depend on that trade will suffer, reducing economic growth. What’s more, as imported goods are now less available, their price will increase, leading to increased inflation. Indeed, this is precisely what happened when the British tried their own little mini fragmentation experiment in the form of Brexit, which some economists have estimated has decreased economic growth in the UK by about 5.5% since the vote in 2016, while it increased consumer prices about 2.9% in three years.

Luckily, the 2018 Trump trade war seems to have been less damaging, with the best estimates I could find indicating that it cost both the U.S. and China around half a percentage point of GDP, while the effect on inflation was negligible. On the other hand, the 2022 rupture between Russia and Europe was so damaging for both parties, that I couldn’t find any good estimates for economic damage, because governments on all sides interfered so heavily. Still, most economists that studied this event seem to agree that it led to greatly reduced trade, which increased inflation and inflicted.) heavy economic damage on both sides, which would have been worse, had governments not acted by taking on more debt.

The second fragmentation channel that IMF economists have identified is capital, meaning that as money becomes less able to move around the world, it will become more expensive, meaning higher interest rates. So far, this has especially impacted smaller economies that decided to break away from the global economy, where both Russia and Britain have had to raise interest rates or, even restrict money flows, to prevent their currencies from falling too fast.

Speaking about currencies, the third fragmentation channel is about payments, where, while you might not realize it when you do it, most global transactions are handled through the Belgian SWIFT payments network. But, as this network has increasingly been used to sanction countries, many alternatives are now being developed, ranging from private alternatives in Russia to central bank digital currency initiatives in Asia. A development that could lead to increased payments costs, although the increased competition could also help make international payments cheaper.

Moving on from money, the fourth channel of fragmentation involves the movement of people, which so far has typically meant that it has become more difficult to enter countries, which has led to big changes in where people travel. However, this doesn’t necessarily mean that there are less people moving around. For example, while after Brexit we saw a big decrease in immigration from the EU to Britain, overall migration has increased, as migration from places like India made up for lost EU immigration. Another example is that when Russia got isolated in 2022, it initially led to a big wave of migration of Russians to European and other countries. After that initial wave though, the movement of people for both business and tourism between the two blocks decreased a lot. However, as a consequence, a lot of tourism and international business activity from Russia got diverted. For example, from London to Dubai and from Southern Eu rope to Turkey.

The fifth and final big channel that I thought was important from the IMF research was that these economists expect higher global volatility as the world moves from globalization to fragmentation. Indeed, after Brexit, the Pound certainly got more volatile, and similarly, after Russia’s isolation, we saw huge volatility in global energy and food prices, which made living conditions in economies that depended on food and fuel imports like Egypt, Sri-Lanka, and Pakistan almost unbearable.

That being said, as a the character little finger from Game of Thrones once said:

Chaos is a ladder. Many who try to climb it fail. Never get to try again. The fall breaks them… Only the ladder is real. The climb is all there is.

In other words, for any of you who did not watch Game of Thrones, while on average fragmentation will probably be bad for the global economy, the changing global order will present opportunities for some individuals, companies, and countries, who can use the chaos as a ladder to climb up to a better place in the new global economic order.


Who stands to win or lose from fragmentation?

Well, while again, while we cannot be completely sure yet, I did find that some really interesting winners and losers emerged as a consequence of the fragmentation events that we have looked into so far: Brexit, the U.S. China Trade War, and Russia’s 2022 isolation.

So, who lost during these events? Well, basically increased inflation and reduced economic growth meant that, on average, in countries that were directly involved, consumers lost purchasing power while businesses lost business, and governments had to spend more to cushion the blow for their citizens. What’s more, since markets are global, prices increased everywhere, and thus, even citizens in countries that were not directly involved lost purchasing power.

That being said, I have found 4 groups that have been hurt particularly badly.

The first are the inhabitants of the economies that isolated themselves the most. So, both Russians and Brits got hurt more from their respective fragmentation events compared to Europeans, simply because they lost access to a bigger market.

The second category of losers have been small export and import businesses. You see, trade barriers make trade more difficult. But, if you are a big company you are more likely have the resources to hire some good lawyers that can help you find a way around them. Similarly, because government subsidies are difficult to get, they are more likely to benefit big companies, who can hire people to figure out how to fill out all the paperwork.

On the other hand, when it comes to investment losses, big businesses, governments and wealthy individuals that had previously felt like global citizens have seen their money evaporate after big fragmentation events. For example, after Russia’s invasion of Ukraine, a lot of big Western businesses had to take big losses on their investments in Russia. On the Russian side, a lot of wealthy Russian’s as well as the Russian government saw a big share of their assets in Europe seized or frozen.

The fourth and final set of losers have been those economies that had previously really profited from the re-integration with ex-communist powers. For example, Germany’s economy first took a big hit, after it lost access to cheap Russian energy, and is now seeing itself being outcompeted by state sponsored Chinese car and solar companies. On the other hand, countries that had been more self-sufficient, like France, have, so far, been more resilient.

This shows us a key reason why fragmentation is likely here to stay for a while, as countries now have a strong incentive to be more self-reliant, which will increase fragmentation, which will then prompt countries to again become more self-reliant.

A pretty depressing message given that this will likely hurt global economic growth and increase inflation. So, let’s quickly move on to discuss the three categories of winners from fragmentation, so far.

First, when governments spend more to adapt to economic changes, companies t hat can provide needed services or products can benefit greatly. For example, to deal with the Brexit chaos, the UK government hired a whole bunch of Brexit consultants to help it navigate the storm. Similarly, a company like China’s BYD could not have become the world’s biggest electric vehicle manufacturer, had it not been supported by China’s industrial policies.

A second category of winners, so far, have been those who operated in sectors which saw increased volatility from big fragmentation events. For example, as energy prices shot up in Europe in 2022, many alternative energy providers recorded record profits as they could also sell at a higher price. Similarly, countries that offered alternatives to Russian energy, like Qatar and the United States profited greatly from Europe’s drive to replace Russian gas. Another example of affected sectors were alternative business and tourist destinations for Russians, where for example, Dubai profited greatly from the exodus of wealthy Russians from London, and Turkey profited greatly from Russian tourists that were no longer welcome in Southern Europe.

The final category of winners that ha s emerged are the so-called connector economies, which are basically like middlemen between countries that used to trade or invest directly. For example, in 2022, profits from trade shot up in countries like Armenia and Kazakhstan as trade between Europe and Russia was rerouted through these countries. Similarly, recent research has shown that as trade between China and the U.S. plummeted, exports from China to connector economies like Mexico, Taiwan, and Vietnam increased, while American imports from these countries greatly increased as well, from which of course, the connector economies have benefitted greatly.

So, in


The world has seemingly already moved from a phase of globalization to one of fragmentation, where trade slows down. This will likely lead to slower economic growth, increased inflation, higher interest rates, changing global payment methods, big changes in how people move around the world, and increased volatility overall.

Something from which most of us will suffer. But, at the same time, for those countries and individuals who can position themselves to receive increased government spending, provide goods that have suddenly become scarce, or can position themselves as a connector economy, the chaos of fragmentation can be a ladder to climb up the global economic hierarchy.

Of course, since we are at the start of this trend, a lot of the consequences are still unclear. But, as always, I will keep up to date about the latest developments, here on the Money & Macro channel.

But, about those updates, I’ve noticed from some of your comments that they can be a bit dense from time to time for those of you who have not studied economics. And, given that I used to teach economics at university, I’ve often been asked to make more of my old teaching materials available so that you can develop a deeper understanding of the subject, which will in turn help you make more sense of what is happening in the global economy today.

That’s why I am launching the School of Money and Macro, where I’ll be sharing masterclasses and courses to help you build foundational knowledge of economics, using the real life examples, simple language, and visuals that you know from the channel.

To expand on this video about fragmentation, the first masterclass will be an in-depth summary of the latest research and insights about industrial policy, and how it will reshape the global economy for decades to come. In this masterclass, I’ll cover its advantages & disadvantages, which countries are doing it, what sectors are benefitting, the scientific evidence about whether or not it worked in the past, how to potentially make industrial policy work today, and finally, I’ll discuss how it will impact the global economy with those attending the masterclass live.

Yes, you heard that right, the masterclass will be a small scale live online event which includes extensive time for questions and discussions with me. Of course, for those unable to attend, I’ll also post a version of the masterclass, with slides, and sources, but without the Q&A, on the website of the School of Money and Macro.

And, a special note for my Patrons and members: as a thank you for your continued support, you’ll get a significant discount to attend the live event. Be sure to check out the members post on YouTube or Patreon.

So, if you want the latest insights into how industrial policy will reshape the global economy then reserve your spot to attend the live event, or buy a ticket for the recorded masterclass using the following links: