The geopolitical influence on global trade

Summary

Geopolitics have been top of mind over the past few years as geopolitical developments have, at times, rattled financial markets and disrupted global economic activity. So far, geopolitical events have only caused temporary bouts of market volatility and activity disruptions; however, geopolitics may be causing structural changes to the way countries around the world interact with each other and, in turn, the functioning of the global economy. Not long ago, we published a series of reports focused on the intersection of geopolitics and deglobalization, and highlighted the possibility of a geopolitically induced fragmenting of the global economy. In this report, we explore whether opposing geopolitical ideologies are indeed influencing global trade patterns and if the hypothetical fragmentation is materializing.

An update on the intersection of deglobalization and geopolitics

Last year, we published a series of reports focused on the state of globalization. The takeaway of those reports, in short, is that we believe the trend toward globalization has ended. And rather than a resurgence of economic cooperation between countries around the world, we believe deglobalization is more likely than re-globalization going forward. Geopolitics is at the heart of our view for further deglobalization. Over the past few years, the geopolitical landscape has materially worsened. Major military conflicts are active on two continents, while less systemic confrontations have popped up across South America, Africa and other parts of Europe and Asia. As far as the more significant conflicts, we have seen countries show explicit support for Ukraine following Russia's invasion, with others expressing solidarity with Russia. Similar dynamics unfolded after Hamas attacked Israel. Select countries have demonstrated unity with Israel, while others have adopted a more critical stance. These conflicts, in combination with other frictions, are creating global geopolitical fragmentation forces, where countries around the world are becoming more divided on geopolitical issues. In the same series of publications, we took that view a step further and noted that geopolitical fragmentation could lead to economic fragmentation, a scenario where countries with opposing geopolitical views at least partly sever economic linkages. Economic fragmentation is a risk to the long-term health of the global economy, especially as arguably the two most economically important countries—the United States and China—find themselves with opposing geopolitical perspectives, not only related to the Russia-Ukraine conflict and the war in the Middle East, but on many other geopolitical matters. With the U.S. and China the two largest economies in the world, and also possibly the most geopolitically influential, we outlined a hypothetical scenario where the U.S. and China cut economic linkages due to geopolitical differences, and countries around the world choose to align themselves with either the U.S. or China to show geopolitical solidarity. This aligning of nations ultimately fragments the global economy into two separate and distinct economic blocs—one led by the U.S. and the other by China.

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