Over the past fifty years, global economic integration has significantly boosted prosperity across both developed and developing nations. This progress was supported by a cohesive international financial framework that encouraged efficient capital allocation, eased cross-border commerce, and maintained relatively low inflation. However, recent geopolitical strains and policy shifts are increasingly disrupting this interconnected system, introducing barriers that hinder the smooth movement of investment and financial resources.
According to a report by the World Economic Forum in partnership with Oliver Wyman, known as the Navigating Global Financial System Fragmentation initiative, severe fragmentation could slash global GDP by $5.7 trillion and push inflation higher by over 5%. Such outcomes would raise the cost of borrowing, insurance, and investing for individuals and businesses worldwide, while also limiting access to high-quality employment in thriving economies.
Several interrelated forces are driving this fragmentation. First, successive global shocks—including the 2008 financial crisis and the pandemic-induced supply chain breakdowns—have destabilized economic confidence and triggered inflationary surges in 2022 and 2023. These disruptions have made governments more cautious, prompting policies focused on national resilience over open-market cooperation.
Second, rising geopolitical tensions—such as trade disputes among major powers, Russia’s invasion of Ukraine in 2022 and the resulting sanctions regime, and nuclear developments in North Korea and Iran—have led countries to reevaluate their financial dependencies. In response, some nations are building parallel financial infrastructures. For instance, China’s Cross-Border Interbank Payment System (CIPS) aims to expand the use of the renminbi in international transactions. If such systems remain incompatible with existing global networks, transaction complexity and costs could rise significantly.
Third, regulatory divergence is accelerating the emergence of regional financial ecosystems. The dominance of the US dollar enables powerful economies to enforce sanctions widely, but this has also motivated others to pursue financial autonomy. In 2025, the average US tariff rate on imports climbed to 17.9%, the highest since 1934, amplifying uncertainty and prompting retaliatory measures. Countries like Canada restricted Chinese steel imports, the EU imposed levies on electric vehicles, and Vietnam proposed penalties on rerouted Chinese goods destined for the US.
Capital flows have also faced new constraints. Chinese state-linked investors have reduced stakes in US private equity, while Washington has introduced controls on outbound investments in sensitive technologies. Both the US and EU have strengthened scrutiny of foreign investments entering their markets.
Meanwhile, the global currency landscape is becoming more diverse. Although the dollar remains central in trade and finance, there is growing adoption of alternative currencies—especially the renminbi—in commodity settlements. This shift reflects a broader trend toward multipolarity in finance.
Despite some rollback of extreme measures and ongoing diplomatic talks, the erosion of international trust means elevated fragmentation will likely persist. The World Economic Forum’s initiative seeks to engage financial leaders in identifying core components of the global system that must be preserved. The objective is to guide policymakers in crafting economic strategies that safeguard national interests without compromising long-term global prosperity.
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Mitigating impacts of global financial system fragmentation
Global economic integration since the 1970s has driven an unprecedented rise in prosperity around the world, in rich and developing countries alike. n nBut now, policies enacted in response to geopolitical tensions and crises are fragmenting the system, impacting the free flow of investment and capital. n nNavigating Global Financial System Fragmentation, an initiative of the World Economic Forum in collaboration with Oliver Wyman, seeks to understand and articulate the costs of financial system fragmentation. n nFor five decades following the end of the gold standard-backed Bretton Woods system in the 1970s, global economic integration drove an unprecedented rise in prosperity around the world, in rich and developing countries alike. n nUnderpinning this growth has been a unified global financial system aimed at lowering barriers to trade and facilitating cross-border transactions and capital flows. But today, policies enacted in response to geopolitical tensions and crises are fragmenting the system, adding friction to the free flow of investment and capital. n nThe disintegration of the interconnected financial landscape into competing regional blocs could undermine the forces that have propelled global economic growth for half a century, making it more expensive for individuals around the world to take out loans, buy insurance, make investments and obtain well-paid employment in vibrant and dynamic national economies. n nFactors behind the fragmentation of the global financial system n nIn recent years, the trend towards ever-closer integration has slowed and even reversed, threatening to undermine the global financial system, the interconnected network of financial institutions which cooperate to allocate resources, manage risks and provide liquidity. n nThat system emerged in fits and starts over several decades, and its existence benefited most individuals and companies on balance by increasing the rate of economic growth (via more efficient capital allocation) and keeping the rate of inflation lower than it would otherwise have been. n nIn a worst-case scenario, fragmentation in the system could reduce global GDP by $5.7 trillion and increase global inflation by more than 5%, according to the World Economic Forum’s Navigating Global Financial System Fragmentation report, produced in collaboration with Oliver Wyman. n nAs countries increasingly prioritize national interests and security concerns (e.g., through efforts to bolster supply chain resilience), the seamless flow of capital, investment, commerce and financial services has been disrupted, resulting in a more disjointed and less conducive environment for growth. These disturbances have increased inflation and reduced economic expansion by introducing friction in economic interactions. n nIn aggregate, each of these impacts harms individuals in all economies – from advanced countries to emerging markets and developing economies (EMDEs) – making goods, homes and services more expensive and shrinking the average person’s purchasing power. n nThe first factor contributing to this breakdown in the system has been a series of shocks to the global economy. These disruptions began with the global financial crisis. Over a decade later, the world was shaken again by the COVID-19 pandemic, which severely disrupted global supply chains. That set off a surge in the rate of inflation in 2022 and 2023, which further unsettled electorates worldwide not accustomed to either pandemics or sudden spikes in prices. n nA second source of pressure has been the escalation in geopolitical tensions in recent years. Examples include trade conflicts between great powers, Russia’s 2022 invasion of Ukraine and subsequent sanctions, and the North Korean and Iranian nuclear programmes. n nThe third force splintering the global financial system has been growing regulatory divergence and the emergence of regional financial systems operating independently of one another. n nFor example, the People’s Bank of China has developed the Cross-Border Interbank Payment System (CIPS) to facilitate cross-border payments using Chinese renminbi. If the infrastructure developed around CIPS were not made interoperable with existing payments infrastructure, complexity and costs would increase for individuals and businesses seeking to operate across borders. n nIn addition, the plethora of sanctions and other restrictions by great powers, enforceable due to their economic heft and the primacy of the US dollar in the existing global financial system, may prompt other countries to consider developing their own independent systems. n nFragmentation has accelerated in recent years n nThe trend toward higher levels of fragmentation has accelerated in recent years, particularly in 2025. The average US effective tariff rate on goods from other countries has increased this year to 17.9%, the highest level since 1934. n nThe impact of tariffs was exacerbated by the way they were implemented, which increased uncertainty. Many countries and entities enacted other trade restrictions, including retaliatory tariffs on US goods, many of which were eventually reversed as negotiations commenced. China announced controls on the export of rare earths that are crucial in the production of advanced weaponry, later indicating it would delay these controls in a one-year reprieve. n nLoading… n nSeveral countries introduced or announced plans to introduce restrictions on China to protect their home markets from being overwhelmed by Chinese goods diverted from the US. This included Canada’s restrictions on Chinese steel, European Union duties on battery electric vehicles, and Vietnam’s planned penalties on illegal transshipments of Chinese goods to the US. n nMajor powers have also raised barriers on the free flow of capital across borders. Chinese state-backed funds have pulled back on investments in US private equity, the US has imposed outbound investment restrictions in sensitive technologies, and the US and the EU have stepped up efforts to screen inbound investments. n nThese changes have come amidst increasing multipolarity in the global currency system. The dollar is still dominant in international trade and cross-border transactions, but there is evidence of growing use of currencies such as the Chinese renminbi in cross-border transactions, particularly in commodity markets. n nCan we mend the wounds to deliver prosperity? n nThe Navigating Global Financial System Fragmentation initiative is working to convene financial sector leaders to understand and articulate the costs of financial system fragmentation. n nThe goal is to develop commonsense approaches to designing and implementing economic statecraft measures in a way that minimizes their impact on the ability of the global financial system to continue to deliver greater prosperity around the world. n nDiscover n nHow is the World Economic Forum improving the global financial system? n nThe financial services industry is facing several future risks, including vulnerabilities to cyberattacks due to artificial intelligence and new financial products creating debt. n nThe World Economic Forum’s Centre for Financial and Monetary Systems works with the public and private sectors to design a more sustainable, resilient, trusted and accessible financial system worldwide. n nLearn more about our impact: n nNet zero future: Our Financing the Transition to a Net Zero Future initiative is accelerating capital mobilization in support of breakthrough decarbonization technologies to help transition the global economy to net zero emissions. n nGreen Building Principles: Our action plan for net zero carbon buildings offers a roadmap to help companies deliver net zero carbon buildings and meet key climate commitments. n nFinancing biodiversity: We are convening leading financial institutions to advance the understanding of risks related to biodiversity loss and the opportunities to adopt mitigation strategies through our Biodiversity Finance initiative. n nWant to know more about our centre’s impact or get involved? Contact us. n nWhile negotiations on key measures are ongoing and some of the most harmful proposals have been paused or rolled back, recent events have shaken international relations, disrupted markets and made companies more risk-averse about making investments. n nThe elevated level of fragmentation relative to the last 50 years will be an enduring feature of the financial landscape for some time to come because of the erosion of international trust. n nIn this context, it is critical for financial sector leaders to underscore which elements of the global financial system are essential to preserving global prosperity, so that policy-makers can continue to pursue national security and resilience goals without further undermining the system.