NOTE4STUDENTS:

Geo-economic fragmentation is reversing globalization, reshaping trade, investment, and supply chains. UPSC usually asks questions by linking globalization, trade policies, and institutions like WTO to India’s economic and strategic interests. It focuses on how global trends impact India and what policy changes are needed. Aspirants often falter in applying static concepts to current affairs. Many struggle to integrate real-world trade policies, geopolitical shifts, and economic data into structured answers. The Rise of Trade Restrictions, Shifting Investment Patterns, and Financial Decoupling are well-explained in this article with recent examples, helping aspirants connect theory with practice. It provides a cause-effect structure, making it easier to frame balanced answers. One very special feature of this article is how it blends micro (specific trade policies) and macro (global economic trends) perspectives, making complex topics easier to understand and apply in answers.

PYQs Anchoring:

GS 3: Elucidate the relationship between globalization and new technology in a world of scarce resources, with special reference to India. [2022]

GS 2: What are the key areas of reform if the WTO has to survive in the present con text of ‘Trade War’, especially keeping in mind the interest of India? [2018]

Microthemes: Globalisation, WTO

The world is witnessing a shift away from globalization towards geo-economic fragmentation (GEF)—a process where economic integration is reversing due to strategic considerations. The Economic Survey 2024-25, presented by Finance Minister Nirmala Sitharaman, highlights how trade, investment, and migration flows are being reshaped by rising geopolitical tensions.

Countries are once again forming economic blocs, reminiscent of the Cold War era, with terms like “friend-shoring” gaining prominence in global policymaking. Trade disputes, technological standards, and security concerns are driving this shift, impacting global growth and stability.

STATE OF GEO-ECONOMIC FRAGMENTATION

1. The Rise of Trade Restrictions: Trade barriers are increasing at an unprecedented rate. According to the World Trade Organization (WTO):

• Between October 2023 and October 2024, countries introduced 169 new trade-restrictive measures, covering trade worth $887.7 billion—a $550 billion increase from the previous year.
• Since 2020, over 24,000 trade and investment restrictions have been implemented globally.

This rise in protectionism is slowing down global trade, leading to concerns of secular stagnation, where economies struggle with long-term low growth. The International Monetary Fund (IMF) warns that trade fragmentation is costlier today than during the Cold War because global trade accounts for 45% of GDP, compared to just 16% in the past. Reduced trade also hampers knowledge sharing and cross-border investments, further affecting growth.

2. The Shift in Global Investment Patterns

Foreign Direct Investment (FDI) flows are now dictated by geopolitical alignments rather than purely economic factors.

• Investments are increasingly concentrated among allied nations, especially in strategic sectors like technology and energy.
• Emerging markets and developing economies, which depend on FDI from advanced economies, face heightened restrictions, making them more vulnerable.

The trend of “friend-shoring” and “re-shoring” (moving production back to home countries or friendly nations) is reducing investment in these economies, leading to potential output losses and economic instability.

3. China’s Growing Dominance

The Economic Survey underscores China’s expanding control over global manufacturing and energy transition technologies:

• China is projected to account for 45% of global manufacturing, surpassing the combined output of the US and its allies (UNIDO projection).
• It dominates renewable energy production, controlling:
  • 80% of the solar panel supply chain (from polysilicon to modules).
  • 80% of global battery manufacturing capacity, essential for electric vehicles.
  • 60% of the world’s wind energy infrastructure.

This dominance gives China a strategic edge in shaping global supply chains, reinforcing its position as an economic powerhouse.

Reasons behind this Fragmentation:

1. Geopolitical Tensions and Economic Nationalism

• Rising competition between major powers (U.S.-China, Russia-West) is pushing nations to prioritize national security over global trade.
• Example: Western sanctions on Russia post-Ukraine invasion forced Russia to pivot towards China, UAE, and India.
• Example: The U.S. is strengthening economic ties with Taiwan and South Korea to counter China’s dominance.

2. Trade Protectionism and Industrial Policy

• Governments are favoring domestic industries over foreign competition by offering subsidies, tax breaks, and trade restrictions.
• Example: The U.S. Inflation Reduction Act (2022) provides $369 billion in green subsidies to boost domestic clean energy production.
• Example: India’s Production-Linked Incentive (PLI) scheme promotes local manufacturing in electronics and pharma.

3. The Impact of COVID-19 on Supply Chains

• The pandemic exposed vulnerabilities in global supply chains, leading countries to rethink their reliance on China-centric manufacturing.
• Example: The EU and U.S. are diversifying production to Vietnam, India, and Mexico.
• Example: Japan’s $2.2 billion fund helped companies relocate production away from China.

4. The Rise of Digital and Financial Fragmentation

• The shift towards de-dollarization and alternative financial systems is weakening U.S. economic dominance.
• Example: China’s Cross-Border Interbank Payment System (CIPS) is an alternative to SWIFT for global payments.
• Example: India and UAE are conducting trade in rupees, reducing dependence on the dollar.

5. Declining Trust in Global Institutions

• Countries are losing faith in WTO, IMF, and G20, leading to the rise of regional trade agreements and security pacts.
• Example: The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) is an attempt to bypass the WTO.

Countries’ role in managing Geo-Economic Fragmentation:

1. Diversifying Supply Chains
   • Countries should build regional partnerships to balance security with economic efficiency.
   • Example: IMEC (India-Middle East-Europe Corridor) aims to provide an alternative to China’s Belt and Road Initiative.
2. Strengthening Trade Agreements
   • Nations should reform global trade rules under WTO, IMF, and G20 to prevent economic conflicts.
   • Example: The Regional Comprehensive Economic Partnership (RCEP) is boosting intra-Asia trade.
3. Balancing Protectionism and Globalization
   • Governments should promote domestic industries while keeping key global trade partnerships intact.
   • Example: Germany supports its auto industry while expanding global export partnerships.
4. Enhancing Economic Diplomacy
   • Nations should engage in bilateral negotiations to prevent unnecessary trade conflicts.
   • Example: India and Australia’s early free trade agreement (ECTA) strengthened trade while keeping national interests secure.
5. Investing in Digital and Financial Resilience
   • Countries should develop secure digital payment systems and financial institutions that promote cross-border cooperation.
   • Example: India’s UPI and Singapore’s PayNow linkage promote digital trade integration.

WAY FORWARD

Geo-economic fragmentation is reshaping global trade and investment, with nations prioritizing security and self-reliance over globalization. However, over-reliance on protectionism can lead to higher costs, inefficiencies, and slower economic growth. The challenge for world leaders is to strike a balance between economic resilience and international cooperation to ensure a stable and prosperous global economy.

As global rules change, India must focus on self-reliance and economic resilience. India should focus on the following: 

• Strengthening domestic industries to reduce over-reliance on global supply chains.
• Encouraging economic freedom by systematically deregulating industries and empowering businesses.
• Expanding trade partnerships beyond traditional blocs to ensure greater flexibility and market access.

As geo-economic fragmentation continues to reshape the world, India’s best strategy is to leverage its internal strengths, ensuring sustainable and independent economic growth in an increasingly unpredictable global environment.

Back to Basics: Understanding Geo-Economic Fragmentation

Geo-economic fragmentation refers to the increasing division of the global economy into competing blocs due to rising geopolitical tensions, trade restrictions, economic nationalism, and financial decoupling. Nations are moving away from interdependence and globalization towards self-sufficiency and strategic alliances, leading to disruptions in global trade, investment, and supply chains.

Instead of a unified global economy, we now see the emergence of regional economic clusters where trade and investments are conducted within politically aligned nations, while restricting engagement with adversaries. This shift raises concerns about economic slowdown, rising costs, and a decline in global cooperation.

Key Features of Geo-Economic Fragmentation

1. Rise in Trade Barriers
   • Countries are imposing higher tariffs, export bans, and import restrictions to protect domestic industries.
   • Example: The U.S.-China trade war saw tariffs on $550 billion worth of goods, disrupting global supply chains and raising consumer prices.
   • Example: India increased import duties on Chinese electronic goods to promote domestic manufacturing.
2. Restrictions on Foreign Investments
   • Governments are tightening control over foreign direct investment (FDI), especially in strategic industries like technology, defense, and energy.
   • Example: The U.S. and EU restricted Chinese investments in AI, semiconductors, and 5G due to security concerns.
   • Example: India introduced FDI restrictions on Chinese companies following border tensions in 2020.
3. Supply Chain Decoupling and “Friend-Shoring”
   • Nations and companies are reshoring (bringing production home) or “friend-shoring” (moving production to allied countries) to reduce reliance on adversarial nations.
   • Example: The U.S. CHIPS Act (2022) provides $52 billion to shift semiconductor production away from China.
   • Example: Apple and Samsung are relocating production from China to India and Vietnam.
4. Financial Decoupling and De-Dollarization
   • Nations are creating alternative financial networks to reduce reliance on the U.S. dollar and Western banking systems.
   • Example: Russia and China are increasing trade in yuan and rubles, bypassing the SWIFT banking system.
   • Example: BRICS nations (Brazil, Russia, India, China, South Africa) are exploring a new common currency to challenge dollar dominance.
5. Technology Bifurcation (Tech War)
   • The world is moving toward two separate technology ecosystems, with the U.S. and allies on one side and China and Russia on the other.
   • Example: The U.S. banned Huawei and TikTok, while China developed domestic alternatives to Google and Apple services.
   • Example: China is investing billions in domestic semiconductor production after being cut off from U.S. chip exports.
6. Shifting Strategic Alliances
   • Nations are diversifying trade and investment away from geopolitical rivals and towards friendly countries.
   • Example: India is reducing trade dependence on China and increasing ties with Japan, ASEAN, and the EU.
   • Example: The India-Middle East-Europe Economic Corridor (IMEC) is seen as a counter to China’s Belt and Road Initiative (BRI).

Impact of Geo-Economic Fragmentation

Impact	Explanation	Example
Reduced Global Growth	Trade restrictions and supply chain disruptions slow down global economic expansion.	The IMF estimates geo-economic fragmentation could reduce global GDP by up to 7%.
Higher Costs & Inflation	Import tariffs, disrupted supply chains, and production relocation drive up manufacturing costs.	The U.S.-China trade war led to price hikes on electronics, automobiles, and household goods.
Supply Chain Disruptions	Dependence on a single country for key components leads to inefficiencies when trade relations sour.	COVID-19 caused semiconductor shortages, impacting industries from automobiles to consumer electronics.
Weakened Multilateralism	Global organizations like WTO, IMF, and G20 struggle to resolve economic conflicts.	The WTO dispute resolution system weakened after the U.S. blocked judicial appointments.
Financial Decoupling	Nations shift away from the U.S. dollar and create alternative financial systems.	Russia and China are settling trade in local currencies rather than using the dollar.
Technology Fragmentation	Nations develop separate technological standards, supply chains, and regulatory policies.	China banned U.S. chipmakers, while U.S. banned TikTok and Huawei.
Geopolitical Realignments	Countries shift trade and investment to more politically aligned partners.	India is expanding ties with ASEAN and Europe to reduce dependence on China.