Globalisation Economics - What is meant by Global Fragmentation?

Global fragmentation in economics refers to the increasing division of the world economy into distinct blocs or regions, each characterized by separate trade systems, economic policies, or geopolitical alliances. This trend contrasts with globalization, where countries integrate through trade, investment, and shared economic policies.

Key Features of Global Fragmentation

1. Geopolitical Divisions:
   • Economies align along political or ideological lines, often leading to separate trade and investment networks.
   • Example: The rise of distinct Western (U.S.-EU) and Eastern (China-Russia) economic blocs.
2. Regionalisation of Trade:
   • Trade increasingly occurs within regions rather than across global markets.
   • Example: Regional agreements like the Regional Comprehensive Economic Partnership (RCEP) in Asia.
3. Decoupling of Supply Chains:
   • Countries shift production to reduce dependence on foreign nations, especially those seen as geopolitical rivals.
   • Example: Efforts by the U.S. to reduce reliance on Chinese technology.
4. Economic Protectionism:
   • Import tariffs, subsidies, and trade restrictions are used to shield domestic industries and reduce dependence on global markets.
   • Example: U.S. tariffs on Chinese imports during the trade war.
5. Technological Fragmentation:
   • Competing blocs develop separate technological ecosystems.
   • Example: China's development of alternatives to U.S.-dominated technologies like 5G (Huawei) and app stores.

Causes of Global Fragmentation

1. Geopolitical Tensions:
   • Conflicts between major powers (e.g., U.S.-China rivalry) lead to economic decoupling and regional alliances.
2. Pandemics and Crises:
   • Disruptions like COVID-19 highlighted vulnerabilities in global supply chains, encouraging regionalisation.
3. National Security Concerns:
   • Nations seek self-reliance in critical sectors (e.g., semiconductors, energy) to reduce risks of foreign dependency.
4. Diverging Economic Models:
   • Differences in governance, trade policies, and economic priorities push countries apart.
   • Example: Liberal economies vs. state-led economies like China.
5. Populism and Protectionism:
   • Rising nationalism and populist politics fuel protectionist policies that undermine global integration.

Implications of Global Fragmentation

Economic Impacts

1. Higher Costs:
   • Fragmented supply chains increase production costs and reduce efficiency.
2. Reduced Global Trade:
   • Protectionist policies and regionalization reduce cross-border trade volumes.
3. Investment Uncertainty:
   • Firms face risks due to inconsistent trade rules and geopolitical instability.
4. Innovation Divide:
   • Technological fragmentation hampers global collaboration, slowing innovation.

Social and Developmental Impacts

1. Widening Inequality:
   • Developing countries reliant on global trade may suffer from reduced access to markets.
2. Reduced Global Cooperation:
   • Addressing global issues like climate change and pandemics becomes more challenging.

Political Impacts

1. Strengthened Alliances:
   • Countries strengthen regional or bloc-based partnerships (e.g., BRICS or NATO-aligned economies).
2. Weakened Multilateral Institutions:
   • Organizations like the WTO face reduced influence as countries prioritize bilateral or regional agreements.

Examples of Global Fragmentation

1. U.S.-China Rivalry:
   • Trade wars, decoupling in technology sectors, and competing economic alliances.
2. Russia-Ukraine Conflict:
   • Fragmentation between Western economies imposing sanctions on Russia and nations maintaining trade ties with Russia.
3. EU Green Policies:
   • The European Union prioritizes green energy policies, potentially creating trade frictions with fossil fuel-exporting regions.

Conclusion

Global fragmentation reflects a shift away from a unified global economy toward a more divided, bloc-based structure. While it can enhance resilience in certain regions, it risks reducing economic efficiency, innovation, and global cooperation on critical issues. Understanding and managing these trends is crucial for policymakers and businesses navigating an increasingly fragmented world.