The world economy is splitting into competing groups instead of a single connected system of globalization of the 1990s. However, this doesn’t necessarily mean that cross-border trade will shrink.

Instead of bringing production back to the countries where products are used, global companies have been reorganizing their supply chains around groups of countries or “clubs” with similar values or security concerns.

As well as clubs and some quiet continuation of global trade, the International Monetary Fund introduced the idea of “connector countries” – neutral players whose production centres could keep trade flowing between the different clubs. Mexico and Viet Nam, for example, have been used in this way.

This rejig is a diluted version of globalization but can still keep the wheels moving. As long as clubs include both low-wage nations and high-spending economies, the adverse effects of fragmentation – such as inflation and lower efficiency – could be mitigated.

“Clubification” is also replacing traditional globalization when it comes to global financial flows. How the United States funds its fiscal deficit through specific groups of countries rather than a fully open global system is a case in point.

In the early 2000s, the idea of Bretton Woods 2.0 – evolving the monetary system agreed upon in 1944 by 44 nations to coordinate currency exchange rates – gained popularity.

This iteration would ensure the financial intertwinement of China and the US; China was already using its current account surplus to buy US government bonds. The financial solidarity between the two biggest economies preempted that such deep economic ties would help prevent geopolitical tensions from escalating.

It also offset some of the pain felt in the United States of losing manufacturing jobs to China by keeping US interest rates low.

Over the last few years, however, China has been cutting back its investments in US assets while investors from countries politically and militarily aligned with the United States have increased theirs.

The funding of the US deficit was, once again, ensured by America’s friends. Meanwhile, as it was extricating itself from the US bond market, China increased its capital flows into emerging countries, especially in Africa and Latin America, solidifying South-South financial links.

However, even this degraded version of globalization is under threat. Connector countries can easily be portrayed as “Trojan horses,” allowing geopolitical rivals to maintain access to markets. Tighter rules of origin were a key win by the US administration during the negotiation of the United States-Mexico-Canada Agreement under Donald Trump’s first term.

These rules determine where a product must be made to qualify for preferential trade treatment. It served to close a loophole where China could have merely displaced its production to Mexico to benefit from preferential access to the US market.

However, since the US continues its mercantilist approach, the widening of its bilateral trade deficit – importing more than it is exporting from its neighbours – could trigger it to impose higher tariffs on Canada and Mexico.

Similarly, while a free-trade agreement between the United States and the European Union has always been considered unrealistic, the two territories are at least unified by strong political and military links. That offers stable trading conditions, with relatively low and crucially predictable bilateral tariffs. This is likely to change.

The Global South is also divided. While the BRICS are attempting to institutionalize their cooperation, old geopolitical and economic rivalries are getting in the way.

The fraught relationship between China and India provides a good example. Beyond geopolitics, the temptation for India to present itself as a substitute for China to the rest of the world is now irresistible. Besides, just like mature economies, some emerging countries are tempted to raise tariffs on Chinese products to protect their industry, such as Indonesia.

In the financial realm, regulatory divergence across the Global North could impair further integration, with sustainable finance increasingly becoming a source of Transatlantic division. For example, some European financial institutions cannot operate with pension funds in some US states because they apply a sustainability filter to their investments as per EU regulations.

In the Global South, China has been reducing investment in Africa since payment difficulties emerged, such as Angola restructuring its debt partly owned by China.

In sum, when setting up their supply and distribution lines, global companies cannot count on clubs to provide as much stability as they did just a few years ago. Full-on fragmentation, with its uncertainty, is now a real risk, with adverse consequences in terms of global price levels and efficiency.

However, a hybrid model is also conceivable. As well as the two unstable clubs – one centred on the United States, the other on China – a loose alliance of countries organized around the multilateral framework of traditional globalization could survive.

Signs of this have emerged in recent agreements concluded between the EU and the South American trade bloc Mercosur or the rapprochement between a post-Brexit United Kingdom and the EU. This loose alliance and the two clubs would not be mutually exclusive.

For instance, Canada and Mexico could remain in the US-dominated club while pursuing tighter economic links with the EU and Mercosur.

Ultimately, even though it would demand significant agility from global companies, a hybrid model is likely to be more palatable than complete fragmentation and the most viable path forward.

https://www.weforum.org/stories/2025/02/hybrid-model-global-trade-help-navigate-fragmented-world/