Understanding forces behind global financial system fragmentation key to mitigating its effects

For 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.

Underpinning 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.

The 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.

In 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.

That 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.

In 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.

As 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.

In 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.

The 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.

A 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.

The third force splintering the global financial system has been growing regulatory divergence and the emergence of regional financial systems operating independently of one another.

For 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.

In 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.

The 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.

The 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.

Several 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.

Major 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.

These 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.

The Navigating Global Financial System Fragmentation initiative is working to convene financial sector leaders to understand and articulate the costs of financial system fragmentation.

The 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.

While 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.

The 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.

In 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.