Yesterday’s risk, today’s reality: a fragmented financial system

All businesses with international operations today face a more complex landscape than they did at the start of 2025, due to increased fragmentation of the global financial system.

Events of 2025 undermined the concept of an aligned global community. The United States embarked on a wholesale reinvention of the global trade system. Major Chinese companies chose to delist from US exchanges rather than comply with stricter US disclosure regulations. India released final regulations on its Digital Personal Data Protection Act that are poised to increase operational costs for foreign firms and fragment global data flows. These are just a few notable examples among many actions taken by major powers that contribute to the fracturing of the financial system.

But do these events reflect a fleeting bout of protectionism, or are they indicative of a more fundamental shift in global commerce and geopolitics?

Analysis by the World Economic Forum, in collaboration with Oliver Wyman, suggests that policymakers and private sector leaders need to be prepared to contend with the possibility that a lasting shift has occurred. For at least the next several years, there are convincing signs that global finance will continue to move decisively away from a multilateral order toward a world in which national interests drive the global agenda, and in which unilateral action increasingly supplants rules-based governance.

Last year may have marked an acceleration in the fracturing of the global financial system, but the trend toward increasing use of the financial system to achieve foreign-policy and domestic objectives dates back decades and was heightened following the 2022 Russian invasion of Ukraine. The Forum, in collaboration with Oliver Wyman, highlighted in a January 2025 report that the potential cost of global financial system fragmentation could be between $0.6 trillion and $5.7 trillion. The report’s predictions have since been largely validated, but certain assumptions, such as that free and open trade between allies in the West would continue, understated the potential scope of fragmentation.

Last year, major powers pursued security and resilience objectives in a way that has been detrimental to the maintenance of a multilateral free trade order. They have expanded their definition of what constitutes strategic sectors to include semiconductors and artificial intelligence technologies, and implemented trade and investment restrictions on ally and adversary alike to promote domestic production.

The private sector has responded in kind. Businesses around the world have prioritized resilience by moving supply chains closer to home or to geopolitically aligned countries, and banks have backed these efforts with investment initiatives. Companies have restructured themselves to take advantage of subsidies and minimize vulnerability to geopolitical turbulence, as venture capital firms did when they split their China-based businesses from their global entities. As this process continues to play out, constituencies that benefit from restrictive policies will grow, reinforcing the maintenance of this new inward-looking posture by political leaders.

The events of 2025 are indicative of broader forces at play, each of which contributes to an increase in the risks facing businesses seeking to operate across borders as well as the global economy.

1. The rules and principles on which the integrity of the global financial system rests have been challenged, in some cases by countries that had previously championed them. A sound global financial system that encourages cross-border investment rests on a series of pillars, including the independence of fiscal and monetary policy, the rule of law, the reliability of data, and the structuring of domestic and multilateral policies and financial regulations to support financial stability. The events of 2025, particularly unilateral changes to trade policy, have strenuously challenged these principles.

2. Risks of severe fracture have resurfaced, reinforcing the need to model extreme scenarios such as full East-West decoupling. In 2025, US tariffs on China peaked at 145%, at which point Chinese tariffs on US goods were as high as 125%. These exceptionally high rates caused a precipitous drop in trade before the two sides deescalated and would have caused virtually all US-China trade to cease and might have prompted both sides to “incentivize” neutral countries to pick a side. Tensions have now lessened, but the importance of understanding the potential cost of extreme scenarios has not.

3. Intra-West restrictions will likely be a feature of the global trading order going forward. In 2025, the US imposed tariffs on the EU, Canada, Japan, South Korea, and all its geopolitical allies. These countries have largely opted not to respond in kind, but have developed retaliatory packages in case of further escalation. Experts do not anticipate that the US will return to a zero-tariff regime.

4. The global currency landscape will become increasingly multipolar. While the US dollar will continue to be the dominant global currency, countries will seek to continue to diversify the mix of currencies used to settle cross-border transactions, particularly those in which the US is not one of the two parties. This is already seen in China-Africa trade. Digital finance, including the introduction of stablecoins and central bank digital currencies, will further complicate the landscape, simultaneously reinforcing the use of the dollar while also potentially reducing the ability of the US to maintain oversight over cross-border payments.

The year ahead will be challenging for businesses and the public, with a higher risk of economic retaliation and conflict on the horizon, elevating the importance of understanding the vulnerabilities in the global economy. If unchecked, ongoing fragmentation could impair the ability of financial institutions to efficiently intermediate funds, potentially increasing credit, currency, and insolvency risks that can trickle down to individuals, for example by raising the cost of financing to start a business or buy a car or a house.

To this end, the Navigating Global Financial System Fragmentation Initiative is producing revised estimates of the potential cost of fragmentation that account for the escalation in the use of economic statecraft. The developments of last year made clear that assumptions about how such escalation might play out must be updated to reflect the new paradigm and to establish a new baseline for potential impact.

But there are also reasons to be optimistic. In the near term, the shocks of 2025 turned out to be not as damaging to the global economy as feared for many reasons. First, restrictive policies have been only partially or temporarily implemented in many cases, and the leaders of many tariffed countries chose not to take retaliatory action in every instance. Companies and countries also have proven to be more resilient, in part because of supply chain changes made in the wake of the COVID-19 pandemic. Some countries also used additional stimulus to offset the impact of trade policy.

The potential cost of escalation demonstrates that it remains essential to align on commonsense guardrails around the use of economic statecraft. While policymakers continue to pursue national security and resilience objectives, these guardrails can be leveraged to prevent undue harm to the global economy and growth.