No longer.

Business leaders today view geopolitical tensions as the biggest risk to economic growth, according to the latest McKinsey Global Survey on economic conditions. Regional conflicts and international trade divergences have intensified in recent years, testing the resilience and strategies of multinational corporations. For instance, tariffs on goods exchanged between the United States and China have increased up to six times since 2017, and globally, trade interventions have surged 12-fold since 2010.

CEOs and boards understand that a shift in the global order is under way. However, many have yet to grapple with an important implication: these geopolitical shifts present not only risks to mitigate but also opportunities to seize.

Given their fiduciary responsibilities, business leaders understandably tend to focus primarily on the downsides of such shifts, asking questions such as: Which of my products and operations are geopolitically sensitive and how does this sensitivity differ by region? At what point do I need to switch suppliers? How much of my workforce requires visas and how might visa approval challenges affect our productivity in certain parts of the world?

It is important to craft risk and response plans to address those and other potential downsides. But even as they improve their resilience to shocks, business leaders should focus on opportunities for risk-adjusted value creation. They should consider tailoring their growth strategies, core business operations, technology stacks, talent footprints, capital asset portfolios, and organizational capabilities with an eye toward thriving and not just surviving.

Business leaders should be asking themselves questions such as, will our competitors’ products be more or less expensive than ours because of new tariffs and taxes? When and how can we align our business with trade flows into new corridors? What new economic and security alliances could also create opportunities for us to grow or to change our cost structure? What industrial policy incentives might present significant growth potential for us? How is our risk-adjusted cost of capital changing across geographies and how might we optimize our capital deployment?

When organizations view geopolitics through a value-creation lens, they can realize outsize benefits. Consider these examples:

• A North American medical-devices company that shifts its manufacturing operations and supply chain to Mexico from another country to take advantage of trade agreements could save 15 to 25 percent on operating costs while increasing its operating resilience.
• A payments company that moves into the Asia–Pacific region by 2027 could access an additional $1.5 trillion in revenues.
• A semiconductor company that changes its sales and marketing strategy to include targets in the Taiwan-to-Singapore corridor could gain an additional $47 billion in market share.

By contrast, business leaders who disproportionately focus on the downsides can find themselves paralyzed, perpetually on guard for the occurrence of high-severity but low-probability geopolitical events. Instead, they should be systematically and continually assessing the full complement of value drivers across trade, economic, and industrial policies and in the areas of defense and security. These include tariffs, the provision of subsidies in support of national industrial policies, and governments’ bias toward investing in geopolitical allies across supply chains, talent, technology and data, capital deployment, and other business domains.

In this article, we explore these value drivers and explain how a proactive approach to geopolitics can help companies both safeguard existing operations and capture emerging opportunities in various geographical and industry segments.

How a proactive approach to geopolitics can generate value
Many management teams and boards have made a point of aligning their corporate strategies and capabilities with realities on the ground. They have appointed a chief geopolitical officer, set up geopolitical intelligence units to provide early warning of emerging events, developed response plans to empower CEOs in times of crisis, and protected their supply chains from external shocks.

A few advanced leadership teams are taking the next step, however, and exploring ways to create value amid geopolitical disruption. They are finding opportunities in three areas in particular—accelerating growth, optimizing business operations, and developing capabilities and strategies to address global disruption.

Accelerating growth
To make better investment decisions and seize commercial opportunities amid shifting global tensions, business leaders should assess what growth looks like for them, their customers, and their competitors. They should analyze a range of growth scenarios that reflect the implementation of any of the ten value drivers outlined. Through this exercise, business leaders may find opportunities for commercial acceleration or for rebalancing portfolios.

Commercial acceleration. As geopolitical conditions change, companies may be able to attract new customers and capture more market share. Opportunities may emerge when new tariffs disproportionately increase the cost of a competitor’s product, for instance, or when new trade agreements make it possible for a company to market to customers who have historically been out of reach. For instance, the construction equipment company Caterpillar was well positioned to increase sales in Australia and Chile because of free trade agreements among those two countries and the United States.

Current shifts in trade corridors are already reshaping industries. Data from the International Monetary Fund, for instance, show substantial changes across the top trade routes between 2021 and 2023, mostly between China and the United States.

Other research shows that net foreign direct investment (FDI) inflows to China decreased from $344 billion in 2021 to $42.7 billion in 2023, the lowest FDI inflows in three decades. Analysts predict that this redirection of investment will likely accelerate over the next decade. It will be critical for business leaders to monitor where this funding lands.

Portfolio rebalancing. As geopolitical shocks occur, once-stable, high-growth business segments may falter, while previously overlooked segments may represent new potential. Business leaders are already hardwired to continuously assess and react to shifting competitive dynamics in their industries. They must navigate geopolitical disruptions in the same way, continually evaluating and reallocating capital to higher-growth, lower-risk segments—through mergers, acquisitions, or partnerships—and divesting from underperforming, high-risk areas.

One private equity fund, for instance, identified portfolio companies in regions where profits were likely to shrink because of regional conflicts and redirected them to more stable geographies. Additionally, fund executives identified products that could be considered “dual use”—that is, products that could have both commercial and military applications—and would be especially vulnerable to cross-border trade scrutiny. They relocated the manufacturing of these products to areas that would be less exposed to dual-use regulations if those regulations were to increase in scope.

Similarly, a global dairy organization built out several geopolitical scenarios that were likely to develop over the next ten years based on global trends. The company’s leaders considered those scenarios against each of its products and the locations in which the products were manufactured and sold. Based on that analysis, the executive team decided to sell off one of its business units and used the proceeds to double down on investments in a different region that showed growth in most of the scenarios generated. As a result, the global dairy’s share price grew more than 10 percent in the next fiscal year.

Sometimes portfolio balancing incorporates hedging, adjusting capital intensity, increasing liquidity buffers, or adopting localization strategies. These moves can all be part of a standard risk-reduction strategy, but they can also help improve the bottom line. For example, a global automaker implemented a hedging strategy that maintained its risk profile while saving $15 million annually. It reduced its balance sheet hedging by 50 percent and switched to out-of-the-money options—and in doing so improved its management of resources. Additionally, when this process revealed that the company’s liquidity buffer was too high, the company repurposed that excess—nearly a billion dollars—to repay debt, lower hedging costs, and increase floating debt. This all started with business leaders assessing the company’s geopolitical exposure.

Optimizing core business operations
Business leaders can boost organizational resilience when they assess the degree to which geopolitical shifts can affect the cost-effectiveness of their operations, including their relationships with suppliers, their global talent strategies and capabilities, and their technology infrastructure.

Operating footprint. One of the most important decisions for any business leader is where the company will invest in its manufacturing, storage, and customer engagement activities. These commitments can shape the company’s trajectory—and geopolitics can play a big role in unlocking new sources of value. The global electronics company Samsung factored in favorable trade agreements, competitive labor costs, and the strategic advantages of location (in this case, Vietnam) when considering where to invest $2 billion in additional manufacturing capacity. Meanwhile, technology giant Apple, which had traditionally based its manufacturing capabilities in China, has diversified its manufacturing footprint. It recently expanded to India, for instance, to increase manufacturing resilience, take advantage of competitive costs, and engage in growing markets.

Supply chain. Recent geopolitical events have caused notable disruptions in the supply chain and have led to facility closures, prompting many supply chain leaders to source from multiple vendors, move away from just-in-time ordering and delivery, and even stockpile critical inputs. Some are using advanced technologies to anticipate and prepare for future geopolitical disruptions.

For instance, one consumer-packaged-goods (CPG) company was facing substantial changes to its underlying supply network, so it constructed a digital twin of its supply chain to understand all the potential effects of these geopolitical shifts. The analyses conducted in the digital-twin environment prompted the CPG company to change certain elements of its supply chain. In doing so, it was able to reduce its reliance on third-party manufacturing sites, improve its yard management, optimize its labor development, and establish a stronger carrier mix. These moves helped the CPG company reduce overall operating expenses and increase projected growth for the following fiscal year.

Other companies are taking advantage of industrial policies that offer incentives for domestic production or supply chain localization. The electric-car company Tesla, for instance, leveraged the tax credits presented by the US Inflation Reduction Act of 2022 to strengthen its supply chain. It sourced materials domestically and shifted its manufacturing capabilities from Germany to the United States. More recently, Mexico has proposed tax credits to attract foreign companies that source inputs from that country.

Talent footprint. Geopolitical tensions can complicate talent management and undermine workforce cohesion across cultures and nationalities. But there are steps that companies can take to account for such disruptions, including reviewing talent concentration patterns, rebalancing workforce allocations, and localizing important functions, such as human resources or IT support.

The engineering, construction, and urban development company Egis, which has operated in Ukraine since 1993, was able to maintain its operations in the country and maintain productivity throughout the recent conflict by quickly pivoting to remote work.

One global bank, with back-office services and call centers in multiple geographies, performed a geopolitical scan and realized that it would have a hard time finding and hiring talent in certain countries. The bank’s executive team also projected that the cost of conducting business in those countries would likely increase because of impending changes in cross-border trade agreements. Given these data, the team decided to relocate employees from regions where visa and trade restrictions were most onerous and refocus its hiring efforts in new regions with less exposure to geopolitical risk.

Digital talent is perennially in short supply; some companies have reached out to expatriate workers to help fill the gap, which in turn has increased these businesses’ exposure to risk from changes to visa or immigration law. One way to avoid or mitigate this risk is to establish delivery centers in those locations that are rife with digital talent—for instance, India, Mexico, the Philippines, and Poland—and where governments offer incentives for companies that are willing to relocate talent.

Technology and data. Today’s multinational organizations have built technology functions in which the talent, infrastructure, and data footprints extend across borders, which leaves their technology stacks and other resources exposed to geopolitical headwinds. Potential threats include cyberattacks, intellectual property theft, data localization requirements, potential disruptions from trade conflicts, and fragmented IT and data regulations across the globe.

Global IT leaders need to continually assess their technology and data footprints (and those of their third-party providers) to hedge against shocks and remain resilient and agile as policies evolve. Online giant Google chose to build data centers in Finland to harness the country’s abundant renewable-energy resources and to move the company closer to achieving its stated sustainability and carbon-neutrality goals. Meanwhile, Malaysia has offered tax incentives and established the Digital Ecosystem Acceleration initiative to attract companies looking for new sites for their data centers—Google and Microsoft are among those investing.

The capabilities and strategies required to respond to geopolitical disruption
It’s one thing for a business executive to be informed about the potential upsides and downsides of geopolitics. It’s another thing entirely for the organization to have the capabilities required to respond to them—including corporate strategies that take geopolitics into account and capital structures that are sensitive to geopolitical realities.

Broadening the view of corporate strategy. Companies routinely monitor regulatory, tax, and other local policies that directly affect their business strategies. They must similarly monitor geopolitical risks and economic policies in the countries in which they operate—recognizing, of course, that geopolitical influences are often uncertain and intertwined, as actions from one country beget reactions from another. In such environments, leaders must fold geopolitical considerations into their regular strategy- and business-planning exercises and engage their boards on these topics.

Leaders should start by identifying which potential geopolitical and global economic shifts could have the largest effect on their corporate interests. What vulnerabilities, capability gaps, and growth opportunities are revealed through this assessment? Which, if any, strategic decisions would leaders need to adjust if policy or other changes occur? What value could be created under various scenarios? It’s worth remembering that certain capital investments (for instance, in oil or natural gas pipelines, semiconductor fabrication plants, power plants, or mines) can take decades to build, running through multiple administrations and election cycles.

The question of whether current shifts in policy could affect a company’s strategic decisions depends on the company’s appetite for risk. What investments would it be willing to make so the company could take advantage of uncertain but potentially large growth opportunities? What insurance policies should it purchase to mitigate the largest potential downside risks? To explore these questions further, business leaders should engage in scenario planning and tabletop exercises. In these exercises, participants play different roles and discuss potential responses to a range of potential disruptions—for instance, to the outbreak of local conflicts, emerging security threats, or changes in tariffs or industrial policies. Such exercises can help business leaders and board members focus on the decisions they can control rather than trying to predict what may or may not come to pass.

Future-proofing multinational organizations. The recent rise in trade and nontrade barriers has disproportionately affected global businesses—which makes it even more important for future multinational corporations to anticipate the impact of potential laws, policies, and regulations. Without this foresight, multinationals may be subject to forced market exits, which come with their own financial and reputational costs. For example, BP exited Russia three days after the war in Ukraine began, leaving behind its holdings in Russian oil and gas company Rosneft. As a result, BP had to take a charge of more than $24 billion in its accounts and its earnings were reduced by $2 billion a year. Some companies are relying more on structural segmentation to ensure that production, talent sourcing and management, supply chain, R&D, and other operating activities can go on even if one division or region is cut off. These businesses have also empowered their leaders and teams to make decisions locally and create stable growth pathways. For example, HSBC recently reorganized its Eastern and Western businesses to simplify its governance structure and reduce risk.

Other companies are refocusing on resolution planning, which first emerged in the wake of the 2008 financial crisis but has been gaining steam with the rise of various geopolitical disruptions. It requires large financial institutions and certain other firms to describe their strategy for a rapid and orderly resolution in the event of material financial distress or failure. As they consider such planning in the context of geopolitics, business leaders should take care to engage boards and risk committees in these discussions. Such entities can help ensure robust oversight of both growth and risk-mitigation agendas.

Building a dedicated geopolitical functional group. The companies that react most swiftly to geopolitical disruption are typically those that make it a core part of their investment and operating decisions. Many of these companies have constructed functional groups whose primary focus is to monitor the geopolitical landscape, help build forecasts, plan against various scenarios, and keep senior leaders and the board informed so they can respond quickly. Having such a functional group in-house, led by a geopolitics officer and staffed by a specialized team, can ensure that the company is positioned to take advantage of both current global shifts and the ones that will inevitably emerge. The structure provides regular opportunities for boards and senior leaders to discuss geopolitical risk and opportunities in a detailed, nuanced way, allowing them to react quickly and, in the longer term, establish a culture of geopolitical resilience in their organizations.

Establishing a crisis response playbook. Geopolitical events can throw organizations into crisis—but, in our experience, the organizations that bounce forward more quickly tend to be those that have codified the results of their scenario-planning and tabletop exercises and collated them into crisis response playbooks. Such playbooks provide a starting point for assessing the potential impact of local conflicts, unexpected tariffs, policy changes, or other shifts. The outcomes may still be uncertain, but in the meantime, leaders and teams have a guide for working through volatility. One semiconductor company, in its playbook, delegated certain responsibilities to the CEO in the case of disruption to the supply chain but tapped others to manage other aspects of the crisis, thus ensuring that all were focused and able to remain productive as the company substantially altered its supply base.

As our overview makes clear, a proactive approach to geopolitics is essential but also a major undertaking. Organizations must have insight, foresight, oversight, and the right capabilities—but most of all, they must have the fortitude to seize opportunities amid volatility, complexity, and uncertainty. The effort is worth it, however: the executives who think deeply and act on the shifting world order today will be the market leaders of tomorrow.

To read the article as it was published on the McKinsey & Company webpage, click here.

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All the talk of imposing new trade and investment restrictions—often in the name of promoting economic security—may have led officials and analysts to overlook one constructive unilateral option. Namely, strengthening the national and regional business environment so as to enable local firms to adapt to adverse circumstances and opportunities that geopolitical events create.

Here the case is made for Intelligent Unilateralism as a (partial) insurance policy against geopolitics.

As geopolitical rivalry intensifies, the siren song of insular, zero-sum thinking gains in prominence. This flies in the face of decades of experience where our standards of living have been enhanced by doing business with foreign buyers and sellers. Exports augment national sales and make jobs more secure. Import competition keeps local firms on their toes—complacent local oligopolists tend to rip off citizens.

No country in the past half a millennium has become an economic superpower by its economy being hermetically sealed to outsiders. Yet, even for economies as large as Japan, there is still the question: How best to react as China and the United States vie for primacy?

For better or for worse, at least since the global financial crisis, the world is in an era of trade policy unilateralism. The painstaking monitoring of commercial policy by the Global Trade Alert has shown this. Sadly, there remains no appetite for path breaking multilateral opening of markets.

At best, as demonstrated by the outcome of the recent WTO Ministerial Conference, sushi-sized reform is what the WTO has on the menu. Likewise, regional trading agreements. Recently, World Bank analysts reported that the number of newly signed regional accords has been falling as this century unfolds. Reciprocal approaches to trade reform are out of favour, alas. Unilateralism is in.

But, like cholesterol, there are two types of unilateralism. Stupid unilateralism involves erecting trade barriers to imports and other ruses that seek to tilt the commercial playing field in favour of local firms. That the idea for these ruses often come from local firms says a lot about their competitiveness. Successful managers think of new ways to create more value for customers, they don’t go running off for help from officials who are largely clueless in the ways of commerce.

What every government can influence constructively is their national business environment. Unlike trade accords, which take years to negotiate, governments can assess and benchmark their national business environment right away.

Fortunately, there are well-regarded measures and rankings of national competitiveness, such as this one produced by the IMD Business School in Lausanne, Switzerland. Economists can fight like cats and dogs about the best short-term macroeconomic policy, but when it comes to the drivers of long-term economic growth, there is a remarkable degree of agreement. Smart governments should capitalise on this consensus.

To fix ideas consider Switzerland, a country with one of the highest standards of living. Switzerland’s population is too small to support its many successful firms. Switzerland has to export. Therefore, everyone there understands that Switzerland must be competitive no matter what.

If Germany offers huge subsidies to its energy-intensive firms (as it did after Russia’s invasion of Ukraine), Switzerland must react differently because the state doesn’t have as deep pockets as Germany. That involves making sure the transport and digital infrastructure is first rate, that the corporate tax and regulatory burden is fit for purpose, and that Switzerland has the best possible access to the markets of the future as well as to the behemoths of today. Of course, such access does not come for free—in turn Switzerland has to be open to imports as well.

For sure, Switzerland’s current favourable business climate didn’t arise overnight—but bear in mind that these days trade talks take forever (a comment made in the spirit of making a fair comparison.) The intensification of geopolitical rivalry in recent years has strengthened the longstanding case for improving the supply side of national economies. Doing so involves taking on vested interests that cling to privileges that deliver either a quiet life or a very lucrative one. For this reason, supply side reform is like getting children to eat enough fresh vegetables—evidently the right thing to do but an uphill battle all the same.

Governments should focus in particular on those aspects of the business climate that enable firms to adapt to new circumstances. Suppose “economic coercion” by a trading power—or worse, conflict that cuts off supply chains—results in some existing sales markets or sourcing locations being blocked. Then national firms need to have the capabilities and the resources to spot alternative options and to act on them. These firms need to know where foreign markets are being liberalised and the regulations they must comply with to take advantage of any opportunities. This calls for granular monitoring of policy developments abroad as well as beefed up capabilities at home.

Critically, executives and officials need to be comfortable with geopolitical chaos and have gamed out in advance how they might respond. When faced with what many deem “economic coercion,” Australia and Lithuania have shown that small and mid-sized economies can effectively pivot, finding new markets for the valuable goods their firms produce. For sure, at the beginning of these episodes, there were reasons to be fearful. But firms and governments there knew they had alternatives (created in part by WTO and regional trade deals) and pursued them with vigour.

With greater geopolitical rivalry the political calculus of supply side reform has changed. Holdouts against reform must now explain why their interests matter more at a time when adaptability is at a premium. Economic security arguments should push the scales against reform holdouts. The media and public will be at a loss to understand why economic coercion abroad results in higher jobs losses on account of some vested local interest frustrating improvements in national exporters’ adaptability and productivity. Whose side are those vested interests on?

Of course, cushioning those interests that lose from reforms is typically smart politics—but letting them frustrate reform provides geopolitical foes with a greater incentive to strike. In open societies where debates over reform can be followed from autocracies, the opposition of vested interests to reform will be noted—and factored in by foreign governments. As local firms and sectors become more adaptable, the downside from economic coercion shrinks. Supply side reform is one way governments better protect their societies against economic coercion.

Intensified geopolitical rivalry is back—it won’t recede anytime soon. This puts a premium on having nimble firms that can adapt to whatever insanity transpires. In turn, this should shift the political calculus—putting the defenders of status quo bottlenecks on the back foot.

Firms and governments have agency—the times call for the courage to use it.

Simon J. Evenett is the Founder of the St. Gallen Endowment for Prosperity Through Trade and an economics professor. He is also Co-Chair of the World Economic Forum’s Council on Trade & Investment.

To read the full piece posted on LinkedIn by Global Trade Alert, click here.

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Four years ago, one of us wrote an article on the future of trade for the June 2019 issue of this magazine, celebrating the 75th anniversary of Bretton Woods. The message was that there was no strong evidence of a retreat from globalization, but international trade and the multilateral system that underpinned it were under attack, and their future would depend on policy choices. Since then, policymakers in some of the world’s largest economies have made choices to halt further international integration and, in several instances, to embrace protectionist or nationalist policies.

Today, there is still no conclusive evidence that international trade is deglobalizing. When measured in US dollars, global trade growth slowed after the global financial crisis in 2008–09 and declined sharply at the onset of the pandemic in 2020. But since then trade has rebounded to the highest value ever. As a share of GDP, global trade has fallen modestly, driven mostly by China—which for years has pursued a “dual circulation” strategy of prioritizing domestic consumption while remaining open to international trade and investment—and India. This reflects the end of an extraordinary export boom both countries experienced in previous decades as well as fewer imports of intermediate goods than in the past. Yet, as a share of GDP, imports of intermediates by the rest of the world are still growing. The same is true of exports.

American and Chinese tariffs introduced in 2018 did not reduce trade. They curbed trade between the US and China, as expected. But trade in the products most affected by tariffs grew among the rest of the world. In other words, trade was merely reallocated, not reduced. And the tariff war did not stop other countries—such as members of the African Union, the Association of Southeast Asian Nations, and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership—from pursuing regional or plurilateral trade agreements.

The COVID-19 pandemic led many countries to temporarily restrict exports of medicines, and some halted shipments of wheat and other foods as prices spiked following Russia’s invasion of Ukraine. But many governments are still aggressively pursuing economic integration, for instance through deals that make it easier for professionals to work in foreign countries or that facilitate the flow of consumer goods through common safety standards.

Trade may, of course, respond with a delay to changes in the policy environment. And policy itself may lag changes in public sentiment. Terms such as “national security” and “reshoring” have shown up more frequently in news articles and research papers. Perhaps most telling are recent polls of economists by the University of Chicago’s Booth School of Business. In March 2018, 100 percent of those surveyed were against the initial US tariffs. Yet in January 2022, respondents were skeptical about global supply chains: only 2 out of 44 economists disagreed with the statement that reliance on foreign inputs had made American industries vulnerable to disruptions.

Hyperglobalization

The era of “hyperglobalization” that took shape from the 1990s onward was associated with great economic achievement. Extreme poverty as defined by the World Bank was dramatically reduced and expected to be eliminated in all but a small number of institutionally fragile countries, partly thanks to dramatic growth in East Asian countries. Standards of living, as measured by income per capita, increased across the world.

Consumers in economies open to trade gained access to an extraordinary variety of goods sourced from all over the planet at affordable prices. Smartphones, computers, and other electronics allowed people to be more productive and to enjoy more varied entertainment than previous generations had ever dreamed. Declining prices of air travel allowed people to visit other countries, exposing them to new cultures and ideas—an experience once reserved for the ultrawealthy.

While many factors contributed to this rise in living standards, openness and other market-oriented policies played an essential role. Trade with (at the time) low-wage countries influenced goods prices and wages in advanced economies, benefiting consumers in these countries and workers in exporting economies. Inflation remained surprisingly low—despite quantitative easing and increasing debt in the US.

Finally, the Western world enjoyed a historically rare long period of peace that fostered prosperity. The tight global interconnectedness achieved by the end of the 20th century was arguably a major contributing factor by giving everyone an incentive to behave. War in this hyperglobalized era meant disruption of global supply chains, with potentially dire consequences for the world economy—as we are in the process of finding out.

Yet beneath the surface, tensions were building that led to a backlash against globalization. We chart three phases of this deglobalization movement. The first phase began around 2015 as anxiety about globalization and competition from low-wage countries gave rise to Brexit, US tariffs, China’s retaliation, and a resurgence of extremist views in Europe.

Global backlash

While the average person in the world was better off at the end of the 2010s, many workers in advanced economies were feeling left behind, doing worse than their parents. There is substantial economic research documenting these distributional effects, which had a distinct geographic component: communities more exposed to import competition from low-wage countries thanks to preexisting spatial industrialization patterns did worse than communities that were sheltered from imports.

This, in turn, had important political consequences in the US and the UK. At the same time, globalization created big winners: multinational “superstar” firms that benefited from the hyperspecialization of global value chains, in the form of lower costs and higher profits, as well as a class of highly compensated individuals who reaped the rewards associated with expanding markets and new economic opportunities. Not only were some left behind; others were racing ahead.

It took time for mainstream economists to acknowledge these effects. But in many ways the effects were nothing new: they reflected the usual tension between overall welfare and distributional conflict generated by trade. However, the speed and intensity of these changes gave this tension a new dimension. Similarly, there was nothing fundamentally new about economists’ recommendations: most rejected protectionism as a solution and endorsed some form of redistribution from winners to losers.

At the same time, Western governments were becoming increasingly concerned that competition with China was “unfair,” given its use of subsidies as well as restrictions imposed on companies seeking access to its market. This spurred demands for more confrontational policies toward China, especially because it was no longer a poor developing economy.

Of course, there had been backlash against global trade before, notably at the 1999 Seattle protests. But these movements did not influence policy. There was little reason to believe that the backlash against globalization between 2015 and 2018 would have permanent consequences for the future of globalization either. After all, the world was too interconnected to revert to the old regime.

Pandemic pressures

The second phase of the deglobalization movement began with calls for resilience at the onset of the pandemic in 2020. But what is resilience? There is no clear benchmark. Defining and measuring resilience depend on the nature of the shock. COVID, for example, was both a supply shock—with key international suppliers facing lockdowns at different times, slowing deliveries—and a demand shock, as demand for medical goods and durable goods like cars and second homes grew rapidly.

During COVID, short-term delivery delays and shortages due to the disruption of international trade were widely described as a crisis. But much of this was blown out of proportion, and in fact markets proved extremely resilient. The US, for instance, imports medical goods and supplies from a diverse group of countries. The one exception is face masks. But in 2020 shipments of face masks from China arrived within months, and this meant that shortages were completely alleviated.

Such examples show that international trade increased resilience. Along the same lines, the US actually preserved trade relationships; importers traded with foreign partners more regularly and sought out new suppliers, even though overall trade volume fell. Other papers show, based on quantitative model simulations, that international trade makes economies more diversified and hence more resilient. The intuition is that supply shocks are less correlated across economies than within them and that access to multiple suppliers makes it easier to respond to country-specific shocks.

Overall, arguments against trade that emphasize the fragility of supply chains are not consistent with evidence. These arguments were used to stoke the protectionist sentiment that had originated in the first phase, but ultimately the initial effects were not enduring. Trade grew fast in 2021 as the world turned a corner in management of the pandemic.

Geopolitical pressures

The third phase began with Russia’s invasion of Ukraine in February 2022. For the public, this highlighted new risks from international specialization. As Russia cut gas supplies to Europeans and energy prices skyrocketed, the pitfalls of reliance on a single country for imports of a critical input became clear. The concerns were not intrinsically about Russia. But by extrapolation, countries began to wonder what would happen if they had to decouple from China overnight. Policymakers concluded, if they had not already, that it would be better to decouple immediately on their own terms.

Around the same time, a new mindset was widely adopted—namely, that international welfare is a zero-sum game. The United States imposed a ban on exports to China of advanced logic and memory chips and the machinery to produce them. Semiconductor technologies certainly do have military applications, and the export bans could set back China’s military. But the technologies have many more applications in the civilian sector, and so these bans also retard civilian technological development. The world shifted from one in which trade, competition, and innovation in all countries were encouraged to one in which the most advanced economy sought not just to compete but to foreclose.

At this point any forecasts are highly speculative, since, as before, outcomes will be highly dependent on policy choices. One possibility is that this is as far as the deglobalization movement goes; interventions to foreclose technology access will be limited to products with a credible dual use, while trade in other products will continue to flourish. But another possibility is that the world will end up fragmented in rival camps and that a new cold war will unfold, this time between the US and China (and their respective allies). The consequences of the latter scenario could be severe.

New cold war

Many models of long-term growth emphasize the role of population size in research and development. The world’s largest and most populous economies are expected to have new ideas and develop absolute advantages, as evidenced by their leading market positions in a variety of products. If scientific collaboration between China and the US breaks down, the world could have fewer solutions to the next pandemic and endemic diseases.

More generally, separating from “non-friendly” partners means removing potential low-cost suppliers. When it comes to decarbonization, for instance, the cost of solar panels is substantially higher in the West than in China, and industry estimates suggest that tariffs have slowed installation. Addressing climate change is urgent. Every year lost results in more damage and substantially larger mitigation costs.

Is this the price of greater resilience? Restricting global trade is unlikely to lead to resilience. As we argued earlier, resilience cannot be evaluated without reference to specific shocks. Trade exclusively with “friendly” countries may imply greater resilience to geopolitical risks—at least in the near term—but the concept of friendship is itself subject to constant change. It may, however, lead to less resilience to other types of shocks, such as the recent health shock.

Within countries, inequality could increase. Greater trade barriers lead to higher prices, which mean lower real wages. Globalization may have contributed to more spatial inequality, but protectionism is not the cure: it will likely make the problem worse. Across countries, there is a risk of increased global inequality. Geoeconomic fragmentation could lead to more trade between high-income economies that are “friends.” Increasing emphasis on environmental and labor standards in trade agreements would raise entry barriers for very poor countries that find it difficult to meet these requirements. Without access to lucrative foreign markets, there is no clear path for poverty reduction and development in such economies.

But the greatest risk may be to peace. Cold wars have often led to hot wars. During the interwar period in the 1930s there was a dramatic shift away from multilateral trade toward trade within empires or informal spheres of influence. Historians have argued that this shift exacerbated tensions between countries ahead of World War II. We can only hope that the coming years will not be a replay of this pre-belligerence era.

Pinelopi K. Goldberg is Elihu Professor of Economics and Global Affairs and an affiliate of the Economic Growth Center at Yale University.

Tristan Reed is an economist with the World Bank’s Development Research Group.

To read the full article as it was published in the International Monetary Fund’s Finance & Development Magazine, please click here.

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