The World Economic Forum (WEF) has warned that a complete East-West economic decoupling could reduce global gross domestic product by as much as USD 6.9 trillion, marking a stark shift from globalization to geo-economic fragmentation in 2025-26. The report, released on June 29, 2026, highlights that fragmentation is already costing the world economy between USD 213 billion and USD 307 billion in GDP growth annually, while pushing inflation up by 0.2 to 0.3 percentage points.
Rising Trade Barriers and Retaliatory Measures
According to the WEF, countries are increasingly imposing unexpected trade and financial barriers, amplifying risks for businesses and economies worldwide. The United States has sought to reshape the global trade and financial system through tariffs and other restrictions, particularly targeting China. In retaliation, Beijing leveraged its dominance in critical minerals supply chains and redirected exports, helping it achieve a record trade surplus in 2025. Washington also extended tariffs and restrictions to allied countries, prompting retaliation and efforts to diversify geo-economic partnerships.
The report notes that "in 2025 and 2026, severe swings in policy and enforcement by countries reduced certainty and affected decisions on investing and hiring." This policy volatility has created an environment of uncertainty, dampening business confidence and investment.
Weakened Multilateral Institutions
The WEF report also highlights that rising nationalism, geopolitical tensions, and declining institutional legitimacy have weakened the effectiveness of multilateral institutions such as the International Monetary Fund (IMF), the World Bank, and the World Trade Organization (WTO). With the WTO's dispute-settlement role diminished, countries are increasingly relying on bilateral agreements and local currency settlements. This shift could reduce economic efficiency and heighten financial stability risks.
Furthermore, the report warns that pressure on central bank independence is increasing as governments attempt to influence monetary policy through rhetoric and policy actions. This trend could undermine the credibility of monetary policy and lead to higher inflation expectations.
Differential Impact Across Economies
The WEF estimates that existing trade and financial policies are already slowing growth and raising inflation, though the impact varies across economies. For example, US output growth is expected to be 0.4 to 0.6 percentage points lower than projected, while some neutral countries like Indonesia are less affected, with a projected 0.1 percentage point hit to output growth.
The report cautions that governments may increasingly weaponize control over key economic chokepoints, such as critical minerals, technology, and financial systems. Further economic fragmentation would weaken growth and fuel inflation across all regions. In the worst-case scenario, economic growth could fall by up to 6.4 percentage points, while inflation could rise by as much as 6.1 percentage points.
Extreme Scenarios and Preparation
Highlighting the sharp escalation of the 2025 US-China trade conflict, which briefly saw tariffs exceed 100 percent, the WEF stressed that the world economy needs to prepare for extreme scenarios. The report emphasizes that an increasingly likely escalation could raise the economic cost to USD 6.9 trillion, severely impacting emerging markets and developing economies (EMDEs) due to reduced access to capital.
The WEF report serves as a stark reminder of the potential consequences of continued geo-economic fragmentation, urging policymakers to consider the long-term costs of decoupling and the importance of maintaining open and rules-based trade and financial systems.
