For much of the past three decades, globalisation seemed like an unstoppable force. Governments across the world dismantled barriers to trade, investment and finance, betting that ever-deeper integration would deliver prosperity and stability. But in his new book The Fractured Age: How the Return of Geopolitics Will Splinter the Global Economy, Neil Shearing, group chief economist at Capital Economics, argues that this era has ended. The defining trend of the coming decades, he writes, will be fragmentation, driven above all by US-China rivalry.

“The genesis of the book was really the widespread view that globalisation is dead,” Shearing told bne IntelliNews in an interview. “Data that showed trade volumes were close to record highs and capital flows still high … When I looked at the numbers and tied them into what was happening in the news, it became clearer that it wasn’t globalisation or de-globalisation, it was this process of fracturing where the US and China in particular were pulling apart from one another in certain areas.”

The turning point

Shearing traces the peak of globalisation to the early 2000s, when world trade and capital flows grew at unprecedented rates and global institutions such as the World Trade Organization set the rules of engagement. But the seeds of change were already being sown.

“The turning point,” he wrote, “was in the period between the eruption of the Global Financial Crisis in 2007-08 and the accession to the leadership in China of Xi Jinping in 2012.” Western faith in the benefits of globalisation faltered after the financial crash, while China emerged as a rival power.

In the book, Shearing argued that “the era of hyper-globalisation that defined the global economy in the early twenty-first century is over, mainly because China has emerged as a strategic rival to the US.”

He added: “The US might have been happy to coexist – and trade freely – with a politically repressive China that was economically middling in size, but the sheer size of China’s economy and its increasing ability to project its power overseas means its challenge to the existing order can no longer be ignored.”

One of Shearing’s central points is that globalisation is not reversing wholesale, as seen just under a century ago. “The analogy with the interwar period is interesting but can only be taken so far,” he said. “That was a period of integration, then a period of change when countries turned inwards. We’re at an inflection point now but I don’t think will get to the point where every country is turning inward.”

Instead, he sketches out a central scenario where fracturing is “relatively contained” and focused on strategically sensitive sectors such as semiconductors, dual purpose items and biotech. Other items such as toys, furniture and clothing will continue to be traded with China as they are now. 

The economic cost of such a contained fracturing would be significant but manageable: a hit to global GDP in the range of 4-5%, somewhat larger than the Global Financial Crisis. The real nightmare scenario, Shearing warned, would be outright conflict between the US and China over Taiwan, which could trigger losses of up to 10% of world GDP — “but if the US and China were in a war, the hit to the global economy would probably be the least of our worries.”

Winners and losers

Like any major economic shift, fracturing will create winners as well as losers. The US is likely to remain the world’s largest economy, with its bloc of allies — including Europe, Japan, South Korea, Canada, Australia and others — benefiting from greater economic diversity and technological strengths. Emerging markets that can position themselves as reliable partners to Washington also stand to gain.

India, Vietnam, Mexico and Poland are likely to be among the beneficiaries, according to Shearing, as they can attract supply chains relocating out of China for strategic reasons. 

Some are already seeing results. “Mexico and Vietnam have experienced a surge in exports to the US since 2018,” the book noted. Mexico is emerging as a hub for electric vehicles and batteries, Vietnam for consumer electronics and telecoms equipment, while India could leverage its huge domestic market and IT services base to climb the economic rankings. Both Eastern Europe and Mexico have large automotive sectors that give them the chance to develop as regional hubs for electric vehicles and battery production. 

For resource-rich economies in Africa and Latin America, the story is less promising. Demand for minerals and energy will remain high, strengthening their terms of trade. “But what fracturing does for those countries,” Shearing said, “is reinforce this resource-driven model of growth. It’s very difficult to get rich off resources in a per capita sense.”

China, meanwhile, faces some of the steepest challenges. Its allies, Shearing pointed out, tend to be autocracies or commodity producers. That gives Beijing an edge in securing critical raw materials for the green transition, but leaves it with a far less diverse economic bloc than Washington’s. “The economic costs of a relatively contained form of fracturing would be manageable for the US-bloc but more significant for China,” he wrote.

The tech battlefield 

Shearing identified developing a reliable source of advanced semiconductors as the major challenge for China. Conversely, the US and its allies are scrambling to secure supplies of critical minerals — among them lithium, cobalt and rare earths —that are essential for the expanding electric vehicles and renewable energy sectors.

“The push to secure supplies of key commodities looks set to become a key fault-line in a fractured world,” Shearing argued. “Diversification will become the name of the game.” Governments will need to court producers aggressively to prevent concentrations of supply falling into the hands of a rival bloc.

Another casualty of fracturing process is multilateral institutions like the International Monetary Fund (IMF), World Bank and WTO. These, according to Shearing, are increasingly out of step with today’s realities. “Part of the reason the World Bank and IMF have become outdated, not fit for purpose, is that these institutions created out of the end of the Second World War were inherently Western institutions,” he said. “China’s voting rights in the IMF, for example, don’t reflect its economic heft.”

When it comes to the costs, this will affect “any kind of issues where optimum outcome is depending on multilateral action, climate change being the most obvious,” he told bne IntelliNews. “That requires coordinated action. Without a mechanism to coordinate that, you will get suboptimal outcomes.” 

China, for its part, has tried to shape alternative structures, most notably through the BRICS group. But Shearing is skeptical. “Beyond their size, there’s not much uniting them,” he said, referring to the members of the expanding BRICS. “China and India dominate, and they have at least as many differences with each other as they have in common. I’m doubtful the BRICS will ever be a cohesive bloc.”

Another question Shearing addresses is whether fracturing could end the dollar’s dominance of the global economy. His answer is a firm no.

“I don’t mean the renminbi won’t become more important in global markets,” he said. “We’ll see more trade settled in renminbi, more capital flows in renminbi. But it’s not going to dislodge the dollar from its dominant position. The dollar is coming from such a position of strength.” With just under 90% of global transactions denominated in dollars, even if the yuan share increased, the dollar would still account for the overwhelming majority.

Best case scenario 

Looking ahead, Shearing sketches several possible paths. The costs of fracturing will depend on whether it remains contained to sensitive sectors or spreads more broadly, whether China reforms its model, whether the US maintains leadership of the Western bloc, and whether conflict can be avoided.

“The question in my mind is not trying to resist [fracturing] as a force, it’s trying to shape it, to make sure that we end up with a form of fracturing that imposes the fewest costs.”

One scenario is that the world splinters into several competing blocs, each trying to outdo the other, leading to higher costs and slower growth. Another is a contained fracturing, in which supply chains are reconfigured but overall integration remains high outside of sensitive areas.

What is certain, Shearing argued, is that firms will face a new era where national security considerations play a much greater role in corporate decisions.

In The Fractured Age, Shearing offers a sober but accessible guide to the forces reshaping the world economy. He resists sweeping claims about the end of globalisation, instead offering a nuanced view of a fractured world still bound together by trade but increasingly divided by politics.

“The world benefits in aggregate from globalisation,” he told bne IntelliNews. “Any attempt to unpack that will impose economic costs. The world as a whole will be worse off. But if there is a limited and contained form of fracturing, within that there will be some winners and losers.”

Shearing’s book is not a counsel of despair. Rather, it is a reminder that geopolitics and economics can no longer be separated — and that governments, businesses and investors must prepare for a world where strategic rivalry shapes markets as much as supply and demand.