Geoeconomic power shift fragments trade, EU must adapt

An ECB discussion paper argues that a gradual shift in geoeconomic power from the United States to China is driving fragmentation in world trade. The authors provide policy recommendations for the European Union to navigate intensifying geopolitical competition.

Trade's post-war boom and geopolitical fault lines

World trade expanded strongly after World War II, driven by declining costs, technological progress, and liberalisation.

The US established a rule-based international order, with China's integration in the 1990s accelerating growth.

However, the 2008 Global Financial Crisis marked a turning point.

Since then, global trade has fragmented along geopolitical lines, with trade intensity declining between countries in different geopolitical blocs.

The paper highlights that the use of trade policy for strategic purposes, notably by the Trump administration, is consistent with this existing trend, risking a collectively detrimental escalation of fragmentation.

Structural factors like maturing global value chains, weakened political support for liberalisation, and supply chain vulnerabilities also contributed to the slowdown, but cannot fully explain the geopolitical decoupling observed since the 2010s.

Leveraging economic dependencies

Geoeconomics, central to this analysis, involves leveraging economic dependencies to pursue geopolitical objectives, using trade as a strategic lever.

Countries with geoeconomic power employ "threats not to sell" and "threats not to buy" to extract rents, with this power determined by the scale of dependencies and the ease of circumvention.

The increasing fragmentation of world trade since the 2010s reflects the growing role of geopolitical objectives in trade policy.

Countries are reorganising trade relationships to mitigate geoeconomic dependencies amid intensifying competition.

China's economic rise has shifted global geoeconomic power, granting it significant leverage over the EU and US through its role in intermediate goods production and as an export market.

The US tariff escalation against China, initiated in 2018 and intensified since 2025, illustrates this logic, aiming to reduce asymmetric exposure.

EU's new geoeconomic reality

The European Union must fundamentally adapt to the reshuffling of global geoeconomic power configurations.

This requires explicitly balancing efficiency gains from trade against risks from critical dependencies in key inputs and sectors.

Strengthening coordination across member states and sustaining economic growth for strategic considerations are crucial.

Finally, the EU should seek to form coalitions with like-minded trading partners to uphold a rule-based international order.