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The risks had already been elevated prior to Russia’s invasion of Ukraine. As major global powers increasingly compete through antagonistic economic policies, the prospect of outright decoupling - a severing of relations of dependence in certain areas of exchange - is becoming more likely. Initial, alarming indications that decoupling between major economies may become a reality appeared amid the deterioration of trust between the US and China that occurred during the Trump Presidency in matters relating to industrial espionage, intellectual property protection, and technological competition (as well as more traditional trade disputes). The COVID-19 pandemic was an additional shock that exposed a range of areas of industrial production where dependence on imports (including from China) came to be viewed negatively in many countries. While these developments have led to considerable discussion about decoupling, economic realities have evolved more moderately - suggesting a cordoning off of security-sensitive activities likely to become highly securitized, while leaving the much larger share of non-security-sensitive trade mostly untouched. Under this scenario, decoupling would affect important but well-defined areas of exchange, with a risk of fractures, or even balkanization, in terms of rival technical standards - not least with respect to telecommunications technologies. The risks of decoupling and balkanisation, primarily triggered by the technological rise of China and Western responses to it, could worsen over time - particularly if there is a deepening bifurcation between Western-led and China-led industrial production and standards. This process would likely be manageable for multinational corporations. However, an additional major shock was delivered by Russia’s invasion of Ukraine. Economic sanctions targeting Russia include substantial technological containment measures, and severe restrictions on trade, investment, transportation, and travel. In addition, Russia has opted on its own to sever areas of exchange even further. Many Western companies have decided to simply discontinue business in Russia independent of the sanctions, motivated by the threat of consumer boycotts, investor pressure, and Russia’s degrading business infrastructure. This represents a rupture in exchange between Western nations and Russia that comes close to what prevailed during the Cold War. One emerging global pattern may be a partial technological and industrial bifurcation, for strategic and security-sensitive technologies and standards, between a China-led contingent (perhaps including Russia and nations in the Global South) and a partly-hollowed-out, international, and de facto Western-led contingent.

Economic Decoupling and Balkanization

KEY TRENDS

Geoeconomic Shifts