Fragmentation of the World Order

Fragmentation of the world order The global economic order that formed after the end of the Cold War—based on free trade, integrated supply chains, free movement of capital, and multilateral institutions (WTO, IMF, World Bank)—is undergoing a fundamental transformation. The era of hyper-globalization (1990–2016) is giving way to a new paradigm, described by analysts in various terms: deglobalization, regionalization, fragmentation, or “slowbalization.” For a large capital manager, this fragmentation creates a fundamentally new investment environment in which geopolitical risk is no longer episodic (as during the Gulf War in 1991), but a systemic and permanent factor in portfolio management, influencing every allocation decision.

US-China Rivalry Strategic competition between the US and China—the defining geopolitical conflict of the 21st century—has gone far beyond mere trade disputes over tariffs and bilateral trade deficits. It encompasses technological, financial, military, and ideological spheres, shaping a bipolar structure of the world order in which other countries are forced to balance between two poles or pick a side. The trade war, which began with the Trump administration’s tariffs in 2018 (tariffs on $250 billion of Chinese imports), did not end with the change of administration—Biden maintained and expanded the tariffs, supplementing them with technological restrictions. Investment restrictions have become a new and rapidly expanding dimension of this rivalry. President Biden’s order limiting investments in Chinese companies operating in the fields of semiconductors, quantum computing, and artificial intelligence (Outbound Investment Screening), created a new category of regulatory risk for global investors. The Committee on Foreign Investment in the United States (CFIUS) has expanded its authority to block foreign investments in critical technologies and infrastructure. For large investors, especially family offices and institutional portfolios with significant Asian allocation, this means the necessity of legal due diligence for every investment, regarding sanctions compliance and potential restrictions—a process that increases transaction costs and decision-making time.

Financial Decoupling is manifested in the systematic reduction of financial ties between the world’s two largest economies. The delisting of Chinese ADRs (American Depositary Receipts) from American exchanges under the HFCAA (Holding Foreign Companies Accountable Act) forced major Chinese companies (Alibaba, JD.com, Baidu, PDD) to conduct secondary listings in Hong Kong. Restrictions on the purchase of Chinese bonds and stocks by American pension funds (TSP China Investment Ban) and the inclusion of companies in the Entity List of the US Bureau of Industry and Security (BIS) are shrinking the investment universe. In parallel, China is developing alternative financial infrastructure: the digital yuan (e-CNY) as a tool for currency internationalization, the Cross-Border Interbank Payment System (CIPS) as an alternative to SWIFT, its own rating agencies and settlement systems, reducing dependence on Western infrastructure.

Tech Decoupling Technological decoupling is the deepest, most irreversible, and investment-significant aspect of fragmentation. The US export control over the supply of advanced semiconductors (chips with process technology below 14/16 nm) and lithography equipment (primarily EUV systems from ASML) to China, imposed in October 2022 (October 2022 Semiconductor Export Controls) and expanded in October 2023, became a turning point: for the first time since the Cold War, technological restrictions were applied not to specific violating companies, but to an entire country on the grounds of strategic competition. The Netherlands and Japan have joined in, creating coordinated export controls over key equipment producers (ASML, Tokyo Electron, Nikon).

The investment implications of technological decoupling are vast and multilayered: increased capital expenditures (CapEx) of semiconductor companies to build factories in “friendly” jurisdictions—TSMC builds plants in Arizona ($65 billion), Japan (Kumamoto), and Germany (Dresden); Samsung invests $17 billion in a plant in Taylor, Texas; Intel received $52 billion in subsidies under the CHIPS Act. This increases the cost of electronics and AI infrastructure due to the duplication of supply chains, but also creates investment opportunities in beneficiary companies (equipment makers, construction, specialty chemicals). Two parallel technological ecosystems are emerging—Western and Chinese—with their own standards, platforms, operating systems, and suppliers, doubling the needed R&D and reducing global efficiency.

Artificial Intelligence (AI) has become the newest and most strategically significant field of technological rivalry. The control of chip exports such as H100 and A100 (NVIDIA), needed for training large language models (LLM), limits China’s access to advanced computing power. However, China is actively developing its own alternatives: Huawei Ascend 910B, SMIC chips on the 7nm process (without EUV equipment), DeepSeek models showing efficiency with fewer computing resources. This creates fundamental uncertainty concerning the long-term effectiveness of technological sanctions and requires investors to constantly reassess the “bloc alignment” of every tech company in their portfolio.

Supply Chain Sovereignty: Onshoring and Friendshoring The COVID-19 pandemic exposed the critical vulnerabilities of globalized supply chains and triggered a large-scale, multi-year process of their reconfiguration. The semiconductor shortage (2020–2022), logistics breakdown (container crisis, the Ever Given blocking the Suez Canal), reliance on single suppliers (Single Points of Failure) showed that optimizing supply chains solely for cost (Just-in-Time, lean manufacturing) creates systemic fragility. Three models of reorganization: onshoring—full return of production to the country of consumption; nearshoring—moving production to geographically close countries (Mexico for the US, Eastern Europe for the EU); friendshoring—locating production in geopolitically friendly jurisdictions, even if geographically distant (Vietnam, India for Western companies).

Investment implications of supply chain reconfiguration include: significant increases in capital expenditures by industrial companies for building new production facilities (greenfield investments); a 15–30% increase in production costs compared to optimal outsourcing and, as a consequence, structural inflationary pressure; large-scale redistribution of foreign direct investment (FDI) out of China to beneficiary countries. The IRA (Inflation Reduction Act, $369 billion) and CHIPS and Science Act ($280 billion) in the US allocate hundreds of billions of dollars in subsidies for the localization of semiconductor, electric vehicle, battery, and “green” energy production. The EU has adopted the European Chips Act (€43 billion) and the Net-Zero Industry Act. Mexico has become the US’s largest trading partner, surpassing China—the Mexican peso strengthened as one of the best EM currencies in 2023. Vietnam and India are attracting electronics production out of China (Apple, Samsung, Foxconn).

Sanctions Regimes Modern financial sanctions have evolved from a targeted foreign policy tool directed at specific people and organizations into a systemic factor of global financial architecture. The unprecedented freezing of the Bank of Russia’s currency reserves ($300 billion) in February 2022 was a “tectonic” event that called into question the security and inviolability of sovereign assets in Western jurisdictions for any country outside the Western geopolitical alliance. This accelerated the process of de-dollarization: EM central banks are aggressively increasing the gold share in reserves (record purchases in 2022–2024), developing bilateral settlements in national currencies (Russia-China, India-Russia, Saudi Arabia-China), diversifying reserves into yuan (the share of RMB in global reserves rose from 1% to 2.5% over five years).

For portfolio managers, sanctions risk requires multi-level and dynamic analysis: primary sanctions—a direct ban on transactions with sanctioned individuals and legal entities (SDN List—Specially Designated Nationals List); secondary sanctions—the risk of penalties for third parties for transactions with sanctioned entities, even if those third parties are not in the sanctioning country’s jurisdiction; sectoral sanctions—restrictions on entire sectors of the economy (energy, finance, defense); extraterritorial application—the risk of asset freezes in any jurisdiction observing the sanctions, including neutral financial centers (Singapore, Hong Kong, UAE). Compliance infrastructure is becoming a necessary and costly element of operations for any major investor, increasing operating costs.

Practical measures for portfolio management in the context of sanctions risk include: regular automated screening of all portfolio positions for sanctions risks using OFAC databases (Office of Foreign Assets Control), EU Consolidated Financial Sanctions List, UN Security Council Sanctions, UK OFSI, HMT; legal diversification of custodial infrastructure across jurisdictions to reduce the risk of simultaneous asset freezes; monitoring legislative initiatives to expand sanctions (Congressional bills, EU Council regulations); portfolio stress testing for scenarios involving asset freezes in certain jurisdictions or loss of access to certain asset classes; inclusion of sanctions risk in the investment process at the Due Diligence stage.