European Central Bank publishes discussion paper linking trade fragmentation to rising US China geoeconomic rivalry

The European Central Bank has published a discussion paper on geoeconomics and trade that reviews the evolution of globalisation and argues that world trade has been fragmenting along geopolitical lines since the global financial crisis. The paper says trade between geopolitically aligned countries has remained broadly stable while trade across blocs has declined, and it attributes that shift to the growing use of trade policy to pursue geopolitical objectives, particularly as geoeconomic power has moved gradually from the United States toward China. The paper argues that structural factors such as maturing global value chains, weaker support for liberalisation, supply chain vulnerabilities exposed by the COVID-19 pandemic and China’s more domestically oriented growth model help explain the post-crisis slowdown in trade, but not the bloc-based decoupling seen since the 2010s. It presents China’s growing role as a supplier of critical intermediates and as an export market as a key source of leverage, while also describing US tariff escalation since 2018 as part of a broader defensive response to shifting power balances. On Europe, it says the European Union needs to weigh trade efficiency gains more explicitly against risks from critical dependencies, improve coordination across member states, treat growth as a strategic priority, reduce asymmetric vulnerabilities and build coalitions with like-minded partners to support a rules-based international order. The paper also reviews the macroeconomic effects of tariffs and other trade barriers, describing them as capable of raising costs, disrupting supply chains, weakening output and affecting inflation and financial stability, especially if retaliation broadens into a wider trade conflict.