The Three-Bloc World: How Trade Between the US-Led and China-Led Alliances Has Fallen by 15 Per Cent While Trade Within Each Bloc Has Surged by 25 Per Cent

Expert Comment — Global Programme

2026-03-25

TIn 2018, the year before the US-China trade war began, trade between the United States and China exceeded $660 billion. By 2025, it had fallen to approximately $520 billion, a decline of over 20 per cent. Over the same period, trade between the United States and its allies in Europe and Asia increased by over 25 per cent, and trade between China and its Belt and Road partners increased by a similar margin. The global economy is not deglobalising. It is regrouping into three loosely defined blocs, and the process of regrouping is proceeding faster than most policymakers and business leaders recognise.

The US-led bloc encompasses North America, Europe, Japan, South Korea, Australia, and key partners in the Indo-Pacific. It accounts for approximately 50 per cent of global GDP. The bloc is held together by security alliances, technology partnerships, and a shared commitment to democratic governance. The US Inflation Reduction Act provides $369 billion in subsidies for clean energy technologies, with substantial domestic content requirements that encourage investment within the bloc. The EU’s Green Deal Industrial Plan and the US-EU Trade and Technology Council provide frameworks for deepening economic integration. The CHIPS Act encourages semiconductor investment within the US and allied countries. The result is a progressive thickening of economic ties within the US-led bloc and a progressive thinning of ties across bloc boundaries.

The security dimension of the US-led bloc is as important as the economic dimension. The AUKUS partnership, the Quad, the expanded US-Japan alliance, and the modernisation of NATO all provide security underpinnings for economic integration. Countries that share security frameworks are more likely to develop deep economic relationships. The integration of security and economic policy within the US-led bloc represents a fundamental shift from the post-Cold War era, in which security and economics were treated as separate domains. The securitisation of economic policy is one of the most significant developments in contemporary international relations.

The China-led bloc is less institutionally developed but no less real. It includes Russia, Iran, North Korea, Pakistan, and a network of Belt and Road partners across Asia, Africa, and Latin America. China is the largest trading partner of over 120 countries, giving it enormous economic leverage. The Belt and Road Initiative has created infrastructure dependencies, trade relationships, and financial ties that bind partner countries to China. The BRICS Plus framework, the Shanghai Cooperation Organisation, and the Asian Infrastructure Investment Bank provide institutional frameworks for cooperation. The China-led bloc accounts for approximately 25 per cent of global GDP, a share that is growing as China’s economy expands and as more countries align with China’s economic and political orbit.

The world is not deglobalising. It is regrouping. Trade within geopolitical blocs is intensifying even as trade between blocs declines. The question is what form the new globalisation will take.

The third bloc — the nonaligned middle — includes India, Indonesia, Brazil, Turkey, South Africa, and much of the Global South. These countries account for approximately 25 per cent of global GDP and are growing faster than either of the two major blocs. They seek to maintain strategic autonomy, trading with both blocs and aligning with neither. India imports defence equipment from Russia, technology from the United States, and manufactured goods from China. Brazil exports commodities to China and manufactured goods to the United States. Turkey operates within NATO while maintaining close economic ties with Russia and China. The nonaligned countries are the swing voters in the emerging geopolitical economy, and their choices will determine the shape of the new international order.

The US-China technology war has imposed substantial costs on both economies and on the global technology industry. The export controls on semiconductors have reduced revenue for US chip companies by an estimated $5-10 billion annually. Chinese technology companies have been cut off from advanced chips, design software, and manufacturing equipment. The fragmentation of the technology ecosystem has forced companies to develop separate products for different markets, increasing costs and reducing efficiency. The long-term cost of technology decoupling will be measured not only in lost trade but in slower innovation as the global technology industry fragments into competing ecosystems that cannot benefit from each other’s advances.

The fragmentation of the global economy has a financial dimension that is reshaping the international monetary system. The US dollar’s dominance of global reserves, trade settlement, and financial markets is being challenged by the internationalisation of the renminbi, the development of alternative payment systems, and the weaponisation of dollar-based financial sanctions. The share of the US dollar in global foreign exchange reserves has declined from over 70 per cent in 2000 to under 58 per cent today. The BRICS countries have discussed the development of alternative payment systems. While no alternative to the dollar is imminent, the trend toward a more multipolar currency system is clear and will accelerate as fragmentation deepens.

The three-bloc framework is not uniformly distributed across the world. Some regions are more integrated within a single bloc, while others straddle multiple blocs. East Asia is split between the US-led and China-led blocs, with countries such as South Korea, Japan, and Taiwan aligned with the US while maintaining deep economic ties with China. The Middle East is divided between US-aligned Gulf states and China-aligned Iran, with countries such as Turkey and the UAE maintaining relationships with both blocs. Sub-Saharan Africa is the region most exposed to great power competition, with China, the US, and Europe competing for influence and access to resources. The regional dynamics of fragmentation are complex and vary significantly across different parts of the world.

The fragmentation of the global economy has significant implications for business strategy. Companies must now make strategic choices about which markets to serve, where to locate production, and how to structure supply chains. The traditional assumption that globalisation will continue indefinitely can no longer be sustained. Companies that treat fragmentation as a temporary phenomenon risk being caught unprepared. Companies that recognise fragmentation as a structural shift can position themselves to benefit from the new geography of global trade. The strategic choices that companies make in the next few years will determine their competitive position for decades.

The fragmentation of the global economy has created new challenges and opportunities for diplomacy. The G7, G20, and other multilateral forums have become arenas for bloc competition rather than cooperation. The United Nations system is increasingly contested, with Russia and China using their veto power in the Security Council to block Western initiatives and promote their own agendas. The diplomatic implications of fragmentation extend to trade negotiations, climate change, and global health governance. The management of fragmentation will be one of the central challenges of international diplomacy in the coming decade.

The current fragmentation of the global economy has parallels in earlier periods of history. The interwar period, between 1914 and 1945, was characterised by trade blocs, competitive devaluations, and the breakdown of the international economic order. The post-1945 Bretton Woods system was designed to prevent a recurrence of the interwar fragmentation. The current fragmentation is different in important respects: it is driven by geopolitical competition rather than economic nationalism, and it is occurring in a world of much deeper economic interdependence. But the historical parallels are worth studying, because they demonstrate that fragmentation can persist for decades and can have profound consequences for peace and prosperity.