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Trade tensions between China and the U.S., the Covid-19 pandemic and the war in Ukraine are reshaping economic and financial systems away from broad globalization, with concerns about supply-chain vulnerabilities and energy security fostering more economic nationalism.

“We are in the early phase of the most profound geopolitical shifts the world has seen since the end of the Second World War, promising more abrupt and more dangerous changes to economic structures than what we experienced when the Soviet Union collapsed 30 years ago," said Erik F. Nielsen, group chief economics advisor at UniCredit Bank.

Russia’s invasion of Ukraine has shown that globalization creates dependencies that can be used to weaken an adversary when serious conflict arises. Russia has reduced its supplies of energy and food, while the West has increasingly restricted its access to economic and financial systems.

Critics of globalization have long struggled to find an audience given the benefits of broad economic integration, but globalization is now retreating, Citi economists said in a note.

“Covid-19 highlighted vulnerabilities in far-flung supply chains, while the Ukraine war amplified fears over energy and food supply, in particular," they said.

Countries are shifting focus to domestic priorities and aiming to achieve self-sufficiency in as many sectors as possible. In this context, there won’t be a complete rollback of globalization, but there will be growing nationalism.

“Rather than deglobalizing, we think the world economy will coalesce into two blocs centered on the U.S. and on China, a process we are calling fracturing," Capital Economics’ group chief economist Neil Shearing said in a note.

The fracturing of the global economy into these two blocs might not have a significant impact on the macroeconomic prospects of major advanced economies, all of which are allied with the U.S., he said. However, the politically-driven nature of fracturing will have a significant impact on the operating environment for U.S. and European firms in the sectors most exposed to restrictions on trade, such as technology and pharmaceuticals.

“Geopolitical considerations will play a greater role in economic policy than they have for a generation," Jennifer McKeown, head of global economics service at Capital Economics, said in a note.

The base case scenario for Capital Economics is a partial rollback of economic integration, with a mild economic impact on advanced economies. The wider reach of the U.S.-led bloc--and the broader networks within it--will help it to adapt to the challenges posed by fracturing better than the China-led block, economists at Capital Economics argue.

A less benign scenario is that the U.S.- and China-centered blocs don’t hold, and the global economy splinters into smaller regional or national-level groups, the U.K. economic-research firm said. This could entail a rise in supply-chain nationalism and a broader pushback against sharing technology which would result in a larger hit to productivity growth in advanced economies, it said.

The worst scenario would be confrontation between the U.S. and China, sharply eroding economic and financial ties.

“In the worst-case scenario in which Europe has to choose a side in commercial matters, there can only be one side, of course, namely with the U.S. and the democratic world," Mr. Nielsen at UniCredit said. In that scenario, Europe needs to step up in several areas to be a strong partner for the U.S., he said.

In a less severe division between the two blocs, Europe can play a bigger role and help set standards in a number of areas, such as environmental protection, human rights and safety for products, the economist said. Mr. Nielsen doesn’t think there is a growing risk of nationalism within the E.U.

“Public support for the EU and euro is at an all-time high, so it seems to me that the much more likely result is a deeper integration," Mr. Nielsen said.

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