Capital Group: Scenarios of a Fragmented World
12 SEPT, 2025
By Tom Cooney, International Policy Advisor, Capital Group
The world is at a geopolitical crossroads. The United States, one of the main pillars of the global order, has begun questioning the assumptions underlying this system. Although the global order started to unravel after the 2008 financial crisis, subsequent U.S. administrations—including President Biden’s—sought to maintain the existing framework through traditional alliances. This trajectory shifted sharply during President Trump’s second term, with his administration emphasizing a decisive pivot based on rebalancing defense commitments and revising trade and financial systems.
This strategic shift is likely to have lasting consequences, regardless of future U.S. political changes. By stepping back from soft-power tools, the U.S. may rely more on other powers to achieve its objectives. China and Russia, long critical of the Western-led liberal order, are also leveraging markets and military strength to shape global dynamics in their favor. While many European nations continue to uphold human rights and democratic values, the absence of consistent U.S. leadership makes it harder to present these ideals as globally cohesive.
A Framework for an Uncertain Future
The global order is fragmenting along two main axes: economic and military power. Economically, the world could lean toward tactical negotiations or entrenched isolation. In a negotiation-driven scenario, tariffs are used as leverage but remain manageable, capital flows stay robust, and global supply chains adapt through “friendshoring.” Conversely, an isolationist world is marked by failed negotiations, permanent tariffs, retaliatory trade blocks, severe disruptions in goods and capital flows, and a greater threat to the U.S. dollar’s status as a global reserve currency.
Militarily, the spectrum ranges from long-standing alliances and strategic deterrents to more assertive displays of influence. In globally cooperative scenarios—similar to the international context of the past six to seven decades—alliances such as NATO remain stable, conflicts are resolved multilaterally, and diplomacy plays a central role in easing tensions. Leaders may adopt moderate approaches to international claims, and the U.S. could support de-escalation and dialogue.
In less cooperative scenarios, however, major powers may pursue their interests more directly—through occupation of strategic areas, intensification of regional disputes, and higher risk of weapons proliferation. Multilateral institutions like the United Nations could see their effectiveness questioned, recalling historical periods when global governance structures struggled to maintain influence.
These dynamics combine to form four distinct geopolitical outcomes, each with profound implications for global stability, economic integration, and norms governing international engagement:
- Trade Battle: Characterized by high tariffs, export restrictions, and other protectionist measures that accelerate economic isolation and supply-chain shifts. The U.S. collaborates with other countries to limit risks and diversify economies. Major powers like the U.S. and China clash on technology and trade.
- Grand Agreements: Diplomacy prevails and alliances endure. Mini trade deals may satisfy President Trump, with moderate tariff increases. The U.S. re-engages with NATO/Europe, and U.S.-China tensions remain manageable. This scenario is the most favorable and generally positive for equity markets and the economy.
- Great Powers: Major powers recognize regional spheres of influence while avoiding direct conflict. Trade threats subside, leaving only an orderly division of power—similar to the colonial-era balance where major powers partitioned influence under non-aggression pacts.
- Assertive Nationalism: The opposite of the cooperative scenario, marked by global trade wars and stronger use of hard power for security, with the potential for military clashes among major powers. This scenario would likely negatively affect markets and economies.
Investing in a Changing World
Macroeconomic implications mirror these four scenarios, shaped by geopolitical and economic dynamics. The harshest scenario, Assertive Nationalism, implies no growth, near-zero interest rates, large fiscal deficits, a weaker dollar, and gains for competing currencies and gold.
The Trade Battle scenario could create conditions resembling stagflation. Rising tariffs may fuel inflation, prompting the Fed to raise rates despite modest growth, high unemployment, and large fiscal deficits.
In the Great Powers scenario, governments manage large fiscal deficits and tolerate high inflation while prioritizing geopolitical influence and regional control. Despite these pressures, global growth remains relatively resilient, supported by bloc trade and strategic investments.
The Grand Agreements scenario envisions a more stable global context, where diplomacy prevails, growth remains solid, inflation stays moderate, and the dollar retains its strength.
