The great economic divide: East-West split could cost world $6.9 trillion, WEF warns

In the first half of 2026, Asian financial markets experienced a rollercoaster of performance, shaped largely by global geopolitical tensions and technological advancements. Two major themes defined this period: escalating conflicts involving Iran and the rapid expansion of artificial intelligence (AI). These factors influenced investor behavior and market dynamics across the region, leading to significant fluctuations in equity prices, currencies, and commodity values. While some nations saw robust economic growth driven by innovation and strategic positioning, others faced challenges due to trade disputes, inflationary pressures, and shifting global alliances.

The year began with heightened concerns over the Strait of Hormuz, a vital waterway for global oil transportation, which became the focal point of international tension. A blockade in early 2026 disrupted global energy supplies, sending shockwaves through financial markets. Simultaneously, the AI sector surged forward, fueled by breakthroughs in machine learning and automation. Companies across Asia invested heavily in AI research and deployment, leading to a surge in valuations for technology firms. This dual narrative—of geopolitical instability and technological progress—created a volatile environment where investors had to navigate both risk and opportunity.

The World Economic Forum (WEF) issued a stark warning about the potential consequences of increasing economic fragmentation between the East and the West. Its report highlighted that a complete decoupling could result in a loss of up to $6.9 trillion from the global economy during 2025–2026. The WEF noted that existing trade and financial policies were already affecting global GDP growth, reducing it by between $213 billion and $307 billion annually. Emerging markets and developing economies would bear the brunt of these changes due to limited access to capital and increased exposure to external shocks.

The United States has been actively reshaping global trade and financial systems through tariffs and other restrictive measures, primarily targeting China. In response, China leveraged its dominance in critical mineral supply chains and redirected exports, achieving its largest trade surplus in 2025. The U.S. also extended its tariff war to allied countries, prompting retaliatory actions and encouraging nations to seek alternative economic partnerships. This shift has led to a decline in the effectiveness of multilateral institutions such as the IMF, the World Bank, and the WTO, as countries increasingly rely on bilateral agreements and local currency settlements. Such developments pose risks to financial stability and economic efficiency.

Governments around the world have placed increasing pressure on central banks, attempting to influence monetary policy through rhetoric and direct interventions. This trend threatens the independence of central banking institutions and could lead to unpredictable economic outcomes. The WEF estimated that the impact of current trade and financial policies varies significantly across economies. For instance, U.S. output growth is projected to be 0.4–0.6 percentage points lower than previously anticipated, while countries like Indonesia are expected to experience minimal disruption, with only a 0.1 percentage point reduction in output growth. However, the report cautions that governments might increasingly use control over key economic chokepoints as a strategic tool, potentially exacerbating global fragmentation.

Looking ahead, the WEF emphasized the need for preparedness against more extreme scenarios. It warned that in the worst-case situation, economic growth could decline by up to 6.4 percentage points, while inflation could rise by as much as 6.1 percentage points. The report also referenced the sharp escalation in the U.S.-China trade conflict in 2025, when tariffs temporarily surpassed 100%. As the global economy continues to evolve under these conditions, stakeholders must remain vigilant and adaptable to ensure resilience amid ongoing uncertainties.