In recent years, the world has undergone a marked shift from liberalisation and globalisation towards protectionism. After decades of promoting free trade, reducing tariffs, encouraging cross-border investments and pushing deregulation, many countries are prioritising domestic industries and strategic autonomy.
Early signs emerged after the 2008 global financial crisis. The next few years witnessed a material increase in job losses, income inequality and cultural identity issues. These contributed to political outcomes such as Brexit and Donald Trump’s 2016 election victory. The U.S.-China trade war that followed forced companies to diversify away from China.
However, the real turning point came with Covid-19. Border closures and supply chain disruptions in early 2020 exposed the world’s overdependence on global production networks. Shortages of critical goods like medical equipment, pharmaceuticals and semiconductors pushed countries to re-evaluate reliance on foreign suppliers and sparked a wave of localisation and self-reliance. During this time, governments injected massive fiscal stimuli. Money wildly chased assets, driving up valuations and masking a shift in investment allocation that was under way. This trend, however, became unmistakable as geopolitics intensified, particularly with the Russia-Ukraine war and growing tensions across regions. The return of Donald Trump has reignited protectionist policies, with high tariffs, sanctions and sweeping regulatory shifts under the “Make America Great Again” banner. Global issues such as climate change, gender equity and economic disparity are increasingly sidelined. The world’s largest economy embracing protectionism is altering global strategies, especially in capital allocation, foreign direct investment and international supply chain design.
Domestic Investment
Protectionist policies are driving countries to channel investments into strategic domestic sectors. Governments are offering tax incentives, subsidies and regulatory support to strengthen national capabilities.
In the US, the CHIPS and Science Act has allocated billions to revive the semiconductor industry. The EU is investing in green energy and digital infrastructure. China continues to double down on self-reliance in key technologies. India has adopted a similar strategy through the “Atmanirbhar Bharat” initiative. Production-Linked Incentive (PLI) schemes in sectors such as electronics, pharmaceuticals, textiles and automotive aim to enhance local manufacturing and attract global capital. These efforts are looking to position India as a credible manufacturing and innovation hub, an appealing “China Plus One” alternative.
FDI and Capital Flows
Countries perceived as protectionist or unstable risk become less attractive to foreign investors. In contrast, regions perceived as stable and as allies are benefitting. Southeast Asian countries like India, Vietnam, and Indonesia are seeing increased FDI as companies diversify supply chains away from China. Strategies like reshoring (bringing production home), nearshoring (relocating to nearby countries) and friend-shoring (investing in allied nations) are becoming common.
India is proactively aligning with these trends. It is leveraging its strengths as the “back office of the world” and working to embed itself in emerging global value chains. Trade agreements such as the India-UAE Comprehensive Economic Partnership Agreement, along with ongoing negotiations with the UK, the EU and Australia, reflect this effort. Importantly, government-to-government ties are increasingly influencing capital flows, particularly from sovereign funds and multilateral institutions, a trend now visible in global capital allocation patterns.
Financial Markets
Financial markets react sharply to protectionist shifts. US Investor allocation to international equities used to be 22-24% in 2016. By 2025 this had dropped to 16-18%. A “flight to safety” contributed to sharp rise in gold prices, while announcements of tariffs, sanctions and subsidies increased market volatility.
Another complexity has emerged from the intersection of protectionism and Environmental, Social, and Governance (ESG) investing. ESG had been a growing global priority, aligning capital with sustainable and responsible business businesses. However, recent US policy shifts around climate and diversity have put ESG in a “wait and watch” mode. This uncertainty is stalling momentum in areas previously seen as vital for long-term value and global good.
The resurgence of protectionism is reshaping the global investment landscape. Investors must adapt to a world where economic nationalism, not just market efficiency, will drive policy and capital flows. We are likely to see the return of home bias, safe-haven and ally investing.
In this evolving global order, India stands at a unique inflection point. With the right policies and partnerships, it can become a key recipient of global capital and a central partner in the next phase of global growth, one that is more sustainable and offers strategic diversification.
Views are personal
