The connections that bind the global economy and deliver goods in abundance around the world are unfolding at an alarming rate.
Russia’s invasion of Ukraine and blockade of Covid Zero in China disrupt supply chains, kill growth and push inflation to a forty-year high. These are the main reasons why Bloomberg Economics has lowered its global GDP forecast for 2022 by $ 1.6 trillion.
But what if it’s just the initial blow? War and plague will not last forever. But the main problem – a world that is increasingly divided along geopolitical fault lines – only looks worse.
Bloomberg Economics conducted a simulation of what an accelerated reversal of globalization might look like in the long run. This points to a much poorer and less productive planet, where trade has returned to the level before China’s accession to the World Trade Organization. An additional blow: inflation is likely to be higher and more volatile.
For investors, the world of unpleasant surprises due to growth and inflation can do little to boost stock and bond markets. So far in 2022, goods where shortages raise prices have been among the big winners along with the companies that manufacture or trade them. Shares of defense companies have also risen as global tensions rise.
“Fragmentation will remain,” said Robert Coopman, the WTO’s chief economist. He expects a “reorganized globalization” that will have costs: “We will not be able to use cheap production as widely as possible with minimal costs, as we did.”
For three decades, the defining feature of the world economy has been its ability to produce more and more goods at ever lower prices. The entry of more than a billion workers from China and the former Soviet bloc into the world labor market combined with falling trade barriers and hyperactive logistics has led to an era of prosperity for many.
But the last four years have brought an escalation of a number of failures. Tariffs increased during the US-China trade war. The pandemic has brought blockades. And now sanctions and export controls are stopping supplies of goods and commodities.
All this risks leaving developed economies to face a problem they thought they had long since overcome: a deficit problem. Developing countries may see more acute threats to energy and food security, such as those already causing shocks in countries from Sri Lanka to Peru. And everyone will have to fight against rising prices.
Several figures illustrate the scale of the new barriers.
- Tariffs: As a result of the trade war, U.S. wages for Chinese goods rose from 3% to about 15% during Donald Trump’s presidency.
- Blockade: This year’s crackdown on Covid in China has jeopardized hundreds of billions of dollars in exports and disrupted supply chains for companies from Apple Inc. to Tesla Inc.
- Sanctions: In 1983, trade flows banned from exports or imports accounted for only about 0.3% of world gross domestic product. By 2019, this share has grown more than fivefold. The widespread embargo caused by Russia’s invasion of Ukraine and the countries ’efforts to secure their own supplies by banning overseas sales – like India’s recent ban on wheat exports – have pushed this figure even further.
On the one hand, all of this is part of the global rift that confronts Western democracy and free markets against Chinese and Russian authoritarianism. But it is not necessary to believe in the Manichean struggle between good and evil – or to expect competing camps to separate behind the new Iron Curtain – to see the promising costs.
About $ 6 trillion in goods, equivalent to 7% of world GDP, are traded between democracies and autocracies. To illustrate the risks of great destruction, Bloomberg Economics has introduced a 25% tariff on all this traffic in the global economy model. This is equal to the highest rates that the US and China have set against each other, and this could replace other types of friction, such as sanctions and export bans.
The result: world trade falls by about 20% compared to the scenario without secession – returning to the level of the late 1990s, before China’s accession to the WTO, as a share of GDP. This is a huge and offensive change.
All countries will have to devote resources to activities in which they are less good. Part of the performance associated with trade will be lost. In the long run, the rollback of globalization to the level of the late 1990s will leave the world 3.5% poorer than if trade had stabilized at its current share of production, and 15% poorer compared to the scenario of strengthening global ties.
The model shows that another 7% of existing trade relations will move between blocs. Specifically, this could mean that factories producing goods for U.S. markets are moving from China to, say, India or Mexico.
As this example shows, the winners will be. But the transition will take time and cause serious bottlenecks along the way, opening up a period of high and volatile inflation. As Kenneth Rogaff, then chief economist at the International Monetary Fund, warned back in 2003: can bring this to an end. ”
Certainly, the reality of a global rift is unlikely to be played out in such a clear ideological line. However, these figures make it clear that it is under threat.
Democracies can be forgiven for feeling threatened. In 1983, when Ronald Reagan called the Soviet Union an “evil empire,” authoritarian countries accounted for about 20 percent of world GDP. Let’s move to 2022, and that share has risen to 34%. In the coming years, when China is expected to outgrow the US and Europe, it will be even higher.
The war in Ukraine shows that rival political systems are lined up on opposite sides. Chinese President Xi Jinping continues to support his Russian ally Vladimir Putin, while Europe and the United States are adhering to sanctions for Moscow and military support for Kiev. It also shows the limits of this framing. India, the world’s most populous democracy, continues to buy Russian oil and weapons.
Many other democracies – in Asia, Latin America and elsewhere – are reluctant to join the US-led campaign of economic and financial pressure on Russia.
Whether they are determined by ideological divisions or simply diverge interests in a multipolar world, the real lines of fault are deepening. Covid’s recent blockades in China are a good example of some of their consequences that are hard to predict.
In a world of more friendly great-power relations, Chinese leaders would probably buy enough effective American-made Pfizer and Moderna mRNA vaccines to give their populations some immunity to omicron, which would allow the economy to reopen. In a world where China is determined to demonstrate its self-sufficiency and avoid dependence on foreign innovation, they have not.
As a result, China’s 1.4 billion population does not have sufficient protection against the virus. A recent study published in the journal Nature Medicine found that rupture of the omicron could cause 1.6 million deaths. So Beijing sees little other option than to continue the draconian blockades.
As a result, China is taking a crushing blow to growth. And the rest of the world is facing even greater disruptions in supply chains as Chinese factories shut down and cargo ships stand idle outside Shanghai port.
The threat to the US and European economies is not limited to the effects of Chinese blockades or the reversal of their own measures against Russia. They can also be subjected to direct revenge.
China’s 2010 ban on the sale of rare earth elements – important materials for everything from smartphones to batteries for electric cars – Japan is one example of how export controls can be used by both sides. Another thing is that Russia is cutting off gas to Poland and Bulgaria.
If Putin goes further and cuts supplies to Germany, France and Italy, it will jeopardize 40% of supplies to the European Union, which will turn the bloc into a painful recession after Covid’s recovery.
Even in the depths of the US-China trade war, the idea of a rift between competing geopolitical camps seemed far-fetched. The degree of interdependence embodied in the supply chains of companies like Apple seemed too great to untie. Some have argued that the end of the Trump administration will restore normal relations.
In 2022, when trade war tariffs are still in place, the Covid crisis is adding pressure to localize supply chains, and Russia has blocked US and European markets, it doesn’t seem so far-fetched.
The intensity of the current turmoil from the war and the plague will fade. The main forces driving globalization will not be. Prepare for a world with low growth, high prices and high volatility.
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