The IMF expects the Russian economy to contract by 8.5% in 2022
NEW YORK: Whether the war in Ukraine is driving a nail in the coffin of globalization is hotly debated in the West today, amid the jolt the conflict has brought to the international economic order.
Those who debate the future of economic integration and interdependence in the world cite a very important argument that has supported the rise of globalization. They point to the assertion of the West, and particularly the United States, that globalization is the cornerstone of the rules-based international order.
In a globalized world, they argue, countries that are interdependent through trade and financial ties do not go to war. For them, globalization not only prevents conflict, but it ushers in a world of cooperation and peace.
Although this argument has been challenged many times over the past 76 years, since the establishment of the current political and economic architecture after World War II, it has continued to be the gold standard of globalization.
Some analysts proclaim what we see today as the end of an era. Nobel laureate and New York Times columnist Paul Krugman sees cause for concern because of an “economic recovery of 1914, the year that ended what some economists call the first wave of globalization”. He predicts a new wave of de-globalization.
The debate is not whether globalization will be a casualty of the ongoing confrontation between Russia and the West, but how badly the globalized economy will be hurt by the end of the war in Ukraine. . That said, some see globalization as evolutionary but healthy, while others see it as a partial setback rather than an end.
Skeptics predict an accelerating decline in globalization and global economic integration. They say that while the decline was more pronounced in the United States under former President Donald Trump and his “America First” policy, his successor Joe Biden retained an emphasis on prioritizing “Made in America.”
Biden’s foreign and economic policies are rooted in helping the American taxpayer. He tweeted this week: “Since day one, every action I have taken to rebuild our economy has been guided by one principle – Made in America. That means using products, parts and materials made here in the United States. It means bringing manufacturing jobs back and building supply chains right here at home.
Biden wants to make the United States less dependent on Chinese imports and is working to economically decouple the two countries. But Beijing has its own “Made in China 2025” self-sufficiency initiative and is working to reduce reliance on foreign products across the board.
This was the trend even before the Ukrainian war. Now, with unprecedented sanctions against Russia both in volume and scope, China will surely be motivated to accelerate its drive for self-reliance.
Two weeks after the start of the war and the imposition of sanctions, foreign companies and investors were rushing out of Russia. 400 companies are reported to have pulled out of the country, including tech giant Apple, designer Chanel and furniture chain IKEA.
Russia has been cut off from international financial markets and the SWIFT messaging service that connects more than 11,000 financial institutions around the world, while its assets have been confiscated in the United States and Europe.
But we did not worry about what happened to Russia, since it is the 11th largest economy in the world. All eyes were on the second-largest economy, China, where news from its financial markets was troubling. China is more integrated and essential to the global economy than Russia. Reports speak of an “unprecedented large-scale flight of capital from China” following the war in Ukraine.
According to the Institute of International Finance, quoted by Bloomberg, China has seen investors withdraw money from the country on an “unprecedented” scale since Russia invaded Ukraine, causing a “very unusual change in flows of global capital in emerging markets”. The report noted that there were no “similar exits from the rest of emerging markets.”
The IIF’s chief economist, quoted by Bloomberg, said the timing of the outflows, which coincided with Russia’s invasion of Ukraine, ‘suggests investors are looking at China in a new light’ . However, he warned that it might be premature to say whether this was a trend. Meanwhile, the war has injected a palpable sense of urgency into Europe’s efforts to wean itself off Russian oil and gas.
The lesson for investors and businesses from the war in Ukraine and the coronavirus pandemic is that the era of low cost and efficiency cannot compete with reliability and security. Business leaders have learned after the disruptions to supply chains during the pandemic and the ongoing war, that reliability is cheaper than unpredictability.
“The Russian invasion of Ukraine has ended the globalization we have known for the past three decades,” said Larry Fink, CEO of BlackRock, the world’s largest asset manager, in a letter to the public. shareholders last month.
Fink, whose company manages $10 trillion in assets, said Russia’s isolation “will cause businesses and governments around the world to re-evaluate their dependencies and re-analyze their manufacturing and assembly footprints” .
Indeed, since the pandemic, many countries prefer to be independent rather than interdependent by putting sovereignty before free trade and globalization. Observers point to political polarization and fragmentation around the world and see a similar economic trend that will mirror and amplify these divisions.
However, supporters of globalization believe that reports of his death are greatly exaggerated. They are convinced that what we see is only a readjustment to adapt to the new order. They argue that the interconnected world will never return to the fragmented economic blocs of the past because the economic benefits of globalization cannot be replaced. They point out that what the world needs is more globalization, not entrenchment.
Mgozi Okonjo-Iweala, director-general of the World Trade Organization, was quoted in the New York Times as calling for a move towards “re-globalisation”. She told a conference: “Deeper and more diverse international markets remain our best bet for supply resilience.”
Whatever it is called, it is clear that we are witnessing the dawn of a new era, and of a transformation that will reorient the global economy and bring about a redesigned economic order, driven by the impact of the two major disturbances of our time: The pandemic and the war in Europe.
Depending on how the war ends, we could even see a new world political order replacing the one that has prevailed for more than three quarters of a century.