The War in Ukraine Will Fragment the World, Accelerating Deglobalization.
This phenomenon, which began more than ten years ago, will continue and grow.
World trade is not what it used to be. The international organization that tries to regulate it, the WTO, is forecasting an increase in trade in goods of 3% in 2022, lower than world growth, which could approach 4%.
Of course, this is still the fault of the epidemic. It's mostly the war's fault, according to Larry Fink, who heads BlackRock, the world's largest investment fund with more than $10 trillion in assets under management:
“The Russian invasion ended the globalization we've experienced over the last three decades.”
Just as the 1914-1918 war turned the page on what economist Susan Berger called “our first globalization”. But the great American financier is more than a decade late. He would have done better to look at a note published in January by the BII, which is none other than the BlackRock Investment Institute. A graph over a century and a half clearly showed that world trade has been on a plateau... for almost 15 years now.
Of course, we have to agree on the reality we are talking about. First, globalization is a movement. It is a quantity that becomes more global, that crosses more borders. Then, several quantities are involved. Products, capital, people, information. Most often, the globalization that is praised or rejected is about goods.
A form of deglobalization
And this globalization came to a halt more than a decade ago. Some analysts and economists were already talking about the paradoxes of deglobalization in 2011. That's saying something! The WTO reminds us in its latest forecasts: world merchandise trade grew twice as fast as world GDP before the 2008 financial crisis “but the ratio between trade growth and GDP growth fell to around one on average after the crisis”.
On closer inspection, trade has been growing at a slightly slower pace than output since then. It is indeed a form of de-globalization that is at work. The experts at the McKinsey Global Institute, the research company backed by the firm of the same name, believe that the turnaround took place before the financial crisis.
Donald Trump's blow to globalization
The causes are multiple:
Need to produce closer to consumers
Rising wages in emerging countries
Chinese manufacturers are concentrating on their domestic market
Awareness of the fragility of stretched production chains
…
Why then does Larry Fink now speak of an “end to globalization” with the emergence of new world order? Perhaps because this end no longer comes from a myriad of economic decisions, but from a political choice. Vladimir Putin would have broken the dynamic by deciding to attack Ukraine. But this is a very American point of view here.
Seen from elsewhere, it is perfectly possible to consider that the real political breakthrough came on November 8, 2016, with the election in the United States of Donald Trump, who had built his program on closing the borders.
The breakdown of the 2008 financial crisis
Since then, trade relations have become much tenser. First between the United States and China, then between the United States and Europe, then Europe and China. The COVID-19 epidemic has further distanced them from each other.
Perhaps Larry Fink was thinking not of goods, but capital. After all, his job is to invest other people's money, all over the world. The financial blocking of Russia by the major Western capitals marks a turning point. Investors will now have to take into account a new geopolitical risk.
But the major break in capital movements dates precisely from the financial crisis of 2008, which had brutally frozen them. Since then, banking flows between countries have never recovered their pre-crisis level. Direct investment abroad has continued but at a much slower pace.
The emergence of the Sino-Russian bloc
So deglobalization is nothing new. Russia's invasion of Ukraine is a sign of another reality: the re-fragmentation of the world, which will logically accentuate it. Kristalina Georgieva, the managing director of the International Monetary Fund (IMF), recently spoke of this growing risk:
“The war also increases the risk of a more permanent fragmentation of the world economy into geopolitical blocs with distinct technology standards, cross‑border payment systems, and reserve currencies.”
Russia, for example, could aggregate into a Chinese bloc, as shown by the agreement to build a huge gas pipeline between the two countries, signed just after the invasion. It is not only goods and capital that are affected. Tourists, services, and data will flow less from one block to another. Globalization is a thing of the past. And those who hated it will probably soon regret it.
Some reading
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