By PAUL WISEMAN
For decades, the free flow of trade across much of the world has provided wealthier nations with easy access to low-cost goods and supplies. This meant strong economies and stable markets.
And for households and businesses, especially in the United States and Europe, that meant an entire generation of ultra-low inflation.
Today, Russia’s invasion of Ukraine has dealt a devastating blow to this system. Prices, which had already increased, increased again. Supply chains, already disrupted by the rapid recovery from the pandemic recession, face renewed pressure.
The growing rift between the world’s democracies and its autocracies has further darkened the global picture.
The new world order leaves multinationals in a delicate situation: they are struggling to keep costs low and profits high while ending ties with Russia and facing pressure from consumers disturbed by Russian aggression and China’s human rights abuses.
Larry Fink, CEO of investment management giant BlackRock, wrote in an annual letter to shareholders last week that the Russian invasion “has upended the world order in place since the end of the Cold War” and “has ended the globalization that we have known for the past three decades.
“Large-scale redirection of supply chains,” Fink warned, “will be inherently inflationary.”
Adam Posen, president of the Peterson Institute for International Economics, wrote in Foreign Affairs that “it now seems likely that the global economy is truly splitting into blocs – one oriented around China and the other around the United States. United”.
Although the rift has been going on for years, Russia’s war on Ukraine may have ended it. This likely concludes an era in which countries with opposing political systems – democracies and authoritarian states alike – could trade and benefit each other. With Russian missiles killing Ukrainian civilians, it seems almost odd to remember that hostile nations could take their differences to the World Trade Organization and expect a peaceful resolution.
“It’s hard to imagine Americans or Europeans in the same room as Russian delegates, pretending that one WTO member hasn’t invaded another,” wrote Rufus Yerxa and Wendy Cutler, both former US trade negotiators, in The National Interest.
Three decades ago, at the end of the Cold War, globalization seemed promising. The Soviet Union had collapsed. Communist China came out of isolation and traded with the world. China joined the World Trade Organization in 2001. Russia followed in 2012.
Scholar Francis Fukuyama has declared “the end of history”, saying the future will inevitably belong to free-market democracies like the United States and its European allies.
Trade flows have accelerated. Multinational companies have moved their production to China to access low-wage labor. They further reduced costs by using a “just in time” strategy to acquire materials only as needed to fulfill orders. Profits have ballooned.
A flood of Chinese imports gave American consumers access to inexpensive toys, clothes and electronics. American policymakers dared to hope that trade liberalization would also push Beijing and other authoritarian regimes toward political openness.
But strains appeared. Europe has become dependent on energy from Vladimir Putin’s Russia. In 2011, an earthquake and tsunami damaged auto parts factories in Japan. A resulting parts shortage slowed factories in the United States, a reminder that supply chains that ran across the Pacific were at risk of disruption.
Then the COVID-19 outbreaks shuttered Chinese factories and ports, stalling supply chains, causing shipping delays and higher prices, and forcing American companies to consider bringing production closer to home. .
Geopolitics has gotten meaner.
American manufacturers have accused China of foul play. They claimed – and many global analysts agreed – that Beijing was manipulating its currency to make its exports cheaper and US imports more expensive, illegally subsidizing its own industries and restricting Western companies’ access to the Chinese market. The United States has run gaping trade deficits with China. Many American factories succumbed to competition.
Riding against globalization in the presidency, President Donald Trump has launched a trade war with Beijing. Direct investment between the two sides has plummeted, a result of Beijing’s push to keep money out of China, tighter US controls on Chinese investment in the United States, and corporate efforts to move some chains from supply outside of China.
Today, Russia’s war is accelerating the economic rift between democracies and autocracies. Putin’s aggression has spurred Western sanctions against Russia’s economy and financial system. China, alone among major nations as an ally of Russia, has sought to strike a balance. He criticized the Western response to the war but did nothing that would clearly violate Western sanctions.
Some companies have reacted to Moscow’s economic pariah status by leaving Russia. BP and Shell abandoned their investments. McDonald’s and Starbucks stopped serving customers. Ukrainian President Volodymyr Zelenskyy has criticized Nestlé, Unilever, Johnson & Johnson, Samsung and LG, among others, for continuing to operate in Russia.
“If you are a (Western) company and you see the future in terms of building new factories, sourcing new products, expanding business areas, you will be more likely to look to countries and companies with similar values and standards,” Cutler, now vice president of the Asia Society Policy Institute, said in an interview.
The emerging economic divide suggests a throwback to the Cold War, when the West and the Soviet bloc largely operated in separate economic spheres. But at the time, China was an economic backwater. This time it is the world’s largest exporter and the second largest economy.
Indeed, despite rising tensions between Beijing and Washington, Americans maintain a voracious appetite for cheap Chinese goods. Last year, China exported nearly $507 billion worth of goods to the United States, the second highest figure on record and far more than any other country.
Western retaliation against Russian aggression, while justified, will have “negative economic consequences that go far beyond Russia’s financial collapse, which will persist and which are not pretty,” Posen warned. in Foreign Affairs.
Innovation is likely to falter as American and European scientists collaborate less with their Chinese and Russian counterparts. Deprived of access to cheap labor and materials, Western companies could produce more expensive products. Consumers may no longer be able to rely on readily available, low-cost goods – an alarming prospect with US inflation at its highest level in 40 years.
A move away from China could eventually shift more production to the United States and help restore some manufacturing jobs. Yet Christopher Rupkey, chief economist at research firm FWDBONDS, foresees at least “one gigantic stumbling block” to that idea: A labor shortage has left U.S. businesses already struggling to fill a near record number of job offers.
“There is no one to work in the factories to produce the goods here on American soil,” Rupkey wrote in a research report.
Relying on low-cost providers was so profitable that “potential pitfalls were easy to ignore or downplay,” Howard Marks, co-chairman of Oaktree Capital, told investors in a letter.
COVID disruptions, along with trade and geopolitical disputes, mean that “companies are looking to shorten their supply lines and make them more reliable, primarily by bringing production back to shore,” Marks wrote. “Rather than the cheapest, easiest and greenest sources, there will likely be more premium on the safest and most secure sources.”
Bindiya Vakil, CEO of Resilinc, a supply chain consultancy, thinks such economic decoupling could take years. Still, she said, “a lot of companies that would have taken maybe 20 years to leave China will now exit within three years.”
At least for now, the collapse of three decades of globalization will make supply chains less efficient and possibly jeopardize a fragile global economy. It will also likely prolong the high inflation that has plagued households and businesses.
“I would say it’s a change for the next 30 years,” Vakil said.