The model shows that another 7% of existing trade relationships would shift between blocks. In concrete terms, that might mean factories making goods for US markets moving from China to, say, India or Mexico.
As that example suggests, there would be winners. But the transition would take time and cause severe bottlenecks along the way, ushering in a period of high and volatile inflation. As Kenneth Rogoff, then a top economist at the International Monetary Fund, warned back in 2003: “The global economy now appears immersed in a long wave of low inflation, but experience suggests that many factors, notably heightened conflict that reverses globalization, can bring it to an end.”
Rival Camps
To be sure, the reality of global fracture is unlikely to play out along quite such clear-cut ideological lines. Still, those numbers provide a sense of what’s at risk.
Democracies can be forgiven for feeling under threat. In 1983, when Ronald Reagan called the Soviet Union an “evil empire,” authoritarian countries accounted for about 20% of global GDP. Fast forward to 2022, and that share has risen to 34%. In the years ahead, with China expected to outgrow the US and Europe, it will edge higher still.
The war in Ukraine shows rival political systems lining up on opposite sides. Chinese President Xi Jinping remains supportive of his Russian ally Vladimir Putin, while Europe and the US are aligned on sanctions for Moscow and military support for Kyiv. It also shows the limits of that framing. India, the world’s most populous democracy, continues to buy Russian oil and weapons. Many other democracies — in Asia, Latin America and elsewhere — show little desire to join the US-led campaign of economic and financial pressure on Russia.
Whether they’re defined by an ideological divide, or simply diverging interests in a multi-polar world, the deepening fault-lines are real. China’s latest Covid lockdowns are a good example of some of their harder-to-predict consequences.
In a world of friendlier great-power relations, Chinese leaders likely would have acquired enough of the effective US-made Pfizer and Moderna mRNA vaccines to give their population a measure of omicron immunity, allowing the economy to reopen. In a world where China is determined to demonstrate its self-sufficiency, and dodge dependence on foreign innovations, they have not.
As a consequence, China’s 1.4 billion population has insufficient protection from the virus. Letting omicron rip could cause 1.6 million deaths, a recent study in the journal Nature Medicine found. So Beijing sees little option but to continue with draconian lockdowns. As a result, China is taking a crushing blow to growth. And the rest of the world faces yet more disruption to supply chains, as Chinese factories stall and cargo ships float idle outside Shanghai’s port.
The threat to US and European economies isn’t limited to the repercussions of Chinese lockdowns, or blowback from their own measures against Russia. They could also be exposed to direct retaliation.
China’s 2010 ban on the sale of rare earths – crucial inputs into everything from smart phones to electric-car batteries – to Japan is one example of how export controls can be used by either side. Russia turning off the gas for Poland and Bulgaria is another. If Putin goes further and cuts shipments to Germany, France and Italy too, the result would put 40% of the European Union’s supply at risk, tipping the bloc from Covid recovery into painful recession.
Even in the depths of the US–China trade war, the idea of an extreme rupture between rival geo-political camps seemed far-fetched. The degree of interdependence embodied in the supply chains of companies like Apple appeared too great to disentangle. Some argued that the end of the Trump administration would restore normal relations.
In 2022, with the trade-war tariffs still in place, the Covid crisis adding to pressure to localize supply chains, and Russia locked out of US and European markets, it doesn’t seem so far-fetched.
The intensity of the current shocks from war and plague will fade. The underlying forces driving deglobalization will not. Brace for a world of lower growth, higher prices, and increased volatility.
Methodology and Sources
To estimate the impact of globalization unravelling on international trade flows, Bloomberg Economics used the quantitative international trade model developed by Antras and Chor (2018) and imposed a 25% tariff on all exports of goods and services between countries in the democratic bloc and countries in the autocratic bloc, as classified using the Freedom House’s scores.
The impact of lower trade intensity on global output is derived from estimating the historical relationship between globalization (using the KOF institute’s aggregate globalization index) and potential GDP (using Bloomberg Economics’ estimates for capital deepening and total factor productivity), in the spirit of Del Negro and Primiceri et al. (2015).
The classification of countries between democracies and autocracies is based on Freedom House’s Freedom in the World annual reports. Countries with a Global Freedom Score of 50 or above are classified as democracies.
Trade volumes subject to sanctions are calculated as the total of bilateral trade flows exposed to partial or total import or export bans, based on data from the Global Sanctions Data Base (GSDB), Felbermayr et al. (2020).
--With assistance from Brendan Murray, Alex Tribou and Scott Johnson.
This article was provided by Bloomberg News.