The ties that bind the global economy together, and delivered goods in abundance across the world, are unravelling at a frightening pace.
Russia’s invasion of Ukraine and China’s Covid Zero lockdowns are disrupting supply chains, hammering growth and pushing inflation to forty-year highs. They’re the chief reasons why Bloomberg Economics has lopped $1.6 trillion off its forecast for global GDP in 2022.
But what if that’s just an initial hit? War and plague won’t last forever. But the underlying problem – a world increasingly divided along geopolitical fault lines — only looks set to get worse.
Bloomberg Economics has run a simulation of what an accelerated reversal of globalization might look like in the longer term. It points to a significantly poorer and less productive planet, with trade back at levels before China joined the World Trade Organization. An additional blow: inflation would likely be higher and more volatile.
‘Going To Stay’
For investors, a world of nasty surprises on growth and inflation has little to cheer equity or bond markets. So far in 2022, commodities – where scarcity drives prices higher – have been among the big winners, along with companies that produce or trade them. Shares in defense firms have outperformed too, as global tensions soar.
“Fragmentation is going to stay,” says Robert Koopman, the WTO’s chief economist. He expects a “reorganized globalization” that will come with a cost: “We won’t be able to use low-cost, marginal-cost production as extensively as we did.”
For three decades, a defining feature of the world economy has been its ability to churn out ever more goods at ever lower prices. The entry of more than a billion workers from China and the former Soviet bloc into the global labor market, coupled with falling trade barriers and hyper-efficient logistics, produced an age of abundance for many.
But the last four years have brought an escalating series of disruptions. Tariffs multiplied during the US-China trade war. The pandemic brought lockdowns. And now, sanctions and export controls are upending the supply of commodities and goods.
All of this risks leaving advanced economies facing a problem they thought they’d vanquished long ago: that of scarcity. Emerging nations could see more acute threats to energy and food security, like the ones already causing turmoil in countries from Sri Lanka to Peru. And everyone will have to grapple with higher prices.
Sri Lanka has been rattled by power cuts, food and fuel shortages, and a currency in free fall. Photographer: Buddhika Weerasinghe/Bloomberg
A few numbers illustrate the scale of the new barriers.
• Tariffs: The trade war saw US charges on Chinese goods rocket up from 3% to about 15% over the course of Donald Trump’s presidency.
• Lockdowns: This year’s Covid crackdown in China has put hundreds of billions of dollars in exports at risk, and disrupted supply chains for companies from Apple Inc. to Tesla Inc.
• Sanctions: In 1983, the flows of trade subject to export or import bans was only worth about 0.3% of global gross domestic product. By 2019, that share had risen more than fivefold. Sweeping embargoes triggered by Russia’s invasion of Ukraine, and efforts by countries to secure their own supplies by barring sales abroad — like India’s recent ban on wheat exports — have pushed the figure higher still.
Viewed from one angle, all of this is part of a global rupture that pits Western democracy and free markets against Chinese and Russian authoritarianism. But it’s not necessary to believe in a Manichean struggle between good and evil — or expect the rival camps to separate behind a new iron curtain -- to see the prospective costs.
About $6 trillion of goods — equivalent to 7% of global GDP — are traded between democratic and autocratic countries. To illustrate the risks of the great unraveling, Bloomberg Economics introduced a 25% tariff on all that traffic into a model of the global economy. That’s equal to the highest rates that the US and China have leveled against each other, and it can stand in for other kinds of friction too, like sanctions and export bans.
The result: global trade plunges by some 20% relative to a scenario without the decoupling — falling back to its levels at the end of the 1990s, before China joined the WTO, as a share of GDP. That’s a huge and wrenching change.
All countries would have to shift resources toward activities they’re less good at. A chunk of the productivity that’s associated with trade would be lost. In the long term, a rollback of globalization to late-1990s levels would leave the world 3.5% poorer than if trade stabilizes at its current share of output, and 15% poorer relative to a scenario of global ties strengthening.