Is this the beginning of Deglobalization? The war in the Ukraine may mark the third and final chapter in the end of Globalization and the beginning of a new era for the world economy.
Initiated 30 years ago after the collapse of the Soviet Union, Globalization famously helped make the world “flat”, connecting capital with workers globally, accentuating countries’ specializations and bringing centers of competences, large pools of labor closer to consumers markets; it brought billions of people out of poverty most notably in China.
3 successive shocks have stopped Globalization’s onward march and put it in reverse. First, political support for Globalization has dramatically eroded. Populists and nationalists in the US and in Europe have pushed the erection of barriers to free trade and immigration on top of the political agenda. Donald Trump shifted a paradigm inside the Republican party by imposing tariffs on various imports. The yellow vests movement in France highlighted the precarity of low-paying job workers having to face the immediate competition of other workers in the developing world. Second, the COVID pandemic revealed the fragility of our economies based on their interdependence with each other. All of a sudden, American and French citizens realized that face masks and a brand new car could not be procured any more because of disruptions in far reaching supply chains and because some strategic components could not be sourced any more nationally as those industries had relocated to remote shores long ago. Third, in the wake of the war in the Ukraine, countries perceive more and more their economic interdependence as a vulnerability that needs to be remedied. The wide ranging sanctions the West is imposing onto the Russian economy could yield substantial costs to Europe in case Russia retaliates with a restriction of its natural gas and oil supply. Governments are going to pursue self-reliance and disentanglement from economic connections wherever that connection represents a risk.
So what will happen? It is likely that Deglobalization will lead to a world economy split into blocs—one oriented around China and one around the United States, with the European Union mostly but not wholly in the latter camp—each attempting to insulate itself from and then diminish the influence of the other.
The economic consequences for the world will be immense, starting with inflation. For companies, reshoring in high-cost countries, building redundant supply chains in safer locations will have a cost, to be shouldered by the consumer. There could be a decline or at least a slow-down in the deployment of innovations. In a world split in blocs, states will ensure that only allies have access to their latest technologies.
Deglobalization seems today inevitable, the same way as Globalization looked unstoppable still some years ago. As impacts are still being assessed, the FACC will keep you updated on the latest economic news for our countries and region.
Cédric Ballarin
