Russia’s aggression in Ukraine and China’s Kovid Zero lockdown are disrupting the supply chain, hurting growth and pushing inflation to a 40-year high. They are the main reason for Bloomberg Economics to reduce জ 1.6 trillion from the global GDP forecast in 2022.
But what if that’s just an initial blow? War and plague will not last forever. But the underlying problem – a world divided by a growing geopolitical fault line – is only getting worse.
Bloomberg Economics runs an imitation of how rapid globalization can change in the long run. This points to a significantly poorer and less productive planet, where China returned to trade levels before joining the WTO. An additional blow: Inflation will probably be higher and more volatile.
For investors, there is nothing like pleasing the equity or bond market in a world of bad surprises with growth and inflation. So far in 2022, products – where deficits push prices higher – are among the big winners, as well as companies that manufacture or trade them. Shares of defense firms have also surpassed global tensions.
“There must be disintegration,” said Robert Kopman, the WTO’s chief economist. He hopes for a “restructured globalization” that will come with costs: “We will not be able to use low-cost, marginal-cost production as widely as we do.”
For three decades, a defining feature of the world economy has been the ability to churn out more products at the lowest prices. The entry of more than a billion workers from China and the former Soviet bloc into the global labor market, along with declining trade barriers and over-skilled logistics, has created an age of abundance for many.
But the last four years have brought a growing series of setbacks. Tariffs have multiplied during the US-China trade war. The epidemic has brought down the lockdown. And now, sanctions and export controls are increasing the supply of goods and products.
All of these risks pose a problem to developed economies that they thought they would be defeated long ago: scarcity. Emerging countries could see more serious threats to energy and food security, as they have already caused unrest in countries from Sri Lanka to Peru. And everyone has to be hit with high prices.
A few numbers illustrate the new barrier scale.
- Tariff: US tariffs on Chinese goods have risen from 3% to about 15% during Donald Trump’s presidency due to the trade war.
- Lockdown: This year’s coveted crackdown in China has put hundreds of billions of dollars worth of exports at risk and disrupted the supply chain from Apple to Tesla Inc.
- Restrictions: In 1983, the value of trade flows, subject to export or import sanctions, was about 0.3% of the world’s gross domestic product. By 2019, those shares have more than quadrupled. Russia’s aggression in Ukraine has led to massive sanctions, and efforts to secure countries’ own supplies by stopping sales abroad – such as India’s recent ban on wheat exports – have exacerbated that number.
Seen from one angle, all of this is part of a global breakdown that has pitted Western democracies and free markets against Chinese and Russian authoritarianism. But there is no need to believe in a Manichaean battle between good and evil – or that rival camps will be separated behind a new iron curtain – to see the potential cost.
About $ 6 trillion of goods – equivalent to 7% of global GDP – are traded between democracies and dictatorships. To illustrate the risks of huge revelations, Bloomberg Economics has introduced a 25% tariff on all traffic as a model for the world economy. This is equivalent to the highest rates that the United States and China have leveled against each other, and it could stand in the way of other types of frictions, such as sanctions and export sanctions.
Results: Global trade has declined by almost 20% compared to a scenario without decoupling – returning to its level in the late 1990s, before China joined the WTO, as part of GDP. That’s a huge and wrenching change.
All countries need to move resources towards activities that they are less good at. A part of the productivity involved in trade will be lost. In the long run, a rollback to globalization in the late 1990s would make the world 3.5% poorer if trade stabilized at its current output, and 15% poorer than the scenario of strengthening global relations.
The model shows that a further 7% of existing trade relations will be shifted within the block. In concrete terms, this could mean that factories manufacturing goods for the US market are moving from China to India or Mexico.
That example suggests, will be the winner. But the transition will take time and create serious obstacles along the way, which will trigger a period of high and volatile inflation. Kenneth Rogoff, then a top economist at the International Monetary Fund, warned again in 2003: That’s the decent thing to do, and it should end there. ”
To be sure, the reality of global fractures is unlikely to play out with such a clear-cut ideological line. Nevertheless, these numbers indicate what is at stake.
Democracy can be forgiven for being threatened. In 1983, when Ronald Reagan called the Soviet Union an “evil empire,” authoritarian nations accounted for about 20% of world GDP. Fast forward to 2022, and that share has risen 34%. In the years ahead, China is expected to surpass the United States and Europe, even higher.
Ukraine war shows rival political system lined up in the opposite direction. Chinese President Xi Jinping has sided with his Russian ally Vladimir Putin, while Europe and the United States have rallied around sanctions on Moscow and military support for Kiev. 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 interest in joining the US-led campaign of economic and financial pressure on Russia.
Whether they are defined by an ideological divide, or simply a deviation of interest in a multi-polar world, deeper fault-lines are real. China’s latest coveted lockdowns are a good example of some of their hard-to-predict consequences.
In a world of friendly great-power relations, Chinese leaders could probably achieve a substantial amount of US-made effectiveness.
And Moderna mRNA vaccines allow the economy to revive, giving their populations a measure of omicon immunity. In a world where China is determined to show its self-sufficiency and avoid reliance on foreign innovation, they have not.
As a result, 1.4 billion people in China have inadequate protection from the virus. A recent study in the journal Nature Medicine found that Omicron ripping could cause 1.6 million deaths. So Beijing sees little option but to continue the harsh lockdown. As a result, China is experiencing extreme pressure on growth. Outside the port of Shanghai, Chinese factory stalls and cargo ships floated idly, and the rest of the world’s supply chains faced further disruptions.
The threat to the US and European economies is not limited to the response to the Chinese lockdown, or the push for their own action against Russia. They may face direct retaliation.
China’s 2010 ban on rare earth sales – an important input in everything from smart phones to electric car batteries – is an example of how export controls in Japan can be used by both sides. Russia is blocking gas supplies to Poland and Bulgaria. If Putin goes further and cuts shipments to Germany, France and Italy, the result will be a 40% risk to EU supplies, leaving the bloc in a painful recession from the Covid recovery.
Even in the depths of the US-China trade war, the idea of capturing extreme rifts within rival geopolitical camps seemed far-reaching. The degree of tangible interdependence in the supply chain of a company like Apple seemed to be too great to break. Some argued that ending the Trump administration would restore normal relations.
In 2022, with trade-war tariffs still in place, the Covid crisis putting pressure on the supply chain to localize and Russia being locked out of the US and European markets, it does not seem so far-fetched.
The intensity of the current shocks from the war and the plague will fade. The underlying forces will not drive globalization. Brace for a world of low growth, high prices, and increased volatility.
Methods and formulas
To estimate the impact of globalization on international trade flows, Bloomberg used the quantitative international trade model developed by Bloomberg Economics Entrepreneur and Thief (2018) and imposed a 25% tariff on exports of all goods and services within and within the bloc. Autocratic blocks, such as Freedom House, have been classified using scores.
The effect of low trade intensity on global output stems from estimating the historical relationship between globalization (using the KOF Institute’s overall globalization index) and potential GDP (using Bloomberg Economics estimates for capital deepening and total factor productivity). . (2015).
Countries are categorized into democracies and dictatorships on the basis of Freedom House’s Freedom in the World Annual Report. Countries with a Global Freedom Score of 50 or higher are classified as democracies.
Based on data from the Global Sanction Database (GSDB), Felbermayr et al, the amount of trade subject to sanctions is calculated as the total bilateral trade flows that come in contact with partial or total import or export sanctions. (2020).
– Assisted by Brendan Murray, Alex Tribo and Scott Johnson.