Will the Ukraine war put an end to global economic interdependence?

Analysis Will the Ukraine war put an end to global economic interdependence?
Disruptions to supply chains have worsened during the Ukraine crisis. (AFP)
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Updated 21 April 2022

Will the Ukraine war put an end to global economic interdependence?

Will the Ukraine war put an end to global economic interdependence?
  • Sanctions on Russia over Ukraine have put a big question mark over the future of economic integration
  • Sanctions on Russia will surely motivate China among other countries to accelerate their self-sufficiency drive

NEW YORK: The question of whether the war in Ukraine is driving a nail into the coffin of globalization is the subject of intense debate in the West today, amid the jolt that the conflict has delivered to the international economic order.
Those debating the future of economic integration and interdependence in the world cite a very important argument that underpinned the rise of globalization. They point to the contention of the West, and especially the US, that globalization is the cornerstone of the rules-based international order.

In a globalized world, they argue, countries that are interdependent with trade and financial ties do not go to war. For them, globalization not only prevents conflict, it ushers in a world of cooperation and peace.

Although this argument has been challenged many times in the last 76 years, since the current political and economic architecture was put in place after the Second World War, it has continued to be the gold standard of globalization.

Some analysts proclaim what we see today as the end of an era. The Nobel Prize winner and New York Times columnist Paul Krugman sees reason to worry because of “an economic replay of 1914, the year that ended what some economists call the first wave of globalization.” He predicts another wave of de-globalization.

Is the war in Ukraine driving a nail into the coffin of globalization? (AFP)

The debate is not about whether globalization will be a casualty of the ongoing confrontation between Russia and the West, but about how badly wounded the globalized economy will be by the end of the Ukraine war. That being said, some see globalization as changing but in good health, while others see a partial retreat rather than the end.

Skeptics foresee an acclereration of the decline of globalization and global economic integration. They say that while the decline was more pronounced in the US under former President Donald Trump and his “America First” policy, his successor Joe Biden has preserved the focus on prioritizing “Made in America.”

Biden’s foreign and economic policies are rooted in helping the American taxpayer. He tweeted this week: “From day one, every action I’ve taken to rebuild our economy has been guided by one principle — Made in America. It means using products, parts, and materials built right here in the US. It means bringing manufacturing jobs back and building supply chains here at home.”

Biden wants to make the US less dependent on Chinese imports, and is working to decouple the two countries economically. But Beijing has its own “Made in China 2025” self-sufficiency initiative, and is working on reducing dependency on foreign products in all fields.

This was the trend even before the Ukraine war. Now, with unprecedented sanctions against Russia both in volume and scope, China will surely be motivated to accelerate its self-sufficiency drive.

Two weeks after the start of the war and the imposition of sanctions, foreign companies and investors were rushing to leave Russia. It is reported that 400 companies have withdrawn from the country, among them tech giant Apple, designer Chanel and furniture chain IKEA.

Russia was cut off from international financial markets and the SWIFT messaging service that connects more than 11,000 financial institutions worldwide, while its assets were confiscated in the US and Europe.

But the worry was not about what was happening to Russia, since it is the world’s 11th-largest economy. The eyes were on the second-largest economy, China, where the news coming from its financial markets was unsettling. China is more integrated and essential to the world economy than Russia. Reports spoke of an “unprecedented, large-scale capital flight from China” as a result of the Ukraine war.

“The Russian invasion of Ukraine has put an end to the globalization we have experienced over the last three decades,” Larry Fink, CEO of BlackRock. (AFP)

According to the Institute of International Finance, quoted by Bloomberg, China has seen investors pull money out of the country on an “unprecedented” scale since Russia invaded Ukraine, making a “very unusual shift in global capital flows in emerging markets.” The report noted that there were no “similar outflows from the rest of emerging markets.”

The IIF’s chief economist was quoted by Bloomberg as saying the timing of the outflows, which coincided with the Russian invasion of Ukraine, “suggests that the investors are looking at China in a new light.” However, he cautioned that it might be premature to say if this was a trend. Meanwhile, the war has injected a palpable sense of urgency into Europe’s efforts to wean itself off Russian oil and gas.

The lesson for investors and companies from the Ukraine war and the coronavirus pandemic is that the era of low cost and efficiency cannot compete with reliability and safety. Business executives have learned after the disruptions in supply chains during the pandemic, and the ongoing war, that reliability is cheaper than unpredictability.

“The Russian invasion of Ukraine has put an end to the globalization we have experienced over the last three decades,” Larry Fink, CEO of BlackRock, the world’s largest asset manager, said in a letter to shareholders last month.

Fink, whose company manages $10 trillion in assets, said Russia’s isolation will “prompt companies and governments worldwide to re-evaluate their dependencies and reanalyze their manufacturing and assembly footprints.”

Indeed, since the pandemic, many countries prefer to be independent rather than interdependent by putting sovereignty ahead of free trade and globalization. Observers point to political polarization and fragmentation in the world, and see a similar economic trend that will reflect and amplify these divisions.

An already ravaged global economy is feeling the effects of sanctions and uncertainty following Russia’s invasion of Ukraine. (AFP)

However, globalization’s supporters believe that reports of its death are greatly exaggerated. They are convinced that what we are seeing is but a readjustment to fit the new order. They contend that the interconnected world will never go back to the fragmented economic blocs of the past because the economic benefits of globalization cannot be replaced. They emphasize that what the world needs is more globalization, not entrenchment.

Mgozi Okonjo-Iweala, director-general of the World Trade Organization, was quoted in the New York Times as calling for a move toward “re-globalization.” She told a conference: “Deeper, more diversified international markets remain our best bet for supply resilience.”

Regardless of what one calls it, there is no denying that we are seeing the dawn of a new era, and a transformation that will reorient the world economy and bring about a redesigned economic order, driven by the impact of the two major disruptions of our time: The pandemic and the war in Europe.

Depending on the way the war ends, one might even see a new political world order to replace the one that has prevailed for over three-quarters of a century.