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Global Trade and Investment in 2022

Protectionism, end of globalization, trading blocs… what’s the New Normal?

Since the 1990s, following the collapse of the Soviet Union, the story of the global economy has been that of trade deals and shipping improvements that lowered the barriers to international trade.

Richer countries were able to reap the fruits of poorer countries’ lower labor costs. Less affluent countries, particularly China, were able to grow their economies more quickly and build sizeable middle classes.

Certain aspects of global trade were largely taken for granted. Shipping would be reliable and cost a fraction of the value of goods being moved. Raw materials would be cheap and widely available.

But in the course of just four years, globalization has been set on its ear.

Four Unprecedented Years 

First, it was the Trump tariffs in 2018, then came the Covid-19 pandemic in 2020, and now Russia’s war on Ukraine in 2022.

These three major events have prompted companies to look inward and sacrifice efficiency for reliability and stability, shifting from an emphasis on « just-in-time » to « just-in-case. »

As a result of production stoppages caused by Russia’s invasion of Ukraine and the loss of Chinese components during the pandemic, Germany’s Volkswagen is making the uninterrupted delivery of parts a priority over competitive pricing and could accept dual sourcing of some components. This is a practice that the industry gave up years ago in favor of single sourcing components and just-in-time delivery.

Governments also focused more on safeguarding access to key goods for reasons of national security. Pending legislation in Congress that would dedicate billions of dollars to incentivize the manufacture of microchips in the United States is just one example.

So Where Are We Heading? 

Due to the actions of both companies and governments, it is becoming increasingly clear that the global economy of the 2020s is having little resemblance to past decades. We are witnessing what Adam Posen, president of the Peterson Institute for International Economics, labels a « corrosion of globalization. »

« It now seems likely that the world economy really will split into blocs, each attempting to insulate itself from and then diminish the influence of the other, » Posen wrote recently in Foreign Affairs.

« With less economic interconnectedness, the world will see lower trend growth and less innovation, » he continues. « Domestic incumbent companies and industries will have more power to demand special protections. Altogether, the real returns on investments made by households and corporations will go down”.

Larry Fink, co-founder and CEO of Blackrock, takes the same view. In a letter to shareholders, he writes that Russia’s invasion of Ukraine and its subsequent decoupling from the world economy has « put an end » to the globalization seen in recent decades, while predicting the « magnitude of Russia’s actions will play out for decades to come”.

BlackRock, a global investment management company, has joined scores of international companies in severing business ties with Russia.

Fink and Posen are among a growing number of business executives and commentators who believe that the war in Ukraine will accelerate the shift many nations seek to become more self-sufficient.

The proof is out there if you only listen to what both President Joe Biden and President Xi Jinping of China, representing the two largest economies in the world, are saying. They are essentially singing from the same protectionist songbook.

In his March 1 State of the Union address, Biden vowed “to make sure everything from the deck of an aircraft carrier to the steel on highway guardrails is made in America from beginning to end.” Meanwhile, President Xi recently said that “the rice bowls of the Chinese people must be filled with Chinese grain.” 

And How Will Events in Ukraine Influence the Global Economy

The war in Ukraine has certainly upended the global economy. Severe sanctions have isolated Russia, and supply-chain shocks have roiled markets for food, energy and other commodities. With Russia cut off from the world economy, the prospect of sustained shortages is real, while the prices of oil, certain metals, and agricultural commodities have already soared.

A sustained halt in Russian energy exports could have a dire effect on the global economy, a report from the Federal Reserve Bank of Dallas said last week. “If the bulk of Russian energy exports is off the market for the remainder of 2022, a global economic downturn seems unavoidable. This slowdown could be more protracted than that in 1991,” the bank report said.

The U.S. has pledged to work with international partners to provide at least 15 billion cubic meters more of liquified natural gas to Europe this year, seeking to end the bloc’s dependence on Russian energy exports following the Kremlin’s invasion of Ukraine. The European Union currently receives about 40 percent of its gas via Russian pipelines, several of which run through Ukraine. The EU has vowed to slash Russian natural gas imports by two-thirds by next winter, and to phase them out by 2027.

UN Secretary-General António Guterres has warned that the war in Ukraine could “spiral into a global hunger crisis,” due to soaring fertilizer prices. Fertilizer is a key component in food production, meaning farmers are poised to face higher costs likely leading to further increases in food prices.

Russia is the largest exporter of nitrogen fertilizers in the world but has suspended fertilizer exports due to Western sanctions. Shipments have been disrupted, supplies have dried up, and prices have soared. Fertilizer is about three to four times more expensive than it was in 2020, The Wall Street Journal reported last week. Fertilizer accounts for 11 percent of the variable cash costs for U.S. farmers, according to a Wells Fargo Investment Institute report.

The price of food globally was already nearing record highs due to Covid-related supply chain disruptions, gnarly weather, and spiking energy prices. The war in Ukraine is only compounding those problems. Russia and Ukraine supply more than a quarter of the world’s wheat. “We are going to have a food crisis. It’s a question of how large,” one European fertilizer CEO told The Wall Street Journal.

Soaring energy and food prices driven by Russia’s invasion of Ukraine pushed inflation in Europe last month to levels not seen in four decades, with prices in the 19 countries that use the euro soaring 7.5 percent, according to data released Friday by Europe’s statistics agency. Analysts say its only going to get worse.

A Final Word 

The difference between the pandemic and the war is that there was justified optimism that once the pandemic came to an end, the old normal would return.

Political Scientist Ivan Krastev notes in Speigel International, “After this war, there will be a realization that there is no old normal. And the Russians? They will hardly be able to say that it wasn’t that bad and that nothing tragic happened. There could be a cease-fire or maybe even a peace treaty, but will the West remove its sanctions? Will the people of Europe forget that the pharmacies in Vienna were sold out of iodine for several days? Our world has changed. We used to be in a postwar world, now we are in a prewar world. That is the change, and it is taking place in people’s heads.”

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