The world is in a terrible place at the moment.
The fallout from Russia’s invasion of Ukraine could redraw the world’s map.
Are we witnessing the remaking of the economic order, with “globalisation” in retreat?
Some analysts think so.
But it depends what you mean by “globalisation.”
What is globalisation?
When we talk about globalisation, we’re referring to global trade.
For thousands of years, ancient trade routes were used to shift goods and ideas from one region of the world to another, which was a global process of a kind.
But the term “globalisation” is specifically tied to the evolution of industrial capitalism.
The “first great wave” of globalisation occurred in the 19th century.
Revolutionary technologies like the railway, the steamship, and refrigeration allowed goods to be transported over vast distances, enabling a truly global market for capital and manufacturing to be created.
The “second great wave” occurred in the late 20th and early 21st centuries.
The technologies of this era obliterated time itself, allowing cross-border transactions of data to occur instantly.
They also supported just-in-time manufacturing models that forged ever-tighter bonds between countries and continents.
However, the word “globalisation” was hardly used before the late 1980s, and it is popularly only associated with the second wave — especially the period from the 1980s onwards.
Globalisation and the world order
Since the fall of the Berlin Wall in 1989 and the declaration of the end of the Cold War, the world’s major economies have progressively integrated, and it has fuelled China’s rise as a major economic power.
In the 21st century, highly sophisticated supply chains have come to straddle the globe.
For example, the Apple iPhone is famously made of hundreds of parts, with components sourced from over 40 countries across six continents.
However, the COVID-19 pandemic exposed weaknesses in just-in-time supply chains, resulting in severe goods shortages and price hikes.
Questions are now being asked about the potential benefits of “onshoring” – where elements of manufacturing are brought back onshore (to industrialised countries).
And now, with sanctions against Russia threatening the supply of many crucial commodities, questions are being asked about the future of the global economic order itself.
And some analysts aren’t mincing words.
Rabobank analysts think we’re about to see the largest supply shock since the aftermath of the Yom Kippur War in 1973.
They say commodity prices — as measured by the HWWI Index — have more than doubled since pre-pandemic levels, driven by crude oil, coal and gas prices.
They say the two major shocks that came anywhere near this were the 90 per cent rise in commodity prices following the Yom Kippur war in October 1973 — driven by oil — and the second oil crisis in 1979 following the Iranian Revolution.
Both events were followed by deep recessions.
They also contributed to the collapse of the post-World War II financial order in the 1970s.
Supply chains will be re-written
Freight Waves, the global supply chain magazine, published an extraordinary piece last week.
It argued that “the second Cold War is here” and entire supply chains will be re-written as a consequence.
“We are witnessing the remaking of the world order in front of our eyes, and this will impact global supply chains in unforeseen ways,” Freight Waves chief executive Craig Fuller wrote.
“We are about to experience the most dramatic and unpredictable supply chain map we’ve experienced since World War II.
“If the Russia-Ukraine conflict’s international ramifications keep spreading, we face a real possibility of a bifurcating global economy, in which geopolitical alliances, energy and food flows, currency systems, and trade lanes could split.”
Mr Fuller predicted Western companies would start to shift sourcing away from the “East” and more toward Western and neutral states.
“North American economic integration will become a new priority,” he said.
“Surface transportation across the Eurasian continent will become more complex, and possibly contested.
“Entire supply chains will be rewritten, with new sources and partners, all in the interest of corporate and national security.
“The future market winners will be the corporations that make the investments in supply chain infrastructure and reliable, Western-friendly production locations.”
Shifting tectonic plates
Mr Fuller said trends in global trade often took decades to play out, so these changes would not happen overnight.
Globalisation driven by the World Trade Organization took decades, and if the global economy begins to decouple in the aftermath of Russia’s Ukraine invasion, that decoupling process could take decades too.
But with Russia and China choosing regional hegemony over global integration, Western supply chains would be reconfigured, Mr Fuller said.
“New investments in supply chain technologies and automation will be accelerated, as will preference for near-shoring and domestic sourcing,” he said.
Globalisation in retreat? It depends
Of course, analysts have speculated for years about the future of globalisation.
And Barry Eichengreen, an economist from the University of California, Berkeley, says global trade has been growing more slowly since the 2008 financial crisis.
In 2016, a month before Donald Trump won the US presidential election, Professor Eichengreen said if you defined globalisation as a process of increasing integration for the world’s economies, then you could argue that globalisation was in retreat.
He said the trade-to-GDP ratio, “probably the most straightforward measure of globalisation”, had been falling since the GFC.
See the world trade-to-GDP graph below.
He said global trade had increased from the late 1980s through the 2008 financial crisis at an annual average rate of 8 per cent, nearly twice as fast as the production of goods and services.
Cross-border financial flows grew even more rapidly, “reflecting the breakneck pace of financial globalisation.”
But from 2010, those dynamics changed significantly, he said.
The global trade-to-GDP ratio began declining after the GFC, and by 2016, gross financial flows across borders had fallen to half their pre-2009 levels.
However, he said you could look at globalisation another way.
He said if you defined globalisation as a situation in which nations accepted a degree of integration, without requiring “ever deeper integration,” then globalisation wasn’t in retreat.
“The rate of growth of cross-border transactions can evidently be stabilised or modulated — globalisation can be recalibrated, in other words — without placing the phenomenon itself at risk,” he wrote.
“Brexit, if this is correct, does not spell the end of globalisation, either for Britain or generally.
“It simply signals a new era in which the UK government, and perhaps others, put the brakes on ever-deeper integration in an effort to better regulate and manage those aspects that they see as problematic.”
So, from that perspective, a radical readjustment of supply chains in the wake of the Russia-Ukraine conflict would not spell the end for globalisation.
But it would still be a fraught process.
Especially it if was accompanied by unsettling changes to the global economic order itself.
