Globalization, which has fans and detractors alike, is being tested like never before after the one-two punch of Covid and war.
The pandemic had already raised questions about the world’s reliance on an economic model that has broken down barriers to trade but made countries heavily interdependent as manufacturing was delocalized over the decades.
Businesses struggle to overcome major bottlenecks in the global supply chain.
Russia’s war in Ukraine has raised fears of further disruptions, threatening everything from energy supplies to auto parts to wheat and raw material exports.
Larry Fink, the head of financial giant BlackRock, put it bluntly: “The Russian invasion of Ukraine has put an end to the globalization we’ve been going through the past three decades.”
“We had already seen connectivity between countries, companies and even people under pressure from the two-year pandemic,” Fink wrote in a letter to shareholders on Thursday.
But US Treasury Secretary Janet Yellen disagrees.
“I really need to push back on that,” she told CNBC in an interview.
“We are deeply involved in the global economy. I expect it to continue to be that way, it is something that has benefited the United States and many countries around the world.”
‘An animal that evolves’
Shortages of surgical masks at the start of the pandemic in 2020 became a symbol of the world’s reliance on Chinese factories for all kinds of goods.
The conflict between Russia and Ukraine has raised concerns about food shortages around the world, as the two agrarian powers are among the world’s largest granaries.
It has also spotlighted Europe’s — and especially Germany’s — heavy reliance on gas supplies from Russia, now a state under crippling sanctions.
“A number of vulnerabilities” have emerged that show the limits of having supply chains scattered in different locations, former World Trade Organization director general Pascal Lamy told AFP.
For example, tensions over world trade have prompted the European Union to seek “strategic autonomy” in critical sectors.
The production of semiconductors — microchips vital to industries ranging from video games to automobiles — is now a priority for Europe and the United States.
“The pandemic did not bring any radical changes in the field of reshoring,” said Ferdi De Ville, professor at the Ghent Institute for International & European Studies.
“But this time it could be different because (the conflict) will have an impact on how companies think about their investment decisions, their supply chains,” he said.
“They have realized that what may have been unimaginable last month has now become realistic in terms of far-reaching sanctions,” said de Ville, author of an article on “The End of Globalization as We Know it.”
The goal now is to redirect strategic dependence on allies, which he referred to as “friend-shoring” rather than “off-shoring.”
An agreement between the US and the EU on Friday to create a task force to phase out Europe from its reliance on Russian fossil fuels is the latest example of friend-shoring.
For Lamy, this shows that “there is no deglobalization”.
Globalization, he said, is “an animal that evolves a lot”.
Decoupling from China
Globalization was already facing an existential crisis when former US President Donald Trump launched a trade war with China in 2018, triggering an exchange of punitive tariffs.
His successor, Joe Biden, invoked the need to “buy American” in his sweeping investment plan to “rebuild America.”
“We will buy Americans to ensure that everything from the decks of an aircraft carrier to the steel on highway guardrails is made in America,” he said in his State of the Union address.
One concept that emerged during the Trump years was “decoupling” – the idea of untangling the US and Chinese economies.
The threat has not abated, especially with China refusing to condemn Russia’s invasion of Ukraine.
The United States has warned that the world’s second-largest economy would suffer “consequences” if it provided material support to Russia in its war in Ukraine.
China already had other controversial issues with the West, such as Taiwan, the self-governed democracy that Beijing has vowed to one day seize, by force if necessary.
“It is not in China’s interest for the time being to compete with the West,” said Xiaodong Bao, portfolio manager at Edmond de Rothschild Asset Management.
But the war in Ukraine is an opportunity for China to reduce its reliance on the US dollar. The Wall Street Journal reported that Beijing is in talks with Saudi Arabia to buy oil in yuan instead of dollars.
“China will continue to build the foundations for the future,” Bao said. “Financial decoupling is accelerating.”
(Except for the headline, this story has not been edited by DailyExpertNews staff and has been published from a syndicated feed.)