The second age of globalisation is beginning to buckle
The ripple effects of the Russo-Ukrainian war are spreading and intensifying. Deglobalisation will jeopardise the prosperity and welfare of millions. Originally published in The Australian.
The ripple effects of the Russo-Ukrainian war are spreading and intensifying. Their impact is being felt in almost every corner of the globe, revealing an international system under duress.
The US-led rules-based order has survived and prospered for 77 years through numerous regional conflicts, terrorist outrages and economic shocks. But this time it’s different. Although not the sole cause, the Ukraine conflict is driving a once-in-a-century redesign of the world’s economic and geopolitical plumbing.
Like a once-proud liner battered by countless storms, the old order is in danger of listing, beset by numerous cascading external crises. The threat of nuclear war has increased and the world is rearming as security concerns grow. Food and energy spikes are jeopardising economic recovery, fuelling inflation and shaking up global supply chains already disrupted by Covid-19 and the accelerating decoupling of the US and Chinese economies. Climate change is complicating energy choices. Trade and financial power are being weaponised. Protectionist sentiment is on the rise. All this is morphing into a system-altering super-crisis. There will be no return to normal service.
The emerging world order will be messier, less stable and more contested than the last, with neither autocratic nor democratic states in charge. The world is again beginning to divide into competing economic and geopolitical blocs, one aligned with the US, another with China, and a European grouping that will be primarily, but not wholly, in the US camp. A fourth group of developing countries may try to maintain their independence from the dominant blocs in a futile attempt to re-energise the moribund non-aligned movement. Non-alignment won’t be a viable option if larger nations continue to flex their muscles.
But the most far-reaching consequence will be the end of globalisation as we have known it. The Russo-Ukrainian war has set in motion deglobalisation forces “that could have profound and unpredictable effects”, OECD chief economist Laurence Boone says. Harvard political economist Dani Rodrik agrees. The war has “probably put a nail in the coffin of hyperglobalisation”, he says.
Peterson Institute for International Economics president Adam Posen writes in US policy journal Foreign Affairs that globalisation has been steadily corroding since its high point at the turn of the century. The reasons? Populists and nationalists “have erected barriers to free trade, investment, immigration and the spread of ideas”. China’s challenge to “the rules-based international economic system and to longstanding security arrangements in Asia has encouraged the West to erect barriers to Chinese economic integration”. Posen says the Russian invasion of Ukraine and resulting sanctions “will now make this corrosion even worse”.
So do John Micklethwait and Adrian Wooldridge in a penetrating analysis for Bloomberg News of the consequences of globalisation’s failure. They write that Chinese President Xi Jinping has spent much of his rule building a Sino-centric economic order on the back of his trillion-dollar Belt and Road Initiative that spans half the globe. The invasion will harden Xi’s determination to reduce China’s dependence on the West, fortified by the “wolf pack” of young Chinese nationalists around him. The breadth and speed of Western sanctions against Russia “is another powerful argument for self-sufficiency”.
But there is a deeper reason: the rise of geoeconomics. First coined in 1990 by American strategist Edward Luttwak to describe the willingness of states to use economic and financial power for geopolitical purposes, geoeconomics has become a preferred tool of statecraft. A recent Deutsche Bank report concludes that as great power competition becomes more pronounced, “geoeconomics is likely to be the tool of first resort in addressing international conflicts”.
The use of economic warfare to achieve geopolitical ends is not new. Trade blockades were a feature of the Napoleonic Wars. Autocratic German regimes weaponised trade policy in the first half of the 20th century to achieve global influence. Pre-World War II Germany was a “power trader”, manipulating trade for strategic and commercial advantage. In more recent times, economic statecraft has become an integral part of a distinctive Chinese approach to foreign policy in which economic and trade coercion is used to cement China’s place as a leading global power. During the past decade more than 27 countries, including Australia, have been on the receiving end of such coercion.
Much to the surprise and chagrin of China and Russia, the US has taken geoeconomics to another level using its economic and financial clout to devastating effect in support of Ukraine. About $US300bn of Russia’s $US640bn ($899bn) in gold and foreign exchange reserves have been frozen.
Once considered the “nuclear option”, the US and its allies have cut off Russia from the SWIFT international payment system and the central institutions of global finance, including the International Monetary Fund and all foreign banks. Russia also has been slapped with the most comprehensive sanctions levied against a significant economy. Unlike earlier sanctions against Iran, Venezuela and North Korea, they are being used against a major exporter of food and energy. Only the US has the financial power to make these sanctions work. But they also require an unprecedented degree of co-ordination among Western allies. “It is the alliance, not the finance, that has mattered,” says Posen. Freezing the Russian Central Bank’s reserves works only if Europe is on board.
If China invaded Taiwan, could the US opt for a hard decoupling and prevent China from accessing the 60 per cent of its $US3 trillion foreign reserves held in US dollars? This might be a bridge too far because of the reciprocal costs China could impose and the collateral damage to the US and global economies. A report last year by the US Chamber of Commerce assessed that a soft decoupling would cost the country at least $US500bn of lost gross domestic product, equating to a 2.5 per cent drop in the US economy.
Cornell University academic Nicholas Mulder, author of The Economic Weapon: The Rise of Sanctions as a Tool of Modern War, estimates a hard decoupling could collapse US GDP by 5 per cent, about $US1 trillion – a bigger shock than Covid in 2020.
Still, the speed and severity of Western sanctions stunned Chinese officials, drawing criticism. Vice Foreign Minister Le Yucheng said “globalisation should not be weaponised”, seemingly oblivious to the arbitrary economic and financial punishment his own country has meted out to other nations across the past decade.
“We are shocked,” economist and former adviser to the People’s Bank of China Yu Yongding told Nikkei Asia. “We never expected the US would freeze a country’s foreign currency reserves one day. And this action has fundamentally undermined national credibility in the international monetary system. Now the question is, if the US stops playing by the rules, what can China do to guarantee the safety of its foreign assets?”
The short answer is that Beijing’s options are limited. Despite its financial heft, the yuan is not fully convertible like the US dollar or euro and accounts for only 2 per cent of global payments. Beijing could mitigate the risk by persuading BRI members to use the yuan instead of the dollar, opening the door for others to follow suit.
Saudi Arabia is already considering oil sales to China that would be transacted in yuan. And Russian and Chinese officials are working to connect their countries’ financial messaging systems to circumvent the Western-controlled SWIFT. These measures aren’t likely to dethrone the US dollar in the short term, although that won’t stop China and fellow autocrats from trying.
The conclusion of financial analyst Cissy Zhou is that the global financial landscape is set to become more volatile. Sanctioned countries may choose to side with their own bloc for trading and investment. Russia has demanded that Poland and Bulgaria pay for its gas in roubles, not dollars, and has called on its fellow BRICS emerging economies (Brazil, India, China and South Africa) to extend the use of national currencies for international payments to dilute the dollar’s power. If the West continues to impose financial sanctions on the non-democratic world a dual-track system in global finance could well emerge.
None of this is comforting. Sanctions and embargoes may be preferable to war, but the increased use of geoeconomics is bad news for globalisation. It will discourage economic integration, free trade and technological innovation, leading to lower growth, trade barriers, protectionism and a shrinking of the global economic commons. “What we’re headed toward is a more divided world economically that will mirror what is clearly a more divided world politically,” Council on Foreign Relations senior fellow Edward Alden says. “I don’t think economic integration survives a period of political disintegration.”
Despite recent bad press and widespread belief that globalisation has benefited elites at the expense of the less fortunate, economic liberalism has lifted more than a billion people out of poverty and enriched many lives. Access to goods and services, international travel, instant communications and advances in almost every field of human endeavour are some obvious benefits. World trade in manufactured goods doubled in the 1990s and doubled again in the 2000s.
A geopolitically and economically divided world could ignite another world war just as the end of the first age of globalisation culminated in World War I. Beggar-thy-neighbour tariffs and power trading more than halved international trade between 1928 and 1933, leading to the Depression and World War II. Only after 1945 did economic integration resume its advance – and then only in the Western half of the map.
“What most of us today think of as globalisation only began in the 1980s, with the arrival of Thatcherism and Reaganism, the fall of the Berlin Wall, the reintegration of China into the world economy and, in 1992, the creation of the European single market,” Micklethwait and Wooldridge write.
A reversal of globalisation will not sweep away the world we know. But it will slow progress, jeopardising the prosperity and welfare of millions of people in the developed and developing worlds. Deglobalisation will hurt Russia and curtail China’s power. Their quest to insulate themselves from sanctions by turning inward will sap the dynamism of their economies and reverse decades of progress. It won’t be good for the West either, particularly trade-dependent states such as Australia.
The Western order assumes free trade and greater economic interdependence lessens the risk of war. This belief drove the Western victors of World War II to create an order that would unite victors and vanquished in a shared economic and political future.
As the second age of globalisation begins to buckle, the challenge for US President Joe Biden is to build a constituency for a new world order that preserves globalisation’s enriching features, creates wealth, bolsters the alliance, and exposes the excesses and failings of the authoritarian alternative. As an ally and significant middle power, Australia must take the lead in urging the US and like-minded countries to resist the false lure of protectionism and the fragmentation of the world into competing blocs. Avoiding this dystopian future will require a fresh narrative and strategy.
Russian President Vladimir Putin’s no-limits barbarism has had the unintended consequence of reuniting polarised democracies. This new sense of unity, Micklethwait and Wooldridge write, “is no longer confined to the metropolitan elite. One of the great problems with modern liberalism of the past few decades has been its lack of a gripping narrative and a compelling cast of heroes and villains. Globalists have talked a bloodless language of ‘comparative advantage’ and ‘non-tariff barriers’, while populists have talked about sneering elites and hidden conspiracies. Now Putin has inadvertently reversed all that. Freedom is the creed of heroes such as (Ukrainian President Volodymyr) Zelensky; anti-liberalism is the creed of monsters who drop bombs on children.”
But a narrative without a strategy is like a car without an engine. The strategy should have two main purposes: hardening the resolve and ability of the Western alliance to withstand further adventurism from Putin and his authoritarian soulmates; and deepening the economic integration of like-minded countries through an inclusive reglobalisation. This should leave no one behind and the door open to autocracies. But only if they are prepared to respect the rules of an international order from which they have gained enormously.
Although Biden has exceeded expectations in rebuilding the alliance and coaxing Europeans to take more responsibility for their own security, he has failed to bind economically America’s European and Asian allies with cross-regional trade deals. A central aim of our foreign and trade policy should be to persuade Biden to advocate for free trade by committing his country to high-standard free trade deals that offer tangible benefits to vacillating non-democracies as well as the developed West. Joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership linked to a redesigned Transatlantic Trade and Investment Partnership would be a good start.
As Micklethwait and Wooldridge observe, the US “won the last Cold War peacefully because it united the free world behind it. This is the way to win the next one peacefully as well. Put together the free world’s economic potential – the EU, North America, Latin America’s biggest economies and the democracies of Asia – and it can do more than see off the autocracies; it can pull them towards freedom.”
There is no more important task for the next government than persuading the Biden administration to advocate for an inclusive reglobalisation. Re-designing economic liberalism to make it more sustainable, egalitarian and interconnected is the best way of reversing the worrying descent into war, conflict and division.