Times are changing. The global pandemic and Russia’s unprovoked invasion of Ukraine have sparked debate on the future of globalization — nations trading with few barriers, focusing on the industries and services they do best.
The war in Ukraine has strained ties between countries that were already under pressure due to the coronavirus pandemic. It has exposed the risks inherent in economic interdependence among nations with different ideologies and security interests. It may well be that globalization as it has been known is dead in a post-COVID-19, post-Ukraine war world.
The war has had a big impact on the global economy, especially as supply chain shocks threaten everything from energy supplies to auto parts to exports of wheat and raw materials, and sent prices skyrocketing. It has also raised concerns about food shortages because Russia and Ukraine are among the major breadbaskets of the world. Many countries have banned the export of food grains, fearing supply disruptions and higher prices due to shortages.
The CEO and chairman of Black Rock, the world’s largest asset manager, said in a letter to shareholders last month that “The Russian invasion of Ukraine has put an end to the globalization we have experienced over the last three decades.” He added that companies and governments will now be forced to further “reevaluate their dependencies and reanalyze their manufacturing and assembly footprints.”
The pandemic dramatically demonstrated vulnerabilities in long supply chains and made countries look closer to home. While it is impossible to predict the outcome of the war, Russia’s invasion of Ukraine on Feb. 24 has upended a world order that has been in place since the end of the Cold War in the 1990s. It signals changes to globalization as the world has known it.
The combination of technology and a relatively stable geopolitical landscape promoted steady expansion of global trade over the last 50 years. In 1970, trade accounted for 25% of global GDP, meaning one quarter of all goods produced were traded with international partners. By 2000, global trade had doubled to 50% of all goods and services produced.
But the trend toward globalization recently started to run in reverse. The world trade share of GDP output peaked in 2008 at 61%. In 2020, global trade accounted for just 51.6% of worldwide GDP, the lowest since 2003.
Even before the pandemic, the 2008 financial crisis dealt a blow to globalization, as cross-border investments, trade, and supply chains all contracted. In the last decade, globalization has suffered multiple setbacks in the form of Brexit, the US-China trade war, the pandemic, and now the Russia-Ukraine war.
The conceit that economic interdependence promotes political stability has been shaken. Russia, the ninth largest economy in the world, is being economically isolated from the West, which has responded to Russian aggression with harsh economic sanctions. Consider that the European Union is Russia’s main trading partner, accounting for 38 percent of its exports. Of course, this is partially neutralized by its dependence on imports of Russian gas and oil.
Governments and corporations are recognizing the limits of having supply chains spread out in multiple locations. For instance, shortages of surgical masks and personal protective gear at the outset of the pandemic in 2020 showed the vulnerability of the world’s dependence on Chinese factories for all sorts of goods.
All this means global trade may have crossed the Rubicon and is heading toward cold war-era trade blocs, one led by the U.S. and the other by China.
Globalization may not fully recover from the pandemic and the war in Ukraine. A version of it based on different principles and moves away from pure efficiency to consider security, reliability, and partnerships may be in the offering.