The End of the Age of Globalisation

How Russia's invasion of Ukraine could hasten the demise of the US-led economic order.

The economic consequences of Russia’s bloody and despicable assault on Ukraine are very much a secondary consideration to the immediate human and geopolitical implications. And since the various national responses to the conflict are still so fluid, it is far too early to be able to identify the war’s precise longer-term economic effects. Nevertheless, it is possible to tentatively suggest what could unfold on the international economic front.

At least in the short term, the direct and indirect disruptions to economic relations arising from the invasion will almost certainly damage prospects for economic growth and boost inflation far beyond the combatant countries. In particular, the relative toughening of sanctions will generate economic difficulties in many areas beyond Russia itself.

While the war is of huge importance geopolitically, it would, however, be misleading to overstate its economic effects, given all the other enormous economic challenges already in place. For example, the Financial Times claims that the war has ‘shattered hopes of a strong global economic recovery from coronavirus’. But this implies that a strong recovery was already on the cards. There has long been a prevalent complacency that ignores the fundamental atrophy afflicting most advanced industrialised countries. War or no war, the high debt and weak investment common to many Western economies are likely to mean a continuation of the sluggish growth of the past decade.

More broadly, the repercussions of the war are likely to reinforce existing economic trends towards autarky and regionalisation, rather than taking us in entirely new directions. Analysts at Goldman Sachs, for instance, suggest that the war is going to damage globalisation and reinforce de-globalisation forces. But this conventional counterposition of ‘de-globalisation’ to ‘globalisation’ does not help clarify what is happening. In practice, market capitalism has always operated both nationally and internationally at the same time. As a result, economic internationalisation (‘globalisation’) can easily co-exist with a heightened focus on national economic considerations (‘de-globalisation’).

Nevertheless, economies will in future become more nationally focused. There will be further calls for the reining in of global supply chains and for the development of a ‘made at home’ supplier model, in the name of greater resilience.

The rise of autarky

To appreciate the distinct impact of the Russia-Ukraine conflict, it’s important to recognise that autarkic trends long predate the war, and indeed even the pandemic. Analysis published by the World Trade Organisation shows that at the time of the 2008 financial crisis, fewer than one per cent of merchandise imports were impeded by mechanisms introduced by governments of the world’s top 20 economies. In 2019, on the eve of the pandemic, this figure had expanded more than tenfold to hit over 10 per cent of trade.

Many of these pre-pandemic protectionist measures had been introduced by globalist-orientated governments, not by self-styled ‘isolationist’ politicians, like Donald Trump. Part of the reason this record of protectionist activity went under the radar until recently was because, compared to early 1930s-style border tariffs and quotas, modern-day protectionism is usually more sophisticated, characterised by ‘non-tariff’ or ‘behind-the-border’ barriers to trade.

Nevertheless, the driver of today’s hidden protectionism is similar to that driving 1930s protectionist tariffs – namely, governments seeking to support crisis-ridden national economies. In this respect, it was the Western financial crisis of 2007-2008, rather than the pandemic or increasing geopolitical tensions, that served to amplify and expand protectionist practices. The crash revealed the limits of debt and financialisation as a way of sustaining an aura of ongoing prosperity. Though we still very much live with debt and financialisation, their relative exhaustion has led to increased dependence on other forms of state intervention.

In the absence of a normal post-recession recovery in most Western countries, governments adopted an increasingly interventionist role in order to mitigate their economic difficulties. Over the past decade, state actions have intensified to support troubled national economies. These are not restricted to ultra-easy monetary policies like low interest rates and quantitative easing – they also involve a variety of government-support mechanisms, including regulatory actions and procurement contracts, as well as direct subsidies and bailouts.

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