Globalisation teeters from Ukraine war, Covid-19 pandemic one-two punch

Two years of disruptions amid the pandemic have caused major bottlenecks in the global supply chain and led to shortages, which the war looks set to make worse
The US says it’s still ‘deeply involved’ with the global economy – but as it decouples from China, some have declared ‘an end’ to 30 years of globalisation

Trade

Agence France-Presse

Published: 12:08pm, 27 Mar 2022

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Globalisation, which has both fans and detractors alike, is being tested like never before after the one-two punch of Covid-19 and war.

The pandemic had already raised questions about the world’s reliance on an economic model that has broken trade barriers, but made countries heavily reliant on each other as production was delocalised over the decades.

Companies have been struggling to cope with major bottlenecks in the global supply chain.

Crews dredge near the container ship Ever Forward after it ran aground off the US coast earlier this month. Its sister vessel Ever Given disrupted the global supply chain for days after grounding in the Suez Canal last year. Photo: AP

Russia’s war in Ukraine has raised fears about further disruptions, with everything from energy supplies to car parts to exports of wheat and raw materials under threat.

Larry Fink, the head of financial giant BlackRock, put it bluntly: “The Russian invasion of Ukraine has put an end to the globalisation we have experienced over the last three decades.”

“We had already seen connectivity between nations, companies and even people strained by two years of the pandemic,” Fink wrote in a letter to shareholders on Thursday.

But US Treasury Secretary, Janet Yellen, disagrees.

“I really have to push back on that,” she told CNBC in an interview. “We’re deeply involved in the global economy. I expect that to remain, it is something that has brought benefits to the United States, and many countries around the world.”

Shortages of surgical masks at the outset of the pandemic in 2020 became a symbol of the world’s dependence on Chinese factories for all sorts of goods.

Farmers harvest wheat near the village of Tbilisskaya, Russia, last year. Ukraine and Russia together account for about one-third of global wheat and barley exports. Photo: AP

The conflict between Russia and Ukraine has raised concerns about food shortages around the globe as the two agricultural powerhouses are among the major breadbaskets of the world.

It has also put a spotlight on Europe’s – and especially Germany’s – heavy dependence 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 spread out in different locations, said the former director general of the World Trade Organization, Pascal Lamy.

The global trade tensions have prompted the European Union, for instance, to seek “strategic autonomy” in critical sectors.

The production of semiconductors – microchips that are vital to industries ranging from video games to cars – is now a priority for Europe and the US.

“The pandemic did not bring radical changes in terms of reshoring (bringing back business from overseas),” said Ferdi De Ville, professor at Ghent Institute for International & European Studies.

“But this time it might be different because [the conflict] will have an impact on how businesses think about their investment decisions, their supply chains,” he said.

Pump jacks are seen at an oilfield in the Republic of Tatarstan, Russia. Europe is attempting to wean itself off Russian fossil fuels. Photo: Yegor Aleyev/TASS/Zuma Press/TNS

“They have realised that what was maybe unthinkable before the past month has now become realistic, in terms of far-reaching sanctions,” said de Ville, author of an article on “The end of globalisation as we know it”.

The goal now is to redirect strategic dependence towards allies, what he coined as “friend-shoring” instead of “offshoring”.

A US-EU agreement on Friday to create a task force to wean Europe off its reliance on Russian fossil fuels is the most recent example of friend-shoring.

For Lamy, this shows “there is no de-globalisation”.

Globalisation, he said, is “an animal that evolves a lot”.

Globalisation had already faced an existential crisis when former US president Donald Trump launched a trade war with China in 2018, triggering a tit-for-tat 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 American to make sure everything from the deck of an aircraft carrier to the steel on highway guardrails are made in America,” he said in his State of the Union speech.

The idea of the US and China ‘decoupling’ emerged while Donald Trump was president. Photo: Joe Raedle/Getty Images/TNS

One concept that emerged during the Trump years was “decoupling” – the idea of untangling the US and Chinese economies.

The threat has not subsided, especially with China refusing to condemn Russia’s invasion of Ukraine.

The US has warned the world’s second-biggest economy would face “consequences” if it provides material support to Russia in its war in Ukraine.

China already had other contentious issues with the West, such as Taiwan, the self-ruled democracy which Beijing has vowed to seize one day, by force if necessary.

“It is not in China’s interest for now to go into competition with the West,” said Xiaodong Bao, portfolio manager at the Edmond de Rothschild Asset Management firm.

But the war in Ukraine is a chance 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 foundations for the future,” Bao said. “The financial decoupling is accelerating.”