Our Opinion: 2022
Globalisation in retreat
A growing number of big investors, including BlackRock and Allianz Global Investors, have gone public with predictions that the war in Ukraine will prove an inflection point in the global economy.
“The Russian invasion of Ukraine has put an end to the globalisation we have experienced over the last three decades.” wrote Larry Fink, chief executive of the world’s largest asset manager, BlackRock, in his annual letter to shareholders. The isolation of Russia from capital markets will promote a trend everywhere towards national independence and hasten the development of rival economic blocs led by the US and China. A world in which cheap offshore manufacturing and smooth global supply chains hold costs down will be replaced by a large-scale reorientation of supply chains, and that will be inflationary, says Fink. That implies lower growth and lower returns for investors.
One metric that offers a reasonable proxy for globalisation is international trade as a share of global GDP. That share surged from 25% in 1970 to 51% in 2000 and peaked at 61% in 2008. This was an era when Western policymakers believed that trade and investment would bring the world closer together politically. From 1992 to 2008, Russian gas exports grew tenfold. Between 1985 and 2015 Chinese goods exports to the US rose by a factor of 125. And in the 1990s annual global flows of foreign direct investment rose by a factor of six.
In the wake of the financial crisis, global trade fell sharply before bouncing back a bit. But it has never again hit that 61% – instead trending lower and falling to 51.6% by 2020.
Meanwhile, global flows of long-term investment fell by half between 2016 and 2019. The Ukraine war follows hard on the supply-chain shocks of the US-China trade war, the Covid-19 pandemic, and the semiconductor shortages – all of which have focused attention on supply-chain sovereignty and domestic production. In other words, globalisation has been in retreat for some time. But Russia’s invasion of Ukraine marks a bigger and more definitive assault than the previous ones.
This is happening for two main reasons. First, because geopolitics is definitively moving against globalisation and towards a world dominated by two or three great trading blocs (an Asian one led by China, perhaps with Russia as its energy supplier; a US-led bloc; and perhaps a third centred on Europe). But just as important is a change in mindset. Business leaders now understand they are in a world where political matters trump economic logic. They are recalculating accordingly, shifting from a “just-in-time” mentality to “just-in-case” – by preparing to bring production closer to home in case their foreign plants are cut off, for example. Historians may well decide that the definitive moment globalisation died was when China, India and South Africa all abstained on the United Nations vote condemning Putin’s invasion.
Already, French president Emmanuel Macron has committed his country to self-sufficiency in pharmaceuticals. The EU has vowed to wean itself off Russian gas, oil and coal by 2027. Joe Biden has promised to “make sure everything from the deck of an aircraft carrier to the steel on highway guardrails is made in America from beginning to end”.
But this obsession of domestic manufacturing over advancing cross-border trade in services and networks is ironic. In fact, it is the latter sectors that have truly advantaged the West over Russia in implementing effective sanctions, and that have deterred Chinese businesses from bailing Russia out. Sadly, the retreat from globalisation will diminish both innovation and the return on capital in the world economy, and it will do so on every side of the economic divide.
Growth will suffer. It will lead to higher prices for inputs, already seen most dramatically in the oil and gas price surges, but also in soft commodities and metals. Higher input prices push up consumer prices and reduce output, thus hitting employment and wages. The other source of economic pain will be lower demand, as markets are closed off to each other. World trade will fall – hurting the global economy, and Britain (an open, trading, service-based economy) more than most.
About 63% of UK GDP is traded, compared with 26%, 36% and 49% of America’s, China’s and Russia’s respectively. Globalisation is in retreat, and we are going to miss it when it’s gone.
For policymakers, deglobalisation adds to the fiscal pressure of a low-growth world. The UK’s Chancellor, Rishi Sunak, fiddled with tax rates in his spring statement. But, arguably far more important, was his promise of a major review of how the tax system creates incentives for investment. That could prove crucial to reinvigorating growth and productivity.
Investors will have to position themselves to take advantage of these mega trends: energy transition, defence, cyber security, and digitalisation.
25th April 2022