The ties that bind the global economy together, and delivered goods in
abundance across the world, are unravelling at a frightening pace.

Russia’s invasion of Ukraine and China’s Covid Zero lockdowns are
disrupting supply chains, hammering growth and pushing inflation to
forty-year highs. They’re the chief reasons why Bloomberg Economics has
lopped $1.6 trillion off its forecast for global GDP in 2022.

But what if that’s just an initial hit? War and plague won’t last forever.
But the underlying problem – a world increasingly divided along
geopolitical fault lines — only looks set to get worse.

Bloomberg Economics has run a simulation of what an accelerated reversal
of globalisation might look like in the longer term. It points to a
significantly poorer and less productive planet, with trade back at levels
before China joined the World Trade Organisation. An additional blow:
inflation would likely be higher and more volatile.

‘Going to Stay’

For investors, a world of nasty surprises on growth and inflation has
little to cheer equity or bond markets. So far in 2022, commodities –
where scarcity drives prices higher – have been among the big winners,
along with companies that produce or trade them. Shares in defense firms
have outperformed too, as global tensions soar.

“Fragmentation is going to stay,” says Robert Koopman, the WTO’s chief
economist. He expects a “reorganised globalisation” that will come with a
cost: “We won’t be able to use low-cost, marginal-cost production as
extensively as we did.”

For three decades, a defining feature of the world economy has been its
ability to churn out ever more goods at ever lower prices. The entry of
more than a billion workers from China and the former Soviet bloc into the
global labor market, coupled with falling trade barriers and
hyper-efficient logistics, produced an age of abundance for many.

But the last four years have brought an escalating series of disruptions..
Tariffs multiplied during the US-China trade war. The pandemic brought
lockdowns. And now, sanctions and export controls are upending the supply
of commodities and goods.

All of this risks leaving advanced economies facing a problem they thought
they’d vanquished long ago: that of scarcity. Emerging nations could see
more acute threats to energy and food security, like the ones already
causing turmoil in countries from Sri Lanka to Peru. And everyone will
have to grapple with higher prices.

A few numbers illustrate the scale of the new barriers.

Tariffs: The trade war saw US charges on Chinese goods rocket up from 3%
to about 15% over the course of Donald Trump’s presidency.

Lockdowns: This year’s Covid crackdown in China has put hundreds of
billions of dollars in exports at risk, and disrupted supply chains for
companies from Apple Inc. to Tesla Inc.

Sanctions: In 1983, the flows of trade subject to export or import bans
was only worth about 0.3% of global gross domestic product. By 2019, that
share had risen more than fivefold.

Sweeping embargoes triggered by Russia’s invasion of Ukraine, and efforts
by countries to secure their own supplies by barring sales abroad — like
India’s recent ban on wheat exports — have pushed the figure higher still.

Viewed from one angle, all of this is part of a global rupture that pits
Western democracy and free markets against Chinese and Russian
authoritarianism. But it’s not necessary to believe in a Manichean
struggle between good and evil — or expect the rival camps to separate
behind a new iron curtain — to see the prospective costs.

About $6 trillion of goods — equivalent to 7% of global GDP — are traded
between democratic and autocratic countries. To illustrate the risks of
the great unraveling, Bloomberg Economics introduced a 25% tariff on all
that traffic into a model of the global economy. That’s equal to the
highest rates that the US and China have leveled against each other, and
it can stand in for other kinds of friction too, like sanctions and export
bans.

The result: global trade plunges by some 20% relative to a scenario
without the decoupling — falling back to its levels at the end of the
1990s, before China joined the WTO, as a share of GDP. That’s a huge and
wrenching change.

All countries would have to shift resources toward activities they’re less
good at. A chunk of the productivity that’s associated with trade would be
lost. In the long term, a rollback of globalisation to late-1990s levels
would leave the world 3.5% poorer than if trade stabilizes at its current
share of output, and 15% poorer relative to a scenario of global ties
strengthening.

The model shows that another 7% of existing trade relationships would
shift between blocks. In concrete terms, that might mean factories making
goods for US markets moving from China to, say, India or Mexico.

As that example suggests, there would be winners. But the transition would
take time and cause severe bottlenecks along the way, ushering in a period
of high and volatile inflation. As Kenneth Rogoff, then a top economist at
the International Monetary Fund, warned back in 2003: “The global economy
now appears immersed in a long wave of low inflation, but experience
suggests that many factors, notably heightened conflict that reverses
globalisation, can bring it to an end.”

Rival camps

To be sure, the reality of global fracture is unlikely to play out along
quite such clear-cut ideological lines. Still, those numbers provide a
sense of what’s at risk.

Democracies can be forgiven for feeling under threat. In 1983, when Ronald
Reagan called the Soviet Union an “evil empire,” authoritarian countries
accounted for about 20% of global GDP. Fast forward to 2022, and that
share has risen to 34%. In the years ahead, with China expected to outgrow
the US and Europe, it will edge higher still.

The Ukraine war shows rival political systems lining up on opposite sides.
Chinese President Xi Jinping remains supportive of his Russian ally
Vladimir Putin, while Europe and the US are aligned on sanctions for
Moscow and military support for Kyiv. It also shows the limits of that
framing. India, the world’s most populous democracy, continues to buy
Russian oil and weapons. Many other democracies — in Asia, Latin America
and elsewhere — show little desire to join the US-led campaign of economic
and financial pressure on Russia.

Whether they’re defined by an ideological divide, or simply diverging
interests in a multi-polar world, the deepening fault-lines are real.
China’s latest Covid lockdowns are a good example of some of their
harder-to-predict consequences.

In a world of friendlier great-power relations, Chinese leaders likely
would have acquired enough of the effective US-made Pfizer and Moderna
mRNA vaccines to give their population a measure of omicron immunity,
allowing the economy to reopen. In a world where China is determined to
demonstrate its self-sufficiency, and dodge dependence on foreign
innovations, they have not.

As a consequence, China’s 1.4 billion population has insufficient
protection from the virus. Letting omicron rip could cause 1.6 million
deaths, a recent study in the journal Nature Medicine found. So Beijing
sees little option but to continue with draconian lockdowns. As a result,
China is taking a crushing blow to growth. And the rest of the world faces
yet more disruption to supply chains, as Chinese factories stall and cargo
ships float idle outside Shanghai’s port.

The threat to US and European economies isn’t limited to the repercussions
of Chinese lockdowns, or blowback from their own measures against Russia..
They could also be exposed to direct retaliation.

China’s 2010 ban on the sale of rare earths – crucial inputs into
everything from smart phones to electric-car batteries – to Japan is one
example of how export controls can be used by either side. Russia turning
off the gas for Poland and Bulgaria is another. If Putin goes further and
cuts shipments to Germany, France and Italy too, the result would put 40%
of the European Union’s supply at risk, tipping the bloc from Covid
recovery into painful recession.

Even in the depths of the US–China trade war, the idea of an extreme
rupture between rival geo-political camps seemed far-fetched. The degree
of interdependence embodied in the supply chains of companies like Apple
appeared too great to disentangle. Some argued that the end of the Trump
administration would restore normal relations.

In 2022, with the trade-war tariffs still in place, the Covid crisis
adding to pressure to localise supply chains, and Russia locked out of US
and European markets, it doesn’t seem so far-fetched.

The intensity of the current shocks from war and plague will fade. The
underlying forces driving deglobalisation will not. Brace for a world of
lower growth, higher prices, and increased volatility.

https://www.moneyweb.co.za/news/economy/age-of-scarcity-begins-with-1-6trn-hit-to-world-economy/