Trade tensions between China and the US, the COVID-19 pandemic and the war in Ukraine are driving economic and financial systems further away from globalisation, with concerns about supply-chain vulnerabilities and energy security fueling greater economic nationalism .
“We are in the early stages of the most profound geopolitical changes in the world since the end of World War II, more abrupt and more profound in economic structures than what we experienced after the collapse of the Soviet Union 30 years ago. Dangerous changes are promised.” said Erik F Nielsen, group chief economics advisor at UniCredit Bank.
Russia’s invasion of Ukraine has shown that globalization creates dependencies that can be used to weaken an adversary should serious conflict arise. Russia has reduced its energy and food supplies, while the West has sharply limited its access to economic and financial systems.
Critics of globalization have long struggled to find an audience touting the benefits of greater economic integration, but globalization is now in retreat, Citi economists said in a note.
“Covid-19 exposed vulnerabilities in far-flung supply chains, while the Ukraine war raised fears particularly over energy and food supplies,” he said.
Countries are focusing on domestic priorities and aiming to achieve self-sufficiency in more and more sectors. In this context, there would not be a complete rollback of globalization, but a growth of nationalism.
“Instead of deglobalization, we think the world economy will consolidate into two blocs centered on the US and China, which we are calling fracturing,” Neil Shearing, chief economist at Capital Economics Group, said in a note.
He added that the breakup of the global economy into these two blocs may not have a significant impact on the macroeconomic prospects of the major advanced economies, all of which are affiliated with the US. However, the politically driven nature of fracturing will have a significant impact on the operating environment for US and European firms most exposed to trade sanctions, such as technology and pharmaceuticals.
“Geopolitical considerations will play more of a role in economic policy than in a generation,” Jennifer McKeown, head of the global economics service at Capital Economics, said in a note.
The base case scenario for capital economics is a partial rollback of economic integration with mild economic impact on advanced economies. Economists at Capital Economics argue that the wider reach of the US-led bloc – and wider networks within it – will help it better adapt to the challenges posed by fracturing than the China-led bloc.
A less benign scenario is that the US- and China-centred blocs don’t hold, and the global economy splits into smaller regional or national-level conglomerates, the UK economic-research firm said. This could lead to an increase in supply-chain nationalism and a broader push against technology sharing, resulting in a major blow to productivity growth in advanced economies.
The worst-case scenario would be a confrontation between the US and China, leading to a rapid deterioration in economic and financial ties.
“In a worst-case scenario where Europe has to choose a side in commercial matters, surely it can only side with the US and the democratic world,” Mr Nielsen said at Unicredit. In that scenario, he said Europe needs to step up in several areas to become a stronger partner to the US.
The economist said that in a less severe split between the two blocs, Europe could play a bigger role and help set standards in a number of areas, such as environmental protection, human rights and product safety. Mr Nielsen does not think there is a growing threat of nationalism within the EU
“Public support for the EU and the euro is at an all-time high, so it seems to me that the more likely outcome is a deeper integration,” Mr Nielsen said.