Western sanctions may lead to the disintegration of globalization

The Covid-19 pandemic, which has crippled the global economy, has emphasized the limits of globalization and revitalized the interdependence of countries – especially European – with Asian and especially Chinese supply chains and logistics, especially in the technological field.

The war in Ukraine and its aftermath could signal a new blow to globalization, and deeply call into question this model of international development built since World War II, then accelerated with the fall of the Soviet bloc. This model is based on open markets and free trade.

Having contributed to the global rise in the standard of living, globalization has recently been undermined by rising inequality in rich countries, driven in particular by the issue of “winners and losers” in free trade, as explained by The Economist, Dani Rodrik. The war between the United States and China, in the race for global economic leadership, has also threatened the rules of international cooperation based on win-win. Now, the sanctions imposed by the West as part of the Russian invasion of Ukraine may accelerate the process of deglobalization and the emergence of new blocs.

International trade is already swaying

On Monday evening, the World Trade Organization (WTO) had already divided a study that noted the risks The disintegration of the global economy Born from the war in Ukraine. The organization fears the emergence of several blocs that could jeopardize international trade. Another study published by two economists on March 29 provided more content about this global turmoil and its implications for the well-being of economies (welfare), with losses by 2040 estimated at 5% on average, and up to 10% in some countries. part of the world. In particular, the return of important tariff barriers in the context of the emergence of two blocs around which world trade will be reorganized.

In the short term, the war in Ukraine should already wipe out half of the growth in world trade projected in 2022, that is, trade between different countries, according to WTO estimates. This growth should be between 2.4% and 3%. In October, the World Trade Organization forecast a 4.7% increase in global trade. Among the mechanisms that the organization revealed to explain this fall, the World Trade Organization noted “Penalties [occidentales, NDLR] directly affect international flows.” and the Change in relative prices (International prices are rising faster than domestic prices, editor’s note) It may lead to some reallocation of consumption from traded manufactured goods to services.”

As a result, according to this first WTO study, the crisis is expected to reduce global GDP growth to between 3.1% and 3.7% this year. For its part, the Organization for Economic Co-operation and Development published a more alarming preliminary estimate on March 17. The organization estimates that global economic growth could be less than one point. At the end of December 2021, the Corporation forecast global GDP growth of 4.5%. This means that this conflict could amputate the global economy by about $800 billion. In the longer term, OECD economists warn of a sharp 5% drop in global GDP growth.

Ukraine and Russia: Featherweight but essential

According to the analysis by the WTO Secretariat, “The people of Ukraine are feeling most of the suffering and devastation, but people around the world will likely feel the costs related to reduced trade and production due to higher food and energy prices and less availability of goods exported by Russia and Ukraine.”

Even if Ukraine’s weight in the global economy remains relatively limited, its specialization in some raw materials and collateral damage to the conflict causes a shock wave in the globalized economy. According to the World Trade Organization, in 2019 the two countries distributed about 25% of the world’s wheat, 15% of barley, and 45% of sunflowers. Russia alone accounts for 9.4% of global trade in fuels, a share that rises to 20% for natural gas. Moscow and how is it too “Key Input Suppliers in Industrial Value Chains”, says the World Trade Organization in its report.

Thus, Russia is one of the world’s main suppliers of palladium and rhodium, used in the automotive industry, accounting for 26% of global import demand for palladium in 2019. A large amount of neon is supplied by Ukraine.

The international organization adds that Europe will be a region affected by the economic consequences of the Russian invasion, due to its close economic and energy relations with Russia, especially with regard to countries that have borders with Moscow or Kyiv. According to the WTO report, 51.5% of all Russian exports went to Europe in 2021 and 49.2% to Ukraine. Africa and the Middle East are among the most vulnerable regions according to the World Trade Organization, as they import more than 50% of their grain needs from Ukraine and Russia.

Tomorrow’s global trade divided into two weatherproof blocks?

But these direct consequences may lead to a deeper transformation, which is meant by the term “disintegration of the global economy”, mentioned by the World Trade Organization. two economists, Eddie Bakers (WTO) and Carlos Góes (University of San Diego) attempted to map this new global balance that could take hold. The authors expect a “Potential separation of the world trading system into two blocks – the US central block and the China central block”. At the heart of these blocks are the geopolitical interests of each country.

For these two researchers, which are based on the United Nations foreign policy index, Europe, Canada, Australia, Japan and South Korea would fit into the Western bloc held by the United States. Latin America and Sub-Saharan Africa lie somewhere in between, with the former being closer to the United States than the latter. India, Russia, and most of North Africa and Southeast Asia are getting closer to China. For its part, the World Trade Organization “There may be more blocks because some countries may find it difficult to belong to one or the other while other countries may want to belong to more than one.”

The dynamic seems to be working already. Russia, as well as Belarus, is now excluded from the principle of free trade with the United States. In doing so, they join the very closed circle of countries with abolished trade status, such as Cuba and North Korea. And since Western sanctions were imposed on Russia, Moscow has increasingly turned to China, as trade between the two countries has exploded since the start of the war. The Chinese Communist Party has made it clear that it has run out of patience “To work with Russia to lift Sino-Russian relations to a higher degree in a new era.”. The Kremlin is also increasingly looking to India. This country provides an outlet for Russian oil boycotted by Western powers, which he sells at an attractive price. This growing movement is not new, as noted in our columns by the economist Jacques Sapir, who estimated that “For Russia, recourse to Asia has become essential to its freedom of maneuver.”

Global trade could rise 160%

Within these future and potential blocs, tariff barriers will remain limited, making it possible to maintain significant trade within the bloc. But according to the authors, trade between blocks can collapse by 98%. The costs of trading between rival blocs would rise from 160% in the most pessimistic scenario to a more contained increase of around 32%. In question, notably the increase in tariff barriers, but also the disappearance of some of the advantages that trade pluralism generates, such as economies of scale.

The two economists note that this fragmentation of world trade would lead to a significant reduction in welfare for all countries. However, the effects are unequal. While losses range from -1% to -8% (median: -4%), in the Western bloc, they range from -8% to -11% (median: -10.5%) in the Asian bloc, with a real expected income loss on the level world by about 5%.

Access to innovation would explain the decline in the standard of living in Eastern Bloc countries

How do we explain this difference? The ability to innovate is at the heart of the matter, the authors emphasized. “By severing ties with richer and more innovative markets, Eastern Bloc countries have redirected their supply chains toward lower quality products, which in turn leads to less innovation. By contrast, while the countries of the Western bloc are also experiencing welfare losses, their innovation trajectories appear virtually unchanged after secession.. By limiting their capacity to innovate, these countries reduce their productivity gains. “And therefore, the countries of the Eastern bloc that currently have a lower level of productivity and have greater links with innovative countries suffer greater losses,” are planning.