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<\/a><\/p>\nFor investors, a world of nasty surprises on growth and inflation has little to cheer equity or bond markets. So far in 2022, commodities \u2013 where scarcity drives prices higher \u2013 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.<\/p>\n
\u201cFragmentation is going to stay,\u201d says Robert Koopman, the WTO\u2019s chief economist. He expects a \u201creorganized globalisation\u201d that will come with a cost: \u201cWe won\u2019t be able to use low-cost, marginal-cost production as extensively as we did.\u201d<\/p>\n
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.<\/p>\n
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.<\/p>\n
All of this risks leaving advanced economies facing a problem they thought they\u2019d 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.<\/p>\n
A few numbers illustrate the scale of the new barriers.<\/p>\n 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\u2019s not necessary to believe in a Manichean struggle between good and evil \u2014 or expect the rival camps to separate behind a new iron curtain — to see the prospective costs.<\/p>\n About $6 trillion of goods \u2014 equivalent to 7% of global GDP \u2014 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\u2019s 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.<\/p>\n All countries would have to shift resources toward activities they\u2019re less good at. A chunk of the productivity that\u2019s associated with trade would be lost. In the long term, a rollback of globalization 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.<\/p>\n 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.<\/p>\n 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: \u201cThe global economy now appears immersed in a long wave of low inflation, but experience suggests that many factors, notably heightened conflict that reverses globalization, can bring it to an end.\u201d<\/p>\n Rival Camps<\/strong><\/p>\n 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\u2019s at risk.<\/p>\n Democracies can be forgiven for feeling under threat. In 1983, when Ronald Reagan called the Soviet Union an \u201cevil empire,\u201d 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.<\/p>\n 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\u2019s most populous democracy, continues to buy Russian oil and weapons.<\/p>\n Many other democracies \u2014 in Asia, Latin America, and elsewhere \u2014 show little desire to join the US-led campaign of economic and financial pressure on Russia.<\/p>\n Whether they\u2019re defined by an ideological divide, or simply diverging interests in a multi-polar world, the deepening fault-lines are real. China\u2019s latest Covid lockdowns are a good example of some of their harder-to-predict consequences.<\/p>\n 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.<\/p>\n As a consequence, China\u2019s 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.<\/p>\n 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\u2019s port.<\/p>\n The threat to US and European economies isn\u2019t limited to the repercussions of Chinese lockdowns, or blowback from their own measures against Russia. They could also be exposed to direct retaliation.<\/p>\n<\/a><\/p>\n\n
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\nThe result: global trade plunges by some 20% relative to a scenario without the decoupling \u2014 falling back to its levels at the end of the 1990s, before China joined the WTO, as a share of GDP. That\u2019s a huge and wrenching change.<\/p>\n<\/a><\/p>\n<\/a><\/p>\n