Western sanctions could lead to the disintegration of globalization


The Covid-19 pandemic, which had blocked the planetary economy, underlined the limits of globalization and reawakened the interdependencies between countries – particularly European – with Asian and particularly Chinese supply and logistics chains, particularly in the technological field. .

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

Globalization, after having contributed to the global rise in the standard of living, was recently undermined by the rise in inequalities in the rich countries, driven in particular by the question of the “winners and losers” of free trade, as explained by the Economist Dani Rodrick. The war between the United States and China, in the race for world economic leadership, 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 well accelerate the process of de-globalization and the emergence of new blocs.

International trade is already wavering

Monday evening, the World Trade Organization (WTO) has indeed split a study in which it points to the risk of “disintegration of the world economy” generated by the war in Ukraine. The organization fears the appearance of several blocs that could jeopardize international trade. Another study published by two economists on March 29 gives a little more content about this global upheaval and its repercussions on the well-being of economies (welfare), estimating the losses by 2040 at 5% on average, and up to 10% in some parts of the world. In question, in particular, the return of significant customs barriers in the context of the emergence of two blocks around which world trade would be reorganized.

In the short term, the war in Ukraine should already erase half of the growth in world trade expected in 2022, that is to say trade between different countries, estimates the WTO. This growth should be between 2.4% and 3%. In October, the WTO forecast a 4.7% increase in world trade. Among the mechanisms unveiled by the organization to explain this fall, the WTO notes that “punishments [occidentales, NDLR] directly impact international flows” and the “change in relative prices (international prices are rising faster than domestic prices, editor’s note) 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 bring global GDP growth down to between 3.1% and 3.7% this year. For its part, the OECD published a more alarming initial estimate on 17 March. The organization estimates that global economic growth could be more than 1 point lower. At the end of December 2021, the institution expected world GDP growth of 4.5%. This means that this conflict could amputate the world economy by approximately 800 billion dollars. In the long term, OECD economists warn of a sharp drop of 5% in global GDP growth.

Ukraine and Russia: featherweight but essential

According to the analysis carried out by the WTO Secretariat, “Most of the suffering and destruction is felt by the people of Ukraine, but the costs in terms of reduced trade and production will likely be felt by people around the world due to rising food prices and the energy and the reduced availability of goods exported by Russia and Ukraine”.

Even if the weight of Ukraine in the planetary economy remains relatively limited, its specialization in certain raw materials and the collateral damage of the conflict cause a shock wave in the globalized economy. According to the WTO, the two countries distributed in 2019 around 25% of the world’s wheat, 15% of barley and 45% of sunflower. Russia alone accounts for 9.4% of world trade in fuels, a share that rises to 20% for natural gas. Moscow and kyiv are also “key input suppliers in industrial value chains”, says the WTO in its report.

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

Europe will be a region affected by the economic consequences of the Russian invasion, adds the international organization, because of its close economic and energy ties with Russia, particularly concerning the States having a border with Moscow or kyiv. According to the WTO report, 51.5% of overall Russian exports went to Europe in 2021 and 49.2% to Ukraine. Africa and the Middle East are the most vulnerable regions according to the WTO, as they import more than 50% of their grain needs from Ukraine and Russia.

World trade tomorrow divided into two watertight blocs?

But these immediate consequences could well draw a deeper shift, what is meant by the term “disintegration of the world economy”, mentioned by the WTO. two economists, Eddy Bekkers (WTO) and Carlos Góes (University of San Diego), attempted to map this new global balance that could take hold. The authors anticipate a “potential decoupling of the global trading system into two blocs – a US-centric bloc and a China-centric bloc”. At the heart of these blocs, the geopolitical interests of each country.

For these two researchers, who are based on the UN foreign policy index, Europe, Canada, Australia, Japan, South Korea would fall into the Western bloc carried by the United States. Latin America and sub-Saharan Africa fall somewhere in between, with the former closer to the United States than the latter. India, Russia and most of North Africa and Southeast Asia are closing in on China. For its part, the WTO considers “that there could be even more blocs because some countries might find it awkward to belong to one or the other bloc while others might want to belong to more than one bloc.”

The dynamic already seems to be at work. Russia, as well as Belarus, are now excluded from the principle of free trade reciprocity with the United States. They thus join the very closed circle of countries with revoked commercial status, such as Cuba and North Korea. And since the introduction of Western sanctions against Russia, Moscow has increasingly turned to China, where trade between the two countries has exploded since the start of the war. The Chinese Communist Party explained that it was impatient “to work with Russia to bring Sino-Russian relations to a higher degree in a new era”. The Kremlin is also increasingly looking to India. This country offers an outlet for Russian oil boycotted by the Western powers, which sells it at an attractive price. This growing movement is not new, recalled in our columns the economist Jacques Sapir, who estimated that “for Russia, turning to Asia has become essential for its freedom of maneuver”.

World trade that could climb 160%

Within these future and potential blocs, tariff barriers would remain limited, making it possible to maintain substantial intra-bloc trade. But, according to the authors, trade between blocks could collapse by 98%. And trade costs between rival blocs would increase from 160% in the most pessimistic scenario to a more contained increase of around 32%. In question, in particular the rise in customs barriers but also the disappearance of certain advantages generated by commercial multilateralism, such as economies of scale.

This fragmentation of world trade would lead to a substantial reduction in well-being for all countries, note the two economists. However, the effects are asymmetric. While the losses would vary between between -1% and -8% (median: -4%), in the western block, they are between -8% and -11% (median: -10.5%) in the block Asia, with a projected real income loss globally of around 5%.

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

How to explain such a difference ? The capacity for innovation is at the heart of the matter, underline the authors. “By cutting ties with richer and more innovative markets, Eastern bloc countries reorient their supply chains towards lower quality products, which, in turn, lead to less innovation. By contrast, while Western bloc countries also experience welfare losses, their innovation trajectories appear virtually unchanged after decoupling.. And by reducing their capacity for innovation, these countries are reducing their productivity gains. “Thus, Eastern Bloc countries that currently have a lower level of productivity and have greater ties to innovative countries have greater losses,” they project.