Skip to main content

This wave of globalisation was over long before Russia invaded Ukraine

China's re-emergence as an economic power was the big driver of globalisation over the past two decades. But it also contained the seeds of a fracturing Sino-US relationship. Globalisation is now in partial reverse as separate US- and China-led economic spheres emerge and the decoupling that began with trade increasingly spreads into technology, market access and financial ties. Ngozi Okonjo-Iweala, the Director-General of the World Trade Organisation, has joined the chorus of those warning about the war in Ukraine and what it means for the global outlook. "History teaches us that dividing the world economy into rival blocs and turning our backs on the poorest countries leads neither to prosperity nor to peace,” she said. Blackrock’s Larry Fink has taken a similar line on the war’s importance, telling shareholders that “the Russian invasion of Ukraine has put an end to the globalisation we have experienced over the last three decades”. But the trends that Ms Okonjo-Iweala and Mr Fink warn of have been in train for some time, part of a multi-year process which is seeing a wave of globalization give way to deglobalisation. While the COVID-19 pandemic and the Ukraine war may come to be seen as turning points for global economic integration, the evidence suggests that globalisation petered out before these crises occurred. Writing in 2019, Vicky Redwood, Senior Economic Adviser at Capital Economics, concluded that the limits of globalisation had been reached, noting how nominal exports of goods and services as a share of global GDP had been flat for a decade, while movements of capital flows across borders told a similar story. She also highlighted data showing how migratory flows as a percentage of the world’s population had effectively stalled from 2015. Despite a temptation to blame these trends on the US-China trade war or the residual impact of the Global Financial Crisis, Redwood instead showed how they reflected the forces of global economic integration had been pushed as far as they would go. More than 90% of the world’s population now live in countries which are WTO members, compared with the less than 30% who were residing in those that originally signed up to its precursor, the General Agreement on Tariffs and Trade, in the late 1940s. Room for further gains are constrained by factors such as reduced reliance on cheap labour in manufacturing and less complex supply chains, she said. Globalisation in (partial) reverse But while globalisation may have run out of steam, could it now be going into reverse? The post-Cold War decades may come to be seen as a golden age of globalisation, but it is not the first. Nikhil Sanghani, Latin America economist at Capital Economics, has identified three waves of globalisation over the past 150 years, starting with the decades leading up to the First World War, during which industrialization and technological development helped drive an increase in flows of goods, cross-border capital and – especially – people. This was the period John Maynard Keynes called an “extraordinary episode in the economic progress of man” in his famous lamentation of its passing at the start of ‘The Economic Consequences of the Peace’. The second wave, which began after the Second World War and ended with the collapse of Bretton Woods in 1971, was marked by post-war reconstruction and increased economic integration in Europe. This latest wave may have emerged from the embers of the Cold War, but its hallmark moment was China’s accession to the WTO in late 2001; within 15 years, China’s share of global goods exports rose to nearly 14% from just 4%. While that was the big driver of globalisation over the past two decades, China’s reemergence as an economic power also helps explain how those forces may now be going into partial reverse. In a 2019 analysis of the economic implications of US-China decoupling, Mark Williams, Capital Economics’ Chief Asia Economist, warned that the fracturing of the Sino-US relationship had less to do with Donald Trump than China’s emergence as a global strategic competitor to the US – and one with fundamentally different values. The fact that US relations with China have barely improved under Joe Biden underlines this point. “Bill Clinton argued that engagement would help steer China to becoming an ally. Instead, viewed from the perspective of the incumbent global superpower today, it seems to be enabling the rise of a strategic rival,” Williams said. As part of its long-running focus on the questions of decoupling and deglobalisation, the Capital Economics team has warned that the follow-up to this most recent wave of globalisation could be precisely what the WTO’s Okonjo-Iweala warns of: the coalescing of nations within rival economic blocs. Despite early fears, the pandemic itself hasn’t led to a permanent weakening of global economic interdependencies. But it has accelerated the fracturing of relations between Washington and Beijing and what’s emerging is far removed from the ethos that defined the post-Cold War years. Here’s Redwood writing last year: “It is now becoming clearer what to expect – namely a type of regionalism driven by the emergence of separate US-led and China-led spheres. While this decoupling began with trade, it will increasingly spread into technology, market access and financial ties”. In Mapping Decoupling, a major 2021 Capital Economics research project, Williams and colleague Julian Evans-Pritchard assessed the size and scope of these potential US and China-led spheres to highlight Beijing’s long-term economic disadvantage. Treading carefully It is against this uneasy backdrop that Russia’s war in Ukraine began. The early February meeting of Presidents Xi Jinping and Vladimir Putin – and a subsequent joint statement proclaiming that “friendship between the two states has no limits” – fuelled an idea that a Sino-Russian front was hardening against western liberalism. However, the reality is more complex. In his immediate take on how China would respond to the Ukraine war on Russia, Williams argued that Beijing will, for the most part, toe the line on the tough financial sanctions that have been imposed on Russian state institutions, firms and individuals – an assessment which has been borne out in the weeks following the initial invasion. This isn’t to suggest that China is disavowing its relationship with Russia. More that, although China itself is trying to reduce its supply chain dependence on the West, it wants this decoupling to happen on its own terms. Beijing is treading carefully to avoid giving the West a pretext to sever trade and financial links that China still relies on today. Although Russia’s war with Ukraine is relatively young, Capital Economics has already begun to assess its longer-term consequences. Click here for a report by Group Chief Economist Neil Shearing on how the war could shape macro and market outcomes in the years ahead. /publications/the-long-run/long-run-update/the-economic-consequences-of-the-war/