The end of the American century
The global economic order is fragmenting fast.
Many believe that the war in Ukraine will reverse or bring an end to globalisation. As Larry Fink – the boss of the world’s largest asset-management firm, BlackRock – put it in his annual letter to shareholders, Russia’s invasion ‘has put an end to the globalisation we have experienced over the past three decades’.
However, this is not the first time that globalisation has been declared dead. Obituaries were published after the financial crash of 2008, after the Brexit vote in 2016 and after the election of President Trump in 2016. Yet more obituaries were penned following the pandemic lockdowns and the accompanying disruption of global supply lines.
When a phenomenon is repeatedly declared dead, only to repeatedly survive, it should raise questions about the usefulness of the concept used to describe it. That certainly goes for the concept of globalisation. World economic developments simply do not follow an either / or, more-or-less logic of globalisation or de-globalisation. This simplistic formula hides the meaning of specific economic trends, which are simply collapsed into the broader process of globalisation, and perceived as parts of a cycle or wave of capitalism.
Nowadays, the period leading up to the First World War is often called the first wave of globalisation. The current era, which is generally thought to have started 30 years ago, at the end of the Cold War, is seen as the second wave of globalisation – or ‘Globalisation 2.0’. The conventional view is that at some point the globalisation wave will be made to recede by some crisis: a financial crash, a pandemic or, as in 1914 and again today, by a war.
This view of economic cycles or waves suddenly being inverted provides catchy headlines. But it falls down analytically because capitalism always operates both nationally and internationally at the same time. As a result, the economic internationalisation usually associated with ‘globalisation’ co-exists with the national economic developments and policies that are often used as illustrations of ‘de-globalisation’.
In order to understand today’s economic developments, it is better to start not with globalisation, but with the idea that the world economy is always in flux – that the balance between international and national is always changing. We can therefore ask: which features in the world economy are likely to be magnified or sped up by Russia’s invasion and why?
The most important impact will be the acceleration of the existing fragmentation within the world economy, both at the regional level and at the national level. The regionalisation of trade and production will likely continue around three big economic blocs: one American-led, the second Chinese-led and the third centred on Europe.
Alongside this regionalisation, and especially within the American and European regions, countries will also turn further inward, with more national state intervention and more protectionist measures. Hence the many calls made in recent years for localising production and ‘reshoring’ activities that had previously been ‘offshored’.
This is an acceleration of an existing trend. It is not the beginning of something new. This fragmentation has been happening for a long time. It has become more pronounced since the financial crisis, and has been given further impetus by the Covid-19 shutdowns and the accompanying disruptions to the global economy.
These parallel trends towards national autarky and towards regionalisation have both economic and geopolitical drivers. Although the two sets of drivers are entwined, it is the geopolitical set that has been more significant in speeding up change.
The material, economic drive towards national autarky and regionalisation is quite straightforward. It is rooted in domestic economic problems afflicting the advanced industrialised countries. Over the past half a century, these countries have experienced a protracted decay in productive activity and a slowdown in productivity growth. The attempts of businesses in these countries to cope with the attendant profitability problems have contributed to the internationalising and nationalising features of recent decades.
So, on the nationalising side, businesses have become ever more reliant on the support of their nation states. And on the internationalising side, these home-grown businesses look to compensate by extending their activities abroad. Sometimes this is done through cross-border trading relationships – increasing sales through exporting, or reducing production costs with cheaper imported supplies. But increasingly this is done through investing and producing abroad.
These two sides are not contradictory. Indeed, the very process of economic internationalisation has been accompanied by increased national state intervention. This is why all the mature national economies have been experiencing, at uneven rates, economic slowdowns, and why all have simultaneously been driven to operate abroad. This process leads to intensified competition on the world market, and brings conflict not just between big businesses based in different territories, but also between their respective governments.
In economic terms, regionalisation can be viewed as a compromise – a way of trying to combine the benefits of both internationalisation and national control. Regionalisation retains some of the cost efficiencies of a wider division of labour and of greater specialisation than is possible within one national economy. And it also gives national governments more clout than is possible at the global level. This mostly benefits the governments of the dominant country, or countries, within a region.
What of the geopolitical drivers behind global fragmentation? This is where the war in Ukraine marks a step change, best captured by the German government’s decision to abandon decades of pacifism and become a substantial military and foreign-policy power once again. This shows that while economic unevenness between countries, and between different parts of the world, has provided the material drivers for the unravelling of the post-Second World War order, geopolitics has generated the sudden, dramatic changes.
Big geopolitical shocks like the war in Ukraine can be pivotal. For Western leaders, geopolitical bombshells bring existing trends and changes to the surface. They also prompt governments to make decisions, for good and for ill.
For instance, protectionist measures, hitherto decried, have become suddenly acceptable and normalised. The pandemic had already concentrated minds on economic resilience and self-sufficiency. But today’s war is reinforcing those existing inducements towards economic self-reliance, in everything from energy to food production.
Matters of wartime national security are an even more powerful stimulus for change. Security concerns focus political minds in a way nothing else does, something Australian prime minister Scott Morrison captured when he remarked how ‘the events unfolding in Europe are a reminder of the close relationship between energy security, economic security and national security’.
So, on top of protectionist state actions taken for domestic economic reasons, it is geopolitical considerations that have pushed Western nations towards economic self-reliance, and thereby reinforcing existing autarkic tendencies.
To understand how politics, geopolitics and economics are already interacting to encourage fragmentation, and to understand how the Russian invasion could make them more overt, it’s worth taking a more detailed look at government and business interactions, regionalisation and international reserves.
Firstly, cross-border competition and rivalry have been helping tighten relationships between businesses and governments. Even the most international of businesses, like Facebook or Apple, Renault or Volkswagen, have close connections to their own nation states.
The war in Ukraine will likely intensify the integration of government and business, which, in turn, will ratchet up the international temperature. This is another reason why we should not expect the apparent Western unity against Russia to survive for that long. Indeed, Western states’ conflicting approaches to sanctions, especially regarding energy, are already out in the open.
Secondly, the trend towards regionalisation will likely be captured by the geopolitical bifurcation of the US and China. Whatever transpires in the coming months between the West and Russia, the geopolitical shake-up prompted by this war will focus on the split between America and China. This is because not only is China much more populous than Russia, but it is also far more deeply interconnected economically, financially and politically with the rest of the world.
The primary geopolitical antagonism will continue to be that between Washington and Beijing. Today’s showdown with Moscow is already being discussed in some US circles as a dress rehearsal for the bigger showdown with China to come. An extra consideration here is that many Asian countries, as well as many in Africa, will want to keep a foot in both camps. A consolidated Chinese geopolitical bloc is not coming anytime soon. The economic historian Adam Tooze writes astutely about the formation of ‘polarities’ rather than ‘blocs’.
This overarching US-China confrontation also means that the position of Europe within the global order depends more on geopolitics than it does on the economics of European-Chinese trade and business relationships. In the shorter term, European leaders could conclude that for all French president Emmanuel Macron’s talk of building European ‘strategic autonomy’, EU member states are too divided to be able to overcome their collective dependence on the US, not least for their military and security needs. They could therefore throw in their lot with Washington as a junior partner. Or the European leaders could decide that, given all the transatlantic tensions in recent years, they would be foolish to rely on America, and instead try to attain some independence as a third region between the American-led and Chinese-led regions.
Thirdly, today’s geopolitical crisis could advance a shift in the international order by undermining the global role of America’s national currency. Possessing the main global currency is one of a hegemon’s greatest economic assets, because it gives it exceptional buying and borrowing capacity on world markets. Today, this ‘exorbitant privilege’ – a term coined in the 1960s by the then French minister of finance, Valéry Giscard d’Estaing – is especially helpful to the US to camouflage its economic decline. Because of the dollar’s international attractiveness and utility, the US is able to fund its accumulated external debts, and its ongoing current account and budget deficits, thereby helping to sustain its geopolitical power despite its declining economic weight in the world. As a weakened Britain once showed, with pound sterling only replaced by the dollar as the global currency during the Second World War, this advantage is one a declining world power is slowest to lose.
The staying power of a global currency derives partly from the network effect – that is, because everyone is using it, there are disadvantages in any country moving away from using it. The dollar’s status as world money thus benefits from incumbency inertia and is unlikely to be lost anytime soon. However, measures being taken by the US government to weaponise the dollar in an attempt to bolster its fading authority could, over the longer term, be counter-productive for America’s standing. This vital hegemonic asset could switch to being a contributor to geopolitical instability.
Any reallocation of the global currency is unlikely to immediately match anything like a clean, three-way regional split into dollars, euros and renminbi. In particular, there are significant barriers to the renminbi assuming a much bigger foreign currency role, not least Beijing’s reluctance to allow the currency’s full convertibility, as argued by Harvard Kennedy School’s Megan Greene. Nevertheless, even a less dominant dollar would represent a sea change, as a new multipolar international monetary system emerges.
Today’s conflict could well speed up this process. Washington’s unexpected decision to freeze Russia’s Western currency assets and limit Russia’s access to dollar-based payments and financial institutions could well prompt other nations to de-dollarise – especially those reluctant to associate with the Western camp against Russia.
China has already been developing alternative, non-dollar financial structures, as well as other international institutions, such as the Asian Infrastructure Investment Bank, parallel to US-dominated institutions. After what’s happened to Russia’s dollar reserves, many other countries will have greater reason to diversify away from the dollar, and potentially cooperate more with China. Indonesia, for example, has already been conducting a substantial part of its bilateral trade with China in renminbi. And Saudi Arabia is currently in talks with China about selling oil in yuans, rather than in dollars.
We should also note the efforts of the Chinese state to create a credible central-bank digital currency (CBDC), ahead of any other country. This would make China less susceptible to American financial sanctions, and it would offer other traders an easy way to re-route transactions and bypass the dollar-based system. As the recognised global ‘first mover’ in this area, China is already helping the Basel-based Bank for International Settlements – often described as the central bankers’ central bank – establish the rules for the interoperability of multiple CBDCs. Once established, this would further undercut the use of the dollar for payments between non-US countries.
The imminent demise of the dollar as world money remains unlikely, but we are moving closer to a turning point. We should recall Ernest Hemingway’s wise words about bankruptcy in his novel The Sun Also Rises. ‘How did you go bankrupt?’, one of his characters is asked. ‘Two ways’, is the reply – ‘gradually, then suddenly’. A gradual shift to a post-dollar financial world might also at some point become a sudden movement. Practically and symbolically, this would be a tremendous blow to America’s already much weakened authority around the world.
So, as we see with the dollar as the global currency, actions taken for geopolitical reasons – namely, financial sanctions on Russia – rebound upon economics. Undermining the global role of the dollar could further undermine America’s geopolitical position.
The West’s economic response to the war could therefore accelerate a disorderly fracturing of the world around distinct monetary, economic and geopolitical polarities. This is truly a world in flux.
This article is based on a talk given at the Academy of Ideas Economy Forum on 4 April 2022, entitled ‘Globalisation in retreat?’.
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