The Issue

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The past few years have turned the world economy upside down as “unprecedented” events continue to unfold; a global pandemic, rising geopolitical tensions and now a war in Ukraine. All of these events have caused severe disruption in supply chains and exponential increases in inflation, while stalling wage growth, but it was Russia’s invasion that Wall Street investors believe ultimately broke the cross-border bonds between countries, companies and people. In response, governments have started more nationalistic approachs to manufacturing, aid and other sectors in an effort to bolster their own economies, shifting away from globalization.

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Globalization gathered steam after the Cold War and for decades, companies pushed to expand markets, as well as to exploit cheap labor, lax environmental standards and tax loopholes. The production of goods was streamlined and supply chains were extended, creating vast fortunes for individual businesses, but also developing livable wages for hundreds of millions around the world. Innovation and technology provided a boost, national GDPs increased, price of goods decreased and active war seemed minimized as globalization was built on the idea that politics and economics could be completely divided. 

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Now, countries and companies alike are realizing that interdependence can be weaponized against them and that certain parts of globalization may be a mistake and important parts of the global integrated economy have started unwinding. Wall Street investors warn that this may be the end of globalization as we know it, but others believe there will merely be a shift or economic realignment. Some even predict the emergence of new economic blocs, centered around like-minded political ideology, instead of a singular global economy. 

 

Why Is It News?

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In an era of increased corporate social responsibility, companies had already started examining how they do business in places like Russia and even China, where geopolitical tensions, human rights abuses and the use of advanced technology to reinforce government control make corporate dealings less desirable. As the pandemic and now the war slow down the global supply chain, companies are taking things even further and re-evaluating their dependence on other areas of the world entirely; spurring them to re-analyze manufacturing and assembly footprints.

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In the U.S., opposition to globalization gained momentum with the Trump administration’s trade policies and drive for “America First.” During the pandemic, other countries followed suit, creating policies that benefited their own citizens, even at the expense of other, low-income nations. When Russia invaded Ukraine, an added dimension of national security caused many countries to escalate their plans for deglobalization. China warned against weaponizing globalization, but themselves have imposed economic punishments on countries they have disagreed with. 

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As global links disintegrated, powerful companies came to the realization that they needed to focus not only on efficiency and cost, but also on resiliency. Globalization allows for flexibility and diversification, but is more often than not used as a tool for hyper-connectedness and dependency. 

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For example, when the pandemic started and Chinese manufacturing plants shut down, it was enough to slow down the global factory activity. With the war in Ukraine, manufacturing of semiconductors has stalled as nearly 90% of the world’s processor-grade neon comes from the area. Even labor markets are affected. The Czech Republic reported that if Ukranians are called up for active duty, a large percentage of their workers (mainly in the construction industry) will be forced to return to Ukraine, crippling the Czech labor market. 

 

Ngozi Okonjo-Iweala, director general of the World Trade Organization, believes that more diversified international markets are still the best option for resiliency in the supply chain. Evidence supports this notion of “re-globalization.” Together, Russia and Ukraine grow almost 30% of the global wheat supply. Ukraine is the top supplier of corn for China, while Russia supplies most of Turkey’s and Egypt’s grain needs. As war rages in Ukraine, food supply for these countries is in jeopardy, but if the market was further diversified, coming from more nations, they wouldn’t rely so heavily on any one outlet and risk starvation now. 

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Economists warn that deglobalization will push inflation even higher as banks are forced to choose between higher prices or lower economic activity. Still, the long-term economic effects of deglobalization are increasingly uncertain.