Opinion | Will Putin kill the global economy?

Economic commentators are always looking for historical analogies, and rightly so. For example, those who had studied past banking crises had a much better understanding of what was happening in 2008 than those who had not. But there is always the question of which analogy to choose.

At this time, many people remember the stagflation of the 1970s. I have argued at some length that this is a bad parallel; our current inflation looks very different from what we saw in 1979-80, and probably much easier to end.

However, there is good reason to worry that we are seeing an economic repeat of 1914, the year that ended what some economists call the first wave of globalizationa great expansion of world trade made possible by railroads, steamships, and telegraph cables.

In his 1919 book The Economic Consequences of Peace, John Maynard Keynes, who would later teach us how to understand depressions, lament what he saw, correctly, as the end of an era, “an extraordinary episode in the economic progress of man.” On the eve of the First World War, he wrote, an inhabitant of London could easily order “the sundry produce of all the earth, in such quantity as he thinks fit, and reasonably expect prompt delivery of it to the door of the house of he”.

But it was not going to last, thanks to “the projects and policies of militarism and imperialism, of racial and cultural rivalries.” Sounds familiar?

Keynes was right to see World War I as the end of an era for the global economy. To take a clearly relevant example, in 1913 the Russian empire was a major wheat exporter; it would be three generations before some of the former republics of the Soviet Union resumed that role. And the second wave of globalization, with its global supply chains made possible by containerization and telecommunications, it didn’t really get off the ground until around 1990.

So are we about to see a second deglobalization? The answer is probably yes. And while there were significant downsides to globalization as we knew it, there will be even more serious consequences if, as I and many others fear, we see a significant setback in world trade.

Why is world trade being affected? Vladimir Putin’s failed war of conquest, of course, spelled the end of Ukraine’s wheat exports, and probably cut off much of Russia’s sales as well. It is not entirely clear to what extent Russian oil and natural gas exports have already been reduced: Europe has been reluctant to impose sanctions on imports of products on which it irresponsibly allowed itself to become dependent; but the European Union is moving towards break that dependency.

Wait, there’s more. You may not have expected Putin’s war to have much of an effect on car production. But modern cars include a lot of wiring, held up by a specialized part called a wire harness, and it turns out that many of Europe’s wire harnesses are made in Ukraine. (In case you were wondering, most US wire harnesses are made in Mexico.)

Still, Russia’s decision to become an international pariah would probably not be enough on its own to slash global trade, as China, which plays a key role in many supply chains, might if it decided to turn inward.

But while China hasn’t invaded anyone (yet?), there are problems on that front as well.

More immediately, China’s response to Covid, which was wildly successful in the early stages of the pandemic, is becoming a growing source of economic disruption. The Chinese government still insists on using homemade vaccines that It does not work welland continues to respond to outbreaks with draconian lockdowns, which are causing problems not only for China but also for the rest of the world.

Beyond that, what Putin has taught us is that countries run by strong men surrounding themselves with trusted men are not reliable trading partners. A Chinese confrontation with the West, economic or military, would be wildly irrational, but so was the Russian invasion of Ukraine. Tellingly, the Ukraine war appears to have sparked a large-scale capital flight from… China.

So if you’re a business leader right now, you’re probably wondering if it’s wise to stake the future of your business on the assumption that you’ll be able to continue to buy what you need from authoritarian regimes. Returning production to nations that believe in the rule of law may increase your costs by a few percent, but the price may be worth the stability it brings.

If we are about to see a partial retreat from globalization, will that be a bad thing? Rich, advanced economies will end up only slightly poorer than they otherwise would have been; Great Britain managed continues to grow despite the decline in world trade after 1913. But I am concerned about the impact on nations that have made progress in recent decades but would be desperately poor without access to world markets, nations like bangladeshwhose economic achievements have crucially depended on their garment exports.

Unfortunately, we are relearning the lessons of the First World War: the benefits of globalization are always at risk from the threat of war and the whims of dictators. To make the world lastingly richer, we must make it safer.

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