Second Age of Globalization is Coming to an End

 By Henry Srebrnik, [Moncton, NB] Times & Transcript

Globalization has been under sustained attack since 2008, when Lehman Brothers failed and the global financial system almost collapsed. And then in 2020 a virus appeared that froze supply chains and forced the world into hibernation. The war in Ukraine has caused yet more damage.

This has happened before. Prior to 1914 many argued that war was impossible given the interconnectedness of the world. An assassination in Sarajevo changed all that.

The conflagration quickly halted trade, capital flows and migration and eventually produced the Great Depression, with global trade shrinking by more than half in 1928-1933. Trade’s share of global GDP did not return to its 1914 level until the mid-1970s.

Now another conflict that has begun in eastern Europe could mark another lasting change in the way the world economy works and it could well mark the end of the second age of globalization.

For the past 30 years businesses could rely on a world in which countries would specialize in their comparative advantage. Commerce and free trade would bring people closer and businesses that ran themselves globally and with the most cost-effective supply chains would prosper.

But now the supply of basic commodities, from wheat to nickel to titanium to oil, has been disrupted. The West is doing everything it can to “cancel” Russia from the global economic system, by sanctioning oligarchs, expelling Russian banks from the global financial plumbing, and preventing Russia’s central bank from accessing its reserves. Western companies are boycotting Russia and closing down their Russian operations.

Geopolitical pressures are threatening the fragmentation of liberalised trading systems. Trade patterns will be shaped by the return of great power politics and the prevalence of friendly trading blocs.

One former booster of global interconnectivity, Mark Leonard, the founder of the European Council on Foreign Relations, in his new book The Age of Unpeace, admits he believed in a world dominated by the U.S. at the helm of “a liberal international order cemented by economic globalization and the internet and governed by liberal democracy and free-market capitalism.” Now he foresees an “unpeace” of permanent contest among states.

Larry Fink, CEO and chairman of the world’s biggest asset manager, BlackRock, which oversees more than $10 trillion in assets, in his March 24 letter to shareholders said Russia’s invasion of Ukraine has upended the world order that had been in place since the end of the Cold War.

“The Russian invasion of Ukraine has put an end to the globalization we have experienced over the last three decades.” Companies and governments would be looking hard at their dependencies on other nations and seeking to “onshore or nearshore more of their operations,” he added.

The whole system of international trade has been based on the dominance of the U.S. dollar. Yet by explicitly weaponizing the dollar to punish Russia in this way, Washington and its allies risk provoking a backlash that could undermine the currency and turn the global financial system into rival blocks that could leave everyone worse off.

“If you change the rules for Russia, you’re changing the rules for the whole world,” argues Mitu Gulati, a financial law professor at the University of Virginia. “Once these rules change, they change international finance forever.”

“This is the beginning of the end of the dollar’s monopoly in the world,” Vyacheslav Volodin, speaker of the Russian Duma, said April 6. Anyone who keeps money in dollars today “can no longer be sure that the U.S. will not steal their money.”

Countries like China have taken note of this. President Xi Jinping is going to move ahead with “decoupling” and insulating his country from dependence on the West. Xi has spent much of his rule building a Sinocentric economic order through the Belt and Road Initiative.

China’s vast holdings of dollar assets now look like a liability given America’s willingness to confiscate Russia’s assets. Any contracts and agreements can be abrogated in international financial activities if foreign central banks’ assets can be frozen.

China has long-term plans for its currency to play a much bigger role in the international financial system. Beijing views the dollar’s dominant position as one of the bulwarks of American power that it wants to lessen.