- The Russia-Ukraine war could be the final nail in the coffin for economic globalization.
- President Joe Biden framed the US ban on Russian oil as an opportunity to achieve energy independence.
- Economic self-sufficiency can fall against global shocks, but it also stands to boost inflation.
Globalization was already under siege before Russia invaded Ukraine, but now the war is shaping up to be the final nail in its coffin as countries like the US start to rethink the past several decades of moving supply chains abroad.
The West, led by the US, moved quickly to impose historic sanctions against Russia, but it now faces a massive problem. The measures, especially those targeting Russia’s massive energy sector, have driven prices for key commodities sharply higher in recent weeks. While demand remains just as hot as it was before the war, partially removing Russia from energy markets placed fresh pressure on global supply.
That’s left America and its allies rushing to fill the hole. In his speech announcing the US’s ban on Russian oil, President Joe Biden urged the importance of becoming “energy independent” to “protect our economy.” The embargo should motivate the country “to accelerate the transition to clean energy,” he added.
The administration took an even bigger step toward energy independence on Thursday, urging Congress to enact “use it or lose it” fines on domestic oil producers’ idled wells to boost at-home production. The White House also announced plans to leverage the Defense Production Act to accelerate domestic production and processing of minerals used in batteries.
“The path to real American energy independence depends on reducing our reliance on foreign oil and on fossil fuels,” a senior administration official said. “And the path to that energy security runs through clean energy.”
The message is the latest to eschew globalization and emphasize the benefits of economic self-sufficiency. The US is considering ways to rely less on others’ resources, which can insulate countries from global shocks like Russia’s invasion.
But such independence would come with a price for America. If the Russia-Ukraine war does usher in a deglobalized economic order, inflation will probably continue to be a major problem.
Reversing globalization means greater independence …
With the US already suffering through supply-chain turmoil as a result of the COVID-19 pandemic, it’s more attractive than ever to be less economically dependent on others. Brian Coulton, the chief economist at Fitch Ratings, told Insider the war in Ukraine marked a “quite fundamental” pivot point from globalization to independence.
This doesn’t mean an end to global trade, but it does mean countries are likely to start prioritizing domestic production for goods essential to daily life. It could also fragment the global economy into smaller blocs that only trade with nearby members.
“The phrases you keep hearing are, ‘We need to ensure energy security, we need to ensure food security, we need to ensure technology security,'” Coulton said. “When they say ‘security,’ they mean ‘we need to make this stuff at home.'”
Biden’s remarks underscore a shift in economic sentiment that’s been years in the making. President Donald Trump ran on the platform of moving manufacturing jobs back to the US, and he justified his trade war with China by arguing it would leave the US less dependent on foreign manufacturers. In fact, Coulton said globalization “probably peaked in 2012 or 2013” and had been “gradually eroded” since.
Russia’s invasion added new urgency to the pivot. Though Russian oil accounted for only about 3% of US crude imports in 2021, the interconnectedness of the global energy market still pushed prices sharply higher. That lifted US gas prices to new highs and sparked a new push toward energy independence.
The impulse to wean the US off others’ goods is only natural, Tania Babina, a business professor at the Columbia Business School, told Insider. The invasion was bound to have immediate impacts, but the economy can adapt to a new world of more limited international trade just as it did during the coronavirus-related lockdowns of early 2020.
“What people don’t always think about – but economists do – is that things are not static,” Babina said. “You can change things and reshuffle things and relocate things to soften the blow of a given shock.”
… but also higher prices
Shifting to economic independence can indeed soften the blow, but it also comes with its own challenges. Chief among them: strong inflation. Coulton of Fitch said deglobalization “seems to be the baseline now,” which would mean “higher prices.”
The math is fairly simple. Much of globalization’s appeal came from the cheap labor offered in manufacturing hubs like China and Vietnam. Companies moved production abroad, and lower labor costs kept prices low for all kinds of goods.
Prices for durable goods in the US – think appliances, cars, and electronics – fell nearly 17% from 2000 to 2020, according to the Consumer Price Index. Yet the overall price index – one of the most widely followed measures of inflation – rose 53% over the same period, signaling globalization was hugely deflationary for a broad range of products.
Bringing those jobs back to the US would almost certainly mean pricier goods. Labor costs are higher in the US, and the shake-up to supply chains could lift material costs as well. A “Made in America” movement would be a boon for economic independence, but Americans would have to pay up.
“This decoupling will inevitably create challenges for companies, including higher costs and margin pressures,” Larry Fink, the CEO of investment giant BlackRock, said in a March 24 letter to shareholders, noting that bringing supply chains back to the US would most likely cause inflation to continue soaring.
Still, deglobalization will not mean complete independence. Rough actions accelerated a “bifurcation” of the world into two sparring camps, the Economist Intelligence Unit said in a March 23 report. The West is likely to maintain internal trade partnerships and economic cooperation even if it moves away from autocracies like Russia and China.
And while China has not formally sided with Russia in its invasion of Ukraine, the two countries enjoy a close economic relationship. The EIU predicted the war in Ukraine would accelerate Russia’s “pivot eastwards” and “cement its alliance with China.” That move would decisively rupture the connection to the West and create a new economic bloc with which to compete, further tangling the globalized supply chains used mere months ago.
“Some countries will take sides, but many others will seek to maintain a foot in both camps,” the EIU said. “As time goes on, this balancing act will become increasingly difficult.”