Economic commentators always reach for historical analogies, and with good reason. For example, those who had studied past banking crises had a much better grasp of what was happening in 2008 than those who hadn’t. But there’s always the question of which analogy to choose.
Right now, many people are harking back to the stagflation of the 1970s. I’ve 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.
There are, however, good reasons to worry that we’re seeing an economic replay of 1914 — the year that ended what some economists call the first wave of globalization, a vast expansion of world trade made possible by railroads, steamships and telegraph cables.
In his 1919 book “The Economic Consequences of the Peace,” John Maynard Keynes — who would later teach us how to understand depressions — lamented what he saw, correctly, as the end of an era, “an extraordinary episode in the economic progress of man.” On the eve of World War I, he wrote, an inhabitant of London could easily order “the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep.”
But it was not to last, thanks to “the projects and politics of militarism and imperialism, of racial and cultural rivalries.” Sound familiar?
Keynes was right to see World War I as the end of an era for the global economy. To take one clearly relevant example, in 1913 the Russian empire was a huge 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 world-spanning supply chains made possible by containerization and telecommunications, didn’t really get going until around 1990.
So are we about to see a second deglobalization? The answer, probably, is yes. And while there were important downsides to globalization as we knew it, there will be even starker consequences if, as I and many others fear, we see a significant rollback in world trade.
Why is world trade taking a hit? Vladimir Putin’s botched war of conquest has, of course, meant an end to wheat exports from Ukraine, and it probably cut off much of Russia’s sales, too. It’s not entirely clear how sharply Russia’s exports of oil and natural gas have already been reduced — Europe has been reluctant to impose sanctions on imports of products on which, fecklessly, it allowed itself to become dependent; but the European Union is moving to end that dependence.
Wait, there’s more. You mightn’t have expected Putin’s war to have much of an effect on auto production. But modern cars include a lot of wiring, held in place by a specialized part called a wire harness — and many of Europe’s wire harnesses, it turns out, are made in Ukraine. (In case you’re wondering, most U.S. wire harnesses are made in Mexico.)
Still, Russia’s decision to turn itself into an international pariah probably wouldn’t by itself be enough to drastically reduce world trade — as China, which plays a key role in many supply chains, could if it decided to turn inward.
But while China hasn’t invaded anyone (yet?), there are troubles on that front, too.
Most immediately, China’s Covid response, which was highly successful in the pandemic’s initial stages, is becoming an increasing source of economic disruption. The Chinese government still insists on using homegrown vaccines that don’t work very well, and it’s still responding to outbreaks with draconian lockdowns, which are causing problems not just for China but also for the rest of the world.
Beyond that, what Putin has taught us is that countries run by strongmen who surround themselves with yes-men aren’t reliable business partners. A Chinese confrontation with the West, economic or military, would be wildly irrational — but so was Russia’s invasion of Ukraine. Tellingly, the Ukraine war appears to have led to large-scale capital flight from … China.
So if you’re a business leader right now, surely you’re wondering whether it’s smart to stake your company’s future on the assumption that you’ll keep being able to buy what you need from authoritarian regimes. Bringing production back to nations that believe in the rule of law may raise your costs by a few percent, but the price may be worth it for the stability it buys.
If we are about to see a partial retreat from globalization, will that be a bad thing? Wealthy, advanced economies will end up only slightly poorer than they would have been otherwise; Britain managed to keep growing despite the decline in world trade after 1913. But I’m worried about the impact on nations that have made progress in recent decades but would be desperately poor without access to world markets — nations like Bangladesh, whose economic achievements have depended crucially on its garment exports.
Unfortunately, we’re relearning the lessons of World War I: The benefits of globalization are always at risk from the threat of war and the whims of dictators. To make the world durably richer, we need to make it safer.