Lead article from the Economist – 19.03.22
Liberal governments need to find a new path that combines openness and security.
THE INVASION of Ukraine is the third big blow to globalisation in a decade. First came President Donald Trump’s trade wars. Next was a pandemic in which cross-border flows of capital, goods and people almost stopped. Now armed conflict in Europe’s breadbasket, besieged Black Sea ports and sanctions on Russia have triggered a supply shock that is ripping through the world economy. Wheat prices have risen by 40%, Europeans may face gas shortages later this year, and there is a squeeze on nickel, used in batteries, including for electric cars. Around the world many firms and consumers are grappling with supply chains that have proved too fragile to depend on—yet again.
If you look beyond the chaos, Vladimir Putin’s warmongering also raises a question about globalisation that is uncomfortable for free-traders such as The Economist. Is it prudent for open societies to conduct normal economic relations with autocratic ones, such as Russia and China, that abuse human rights, endanger security and grow more threatening the richer they get? In principle, the answer is simple: democracies should seek to maximise trade without compromising national security. In practice, that is a hard line to draw. Russia’s war shows that a surgical redesign of supply chains is needed to prevent autocratic countries from bullying liberal ones. What the world does not need is a dangerous lurch towards self-sufficiency.
For most of the past few decades, it has been clear how to trade with the enemy. In the cold war the West and the totalitarian Soviet bloc conducted trade in energy and grain but had a low overall level of interlinking. After the Berlin Wall fell, it was widely assumed that free trade and freedom would conquer the world together, reinforcing each other. And for a while they did. In the 1990s the share of countries with democratic rule rose as tariffs fell and more container ships crossed the oceans. Russians got their first taste of Big Macs and the ballot box within an 18-month spell. Bill Clinton welcomed China’s entry into the global trading system in 2000, predicting that it would have “a profound impact on human rights and political liberty” there.
But in the past decade and a half liberty has retreated, with the share of people living in democracies falling below 50%. In many autocratic places, including China and the Middle East, political reform appears unlikely. The result is a globalised economy in which autocracies account for 31% of GDP, or 14% excluding China. Unlike the USSR, these autocracies are economically intertwined with liberal societies. A third of democracies’ goods imports are from them, and a third of multinational investment in autocracies is from democracies. Open societies trade over $15bn a day with closed ones, buying Chinese-made PCs and Saudi oil, and selling Bulgari and Boeings.
Russia’s invasion has shown the West the perils of trading with adversaries. One concern is moral. All those deals for Urals crude and Black Sea wheat bankrolled Mr Putin’s repression and his rapidly increasing military spending. Another is security, with Europe addicted to Russian gas and many industries reliant on inputs including fertilisers and metals. Such dependency may make autocracies stronger, weaken democracies’ resolve and expose them to retaliation in a war. No country embodies this Faustian pact more than gas-dependent Germany.
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Image by Doug Chayka