The alarming war in Ukraine will drastically accelerate changes in globalization this 2022

The war in Ukraine will accelerate the process of globalization changes. This process was already underway before the pandemic. New concepts and ideas such as deglobalization or the loss of strength of global value chains had begun to be discussed. With the pandemic, concepts such as the shortening or regionalization of value chains, production in proximity, the need for greater diversification of suppliers, the need to maintain higher levels of stocks, just-in-case rather than just-in-time procurement strategies, etc., became popular.

The war in Ukraine is having a huge short-term impact on international economic relations. The war affects, first and foremost, companies present in Ukraine and Russia. It has led to disruptions in supply chains. Of particular importance are the effects on the supply of foodstuffs and other raw materials from Ukraine and Russia, which will aggravate inflationary pressures and may lead to protests and social instability in less developed countries. There is a high degree of correlation between disruptions in food markets and social instability.

The war has affected the transport of goods between Asia, particularly China, and Europe. Ukraine, Russia and Belarus are key elements in the Eurasian transport networks. The value of goods transported by rail between China and Europe grew to $74.9 billion in 2021, up from $8 billion in 2016, and its share of total China-Europe trade increased over those five years from 1.5% to 8%. Higher transportation costs will further fuel inflationary pressures.

Moreover, sanctions have created uncertainty, and are negatively affecting international economic flows.

And all this is taking place at a time of resurgent COVID in China, with its consequences of confinements, shutdowns, port closures, and so on.

A new geopolitical framework

But the main purpose of this post is not to analyze the short-term consequences of the war, about which there are major uncertainties, conditioned first and foremost by the duration and scope of the military conflict.

What are the medium and long-term consequences of the war for globalization?

A first consequence is that geopolitical risk will take on a much greater role, both on the part of governments and, above all, on the part of companies. What seemed unthinkable, a war in Europe, has nevertheless become a reality with the brutal invasion of Ukraine by Russia.

Confidence, a fundamental factor in the behavior of economic agents, will be damaged, and this will have repercussions on investments and the general performance of economic agents.

As a fundamental geopolitical conditioning factor, the war will consolidate the configuration of two large blocs: a democratic-western bloc, and an authoritarian bloc centered on the Moscow-Beijing axis. China has not condemned the invasion of Ukraine, which to some extent means implicit support for it. And it is broadly seconding Russia’s propaganda and disinformation campaigns.

The war will intensify the changes in the global value chains mentioned above: shortening, regionalization, diversification of suppliers, and so on. It will also bring major changes in the sectoral structure of economies: spending on defense, renewable energy, cybersecurity, transportation and logistics will be boosted.

But the war may also have a major effect on the geography of international economic relations. It is quite possible that in the future democratic countries will prioritize their relations with countries that have similar values, respect rules and agreements.

A new strategy towards China?

This may affect China, which in recent years has already seen a sharp deterioration in its international image, due to its authoritarian behavior, its policy in Xinjiang and Hong Kong, its violations of international agreements (for example, through the economic sanctions it applies when a country acts in a way it does not like, against the most basic rules of the World Trade Organization).

In recent times there has been a marked increase in concern about a possible invasion of Taiwan by China. It would be an action that would have incalculable consequences for the Asian power, but an inevitable conjecture is that if Russia has acted as it has acted, so might China.

A war between China and Taiwan (without considering the possible intervention of the United States, which would open up a scenario of unforeseeable consequences) would have very serious consequences for companies, among which I would highlight three:

• The disruption in supply chains due to the alteration of transportation channels that would be caused by the warlike conflict.
• The effects of sanctions that would undoubtedly be applied against China in the event of an attack on Taiwan.
• Reputational damage to companies operating in the Chinese market.

A suspicious attitude towards China may give an impetus to China’s economic decoupling from the Western world. The Financial Times referred to the effects that the war in Ukraine may have on a rethinking of the strategy of companies, in relation to their presence in the Chinese market, or their dependence on supplies from it, in a recent article, with an eloquent title: Foreign businesses in China need to heed the lessons of Russian exodus.

According to the FT, “most experts in China believe that Beijing has no imminent plans to follow Moscow’s lead with an invasion of Taiwan. But many experts in Russia also thought that Moscow would not send its tanks into Ukraine. The lesson of the Russian invasion is not only that the unthinkable can happen, but that the consequences can unfold at a speed and scale that few had imagined possible.”

Businesses, and governments, must anticipate, and must assess these scenarios.

You may also like: Ecuador is finalizing the details of an important partial trade agreement with the Dominican Republic.