The World Economy Emerges From Covid And Goes To War
We are going through a time of great uncertainty. For more than two years, the pandemic has been shaking the foundations of the world economy. No one could have foreseen or anticipated the impact on the production of goods, as well as on transport. In addition, in recent months there have been continuous tensions in energy markets, which are going through a difficult and costly transition to carbon neutrality, as well as with raw materials, whose prices are soaring due to increasing demand.
If all of this was already causing a perfect storm, the landscape became even more gloomy after the Russian invasion of Ukraine. The first disastrous economic consequences are there for all to see, and it is to be expected that they will accentuate the process toward a new world order.
The pandemic has highlighted the limits inherent in ultra-liberal globalization, on which the production model has been based until now, as well as the risk of worrying dependence on the Chinese colossus. The latter, for its part, is working to become increasingly self-sufficient, without losing the predominance it has acquired in world markets. The consequence will probably be a decoupling of the Chinese and U.S. economies. If sanctions consolidate Russia’s economic isolation, the world outlook will change dramatically. What will become of the Belt and Road Initiative, China’s “New Silk Road”? Are we moving toward a globalization redefined by increasingly independent regional trade blocs, which, alongside economic motivation, also take into account ethical and security criteria? In these pages we will try to reflect on the new situation we are about to face.
Covid-19 has put the main global supply chain in crisis
There seems to be no doubt that for a substantial period of time our economic growth will be limited by problems on the supply side, due to the alterations that have occurred in distribution chains. Many observers had predicted that, after the pandemic, the world economy would not be slow to recover, that it was a transitory problem, a sort of convalescence. But those involved in supply chains say repeatedly that shortages, delays and imbalances between supply and demand will persist into the coming months of 2022 and perhaps even beyond.
We all look on in amazement at the unprecedented inconvenience caused by shortages of intermediate products, from raw materials to semiconductors, and of the final products that depend on them. A distribution crisis is causing delays and price increases in almost every sector. In an August survey by Gallup in the U.S., 60 percent of respondents said they had been unable to purchase a product they wanted in the previous two months, and 57 percent had experienced a significant delay in delivery of an item they had ordered. Toyota, the world’s leading automaker, announced on September 10, 2021, that it will produce 300,000 fewer vehicles in the current fiscal year than planned (from 9.3 million to 9 million), due to problems with the supply of components, especially semiconductors.
Before Vladimir Putin ordered his army into Ukraine on February 24, the situation was already suggesting a war economy. It was not for nothing that Covid-19 has been called an “invisible enemy.” It had triggered a situation with devastating and lasting repercussions. If in two years the pandemic has spread throughout the planet and infected over 250 million people and caused five million deaths, despite the unprecedented efforts to contain it, it has also caused other surprising effects, such as, for example, in the commercial field, strong pressure on supply and demand.
When lockdowns crippled businesses, millions of consumers curtailed consumption by staying home, foregoing restaurants, shows and indulgent leisure travel. Telecommuting became widespread and a new phenomenon was born. A pent-up but anxious demand was generated, reinforced by state support, for goods designed to improve the home environment in which people live and now work. At the same time, factories went into hibernation or decreased their production rates. Getting back up to previous levels of activity was not an immediate issue, especially since production had to be increased to cope with the unexpected and growing flood of purchases channeled into e-commerce. Precisely at that juncture, Asian factories, due to the spread of the virus, underwent forced shutdowns and energy blackouts. Chip manufacturers were unable to supply sufficient materials to the automobile and electronics industries, which had avoided stockpiling products during the pandemic due to the uncertainty of the moment. The pent-up demand came to the fore before Covid-19 was actually defeated, and it was met with an uncertain supply response, as it struggled with lingering health hazards in factories and ports.
In China, which is the world’s number one exporting country, factories resumed operations in 2020 after forced closures due to the pandemic, but manufacturing activity during 2021 declined. Industrial recovery also took steps backward due to energy cuts, and electricity was also in short supply due to limitations on coal use. Moreover, China, with eight of the world’s ten most important ports of call, is a hub for the shipping industry. In order to control contagion, the port of Yantian remained semi-closed in May and June 2021; the port of Ningbo closed its doors in August for a short period.
The ocean, the great ally of globalization
The oceans and seas are the true life blood of the world economy. Ninety percent of the world’s trade is carried by giant container ships, oil tankers, LNG carriers, cargo ships for grain or ships equipped with cold storage. For decades, shipping has been a silent ally of globalization. If ever globalization had a symbol, it is the container. Since it was introduced, the transportation of cargo has been simplified, and thus shipping costs have been substantially reduced. Consequently, the volume of goods has also grown exponentially. Many ordinary people, who do not witness the loading and unloading processes in the ports, are not aware of the fact that if these giants of the sea, full of containers, were not there, we would have a very different standard of living. They enable our current style of consumerism. Without them, life would be very different: more expensive and much less varied.
Everything was going well, until two phenomena took maritime transport away from the invisibility inherent to its functioning well, causing that sector, until then an indispensable ally, to turn into a problematic partner. On March 23, 2021, the gigantic container ship Ever Given – among the largest in the world, 400 meters long, 59 wide and 15.7 in draft – ran aground in the Suez Canal, blocking transit for six days in this artery through which more than 10 percent of the world’s commercial traffic passes. On March 28, a queue of 369 ships had formed waiting to navigate the canal. The cost to commerce was estimated at $9.6 billion. That event brought the world face to face with a reality: a maritime accident caused by bad weather has the potential to throw the global distribution chain into chaos.
The second factor is less spectacular, but much more serious, because it is not episodic. For months the upturn in consumption, the lack of space on ships and bottlenecks in ports have been causing extensive delays and have led to skyrocketing tariffs demanded by shipping companies, aware that in times of scarcity and haste, it is they who wield the handle of the price knife. Logistics managers are plunged into a nightmare. As they do not know when their orders will arrive, they buy more than usual and stock up to escape the specter of low inventory, but this in turn reduces shipping’s spare capacity and fuels a ruthless war to control every container, which sometimes ends with products being stranded on land.
In fact, since last summer, cargo ships have been causing blockages for a variety of reasons, ranging from labor shortages to lack of equipment needed to transport containers, or even overcrowded warehouses. At the same time, ports have reached the point of collapse because unloaded containers remain at the dock, as there is a lack of truck drivers ready to transport the goods. And when empty containers do not arrive on schedule so that they can be filled with new products to sell, deliveries encounter further delays. Some ports have run out of space, and rows of ships sit waiting, sometimes for more than a week, before they have a chance to dock. In this way, the slowdowns are affecting the production chain and forming a colossal logjam. Some blame it on companies that reap the benefit, while others blame it on the overwhelming expansion of demand, which seems to have grown beyond systemic maximum load capacities. If this capacity is to be increased, investments and, above all, time will be needed.
It is worth remembering that the current logistic ecosystem was developed to feed U.S. consumers, “the insatiable minotaur,” to use an expression of James K. Galbraith, taken from Yanis Varoufakis. That “insatiable minotaur” absorbed for 40 years the consumer goods produced by Japan, South Korea, China and other countries. To feed it, the world has built a global labyrinth of ports, ships, more ports, warehouses, storage docks, road hubs and rail lines. In practice, distribution problems are a global issue from which no country has been able to extricate itself. In a globalized system such as the current one, to assemble a simple washing machine, components must be sourced from a dozen countries, and any difficulty generates delays. The herd always advances at the pace of the slowest buffalo, so that if even a single chip from Taiwan is delayed, the product cannot be put on the market. The role of governments is therefore marginal, although measures such as those adopted in the U.S. by President Joe Biden, who has forced ports and companies in the sector to work twenty-four hours a day, seven days a week, may help to alleviate the situation.
Forcing people to work. This is a radical course of action, since virtually the entire post-pandemic agenda has been based on policies that encourage demand and discourage work, making supply-side restrictions entirely predictable. It is well known that people, if they have more money, work less, and that they work more if the rewards for working are higher. Last summer, it was clear for all to see that those people who, when unemployed, receive more benefits than they would earn if they were working, would not return to the labor market. That problem is still there, and it is getting worse. In the U.S. there are more than 10 million job openings posted, but only six million people are seeking employment. In total the number of those who have a job or are looking for a job has shrunk by three million, i.e. from a steady 63 percent of the working-age population to a diminishing 61.6 percent.
Questioning the neoliberal production model
In recent decades, the fragmentation of production processes into different locations has been a dominant aspect of globalization. Bottlenecks and sudden price increases have highlighted the risks associated with expanding global supply chains, which were supposedly built on the principle of economic efficiency. But, in addition to these obvious difficulties, there is the fact that distribution chains impose additional social costs that deserve attention. Up until a few months ago, they were the least of the problems for legislators, while they were a concern primarily for academics, who were studying what possible efficiencies and potential risks would be associated with this essential aspect of globalization. This is no longer the case: the bottlenecks in today’s supply chain are creating shortages, driving up inflation and worrying legislators around the world.
The Biden administration’s response has focused on recognizing that supply chains are essential to future economic security. In February 2021, the president issued an executive order requiring various federal agencies to conduct a comprehensive review of the most essential U.S. supply chains to identify risks, address vulnerabilities, and develop a strategy to increase resilience. He made use of an old proverb: “For want of a nail the shoe was lost; for want of a shoe the horse was lost.” The nursery rhyme goes on, until it is the kingdom that is lost, echoing Shakespeare’s Richard III: “My kingdom for a horse!” Small gaps, even at one point in the production chains, can jeopardize safety, jobs, families and communities across the United States.
Last June, the White House released a 100-day report on “Revitalizing American Manufacturing, and Fostering Broad-Based Growth. A report by the White House.” It states, “The COVID-19 pandemic and resulting economic dislocation revealed long-standing vulnerabilities in our supply chains. The pandemic’s drastic impacts on demand patterns for a range of medical products including essential medicines wreaked havoc on the U.S. healthcare system. As the world shifted to work and learn from home, it created a global semiconductor chip shortage, impacting automotive, industrial and communications products, among others. In February, extreme weather events – exacerbated by climate change – further exacerbated these shortages. In recent months the strong U.S. economic rebound and shifting demand patterns have strained supply chains in other key products, such as lumber, and increased strain on U.S. transportation and shipping networks.”
Prominent among the significant contributions to this assessment is the observation that global supply chains have imposed substantial social costs: “The attitude of our public policy and the private sector toward domestic production, which for years had put efficiency and cost containment ahead of safety, sustainability and resilience, has increased risk in the supply chain.” As a result, one wonders if hyperglobalized supply lines are ultimately the best path to economic efficiency. The more complex a distribution chain becomes, the greater the economic risks become. The breakdown of any one link can affect the entire chain and cause prices to soar if it creates a sudden shortage of a necessary good. The worst case scenario occurs when a critical situation in one part of the chain produces a domino effect, causing other businesses to collapse, thus crippling the entire industry. This is obviously a similar situation to what happens in financial networks, where the collapse of one bank can lead others to insolvency and even bankruptcy, as happened in 2008 after the Lehman Brothers crash.
For its part, the European Union has responded with the European Chips Act. It will be used to deal with the shortage of semiconductors. It will allocate, until 2030, more than 43 billion euros to public and private investments in order to quadruple production.
Global value chains in the new globalization
Are we moving toward “de-globalization”? In recent times the term has become fashionable. Perhaps it is an exaggeration to assume that this process will lead the world economy to a radical decline. But on the production side, something is changing with regard to the criteria according to which value chains are composed. Until not too long ago, the dominant, almost sole criterion was efficiency: production processes were relocated to other countries in order to reduce costs, especially labor costs. This ultra-liberal model, which has shaped our economic reality and made China the world’s laboratory, seems to have run out of steam. The pandemic has dealt it a decisive blow, as we have stated, highlighting its intrinsic weakness; and this fact is joined by the geopolitical trajectory begun with the Chinese decision to make its production independent of the West and, above all, to disengage from the U.S. economy.
This means that globalization is redesigning itself and choosing a model in which the objective of efficiency is accompanied by consideration of other factors: resilience, security in the control of vital sectors of an economy and ethical aspects. Possible geopolitical conflicts (the China-United States trade war, Iran, the current war in Ukraine) and natural disasters are other factors that drive the search for greater security of supply. Covid-19 highlighted mutual economic dependencies. Europe today has a substantial need for Chinese imports in the pharmaceutical, chemical and electronic sectors, especially for components produced in areas of the value chain that are less sophisticated from a technological point of view. Today the EU suffers from a critical strategic dependence on Chinese imports in 103 product categories in the electronics, chemical, mineral-metals and pharmaceutical-medical fields. Is the looming change the result of an evolution inherent in globalization? Or should it be attributed to the fact that public authorities are finally beginning to control it? We believe that both factors contribute, because ultraliberal globalization was not and is not sustainable. It did not and does not meet elementary ethical standards.
Germany has passed a new law requiring companies to establish due diligence codes of practice for their supply chains. Large companies must be aware of and monitor these chains to prevent child labor, human rights violations and abusive working conditions. The European Union is developing a similar comprehensive due diligence system for its own area, endorsing a process that appears unstoppable in democratic countries. The United States has passed the Uyghur Forced Labor Prevention Act, which prohibits the importation of products from Xinjiang, as there is evidence that forced labor is being used there. John Paul II and Benedict XVI had already pointed out to us that globalization will be what we make of it, expressing an urgent call to control it.
We are faced with an obligatory modification of value chains. It does not seem that we are moving toward their elimination, that is, a return of production activities to their countries of origin, but rather toward an effort to shorten them, opting for proximate production or its regionalization. The search for greater resilience seems to lead to a greater degree of diversification in supplies and higher levels of storage. In inventory policy by companies, just-in-time strategies are giving way to new formulas. All this will lead to increased costs, and this is likely to reduce the benefits of international trade. In short, we are moving toward a more balanced globalization in which, in the supply chains of goods and services including gas and oil that companies need for their productive activity, alongside the consideration of the benefits of efficiency, other factors are gaining weight: geostrategy and security, ethics and resilience.
Crisis in energy supply
Last November, the United Nations Climate Change Conference (COP26) was held in Glasgow. Although in the run-up to the meeting many countries had announced ambitious plans to reduce emissions, most of these are set in the distant future, around 2050 or even 2060. Meanwhile, governments in Europe and elsewhere are facing an energy crisis caused by rising gas and oil prices. Years of low prices, combined with regulatory pressure on polluting industries, have inevitably depressed investment in fossil fuels. A faster-than-expected recovery from the Covid-19-induced recession and colder-than-usual weather in the Northern Hemisphere were enough to push prices to their highest level in a decade.
Consequences of the Russian invasion of Ukraine
Before the start of the war in Ukraine, the fundamental question was whether the West was able to meet the challenges of the green transition in the context we have described. Now the situation has escalated dramatically. The EU has responded to the war on its eastern border with exceptional unity, determination and speed. The invasion of Ukraine is a turning point. Whatever the duration of the war, it will leave a lasting legacy. It will shape Europe’s political options for years and even decades to come.
First of all, it’s important economic consequences for the EU must be recognized in relation to the increase in oil and gas prices; the exclusion of Russia as a supplier of these two goods, for which it now provides 40 percent and one third of European needs respectively; the costly measures of energy independence; the interruption of grain supplies from the granary of the world, which raises the prices of wheat, corn and soybeans, and also of metals such as aluminum and nickel. Another immediate effect is the sharp drop in tourism of Russian origin. What must be added to this is the cost of the refugee influx and the rise in defense spending. The direct implications on the budgets in 2022 could reach 11.4 percent of GDP.
Poor countries are already suffering from food prices rising to levels that are prohibitive for them. But there is a fear that if the land that feeds Ukrainian granaries cannot be cultivated, we will soon be faced with humanitarian crises. UN official Gabriel Ferrero de Loma-Osorio notes that the war in Ukraine, a major producer of grains and fertilizer, has exacerbated world hunger, already on the rise following the pandemic.
The extent and severity of the economic slowdown will depend on the duration of the war, but not only on this. If Western sanctions remain at the end of the conflict, which cannot be ruled out, the Russian economy will be disrupted. With this, the world-wide scenario will change radically, since Russia will remain in the economic and geopolitical orbit of China, in an increasingly dangerous bipolar world.
Is it possible to stop this senseless and very dangerous dispute? Could China act as a mediator? Western leaders, anxious to end the bloodshed in Ukraine, hope so. Xi Jinping has said his country is sorry to see the flames of war rekindle in Europe. European attempts to convince China to mediate reflect the absence of other options, but also the belief that this is a real possibility, given China’s proximity to Russia, its policy of non-interference, its respect for national sovereignty, and its need to minimize the consequences that will befall it as a result of the sanctions imposed on Moscow. Moreover, the war upsets Beijing’s plans: Xi Jinping’s million-dollar bet in Ukraine is at stake. In fact, China is the main trading partner of Ukraine, which is, together with Poland, the gateway to Europe on the “New Silk Road” and, as such, has been the recipient of heavy investment in infrastructure, which in 2018 touched $7,000 million in Black Sea ports. In 2013, China purchased 9 percent of the country’s arable land, more than 29,000 square kilometers in the Dnipropetrovsk region. This is the identical formula that China had used in various African countries to secure the supply of grain and other foodstuffs, due to its huge population. This agreement is, for the moment, the largest agricultural project outside its borders.
A new global order?
Currently, several events are happening simultaneously: the crisis of the ultra-liberal model of supply chains; the energy crisis aggravated by the Russian invasion of Ukraine; Western sanctions on Putin’s government, aimed at isolating its economy, but the harbinger of an obvious negative spillover to Europe, which will increase Moscow’s growing dependence on Beijing; and the Chinese dynamic with its strategy of dual circulation to strengthen its self-sufficiency in a more hostile external context, which will cause a tendency for its imports to contract.
Obviously, the previous world order is imploding. Africa is seeing its problems worsen; China is in an awkward situation; and India, once it has lost the support of Moscow, sees itself weakened in relation to its hostile neighbors, Pakistan and China. The EU is searching for its role in the world. The United States is moving toward detachment from China and aims at achieving self-sufficiency and security. Latin America is suffering the damaging effects of the global depression. Hard times are coming, with an undeniable economic crisis that will favor a new version of globalization. Let us hope that the guns will soon fall silent and that the future will bring us peace.
DOI: La Civiltà Cattolica, En. Ed. Vol. 6, no. 6 art. 2, 0622: 10.32009/22072446.0622.2
. See L. Saad, “Most U.S. Consumers Have Felt Supply Chain Problems”, in Gallup (news.gallup.com/poll/353312/consumers-felt-supply-chain-problems.aspx), August 11, 2021.
. See Toyota, “Changes to Production Plans for September and October 2021”, September 10, 2021, (global.toyota/en/newsroom/corporate/36003677.html).
. See M. Spence, “Perché le catene di approvvigionamento sono bloccate?”, in Project Syndicate (www.project-syndicate.org/commentary/prevent-future-supply-chain-disruptions-using-ai-models-by-michael-spence-2021-11/italian), November 3, 2021.
. Cf. L. de la Cal, “Apagón chino en los radares de la navegación internacional”, in El Mundo, November 27, 2021.
. See J. K. Galbraith, “The Choking of the Global Minotaur”, in Project Syndicate, November 11, 2021.
. See J. Cochrane, “The Revenge of Supply”, in Project Syndicate
(www.project-syndicate.org/commentary/supply-shortages-inflation-result-of-government-policies-by-john-h-cochrane-2021-10), October 22, 2021.
. See K. Reinert, Introduction to International Economics, Cambridge, Cambridge University Press, 2021, 232-253.
. See D. Acemoglu, “The Supply Chain Mess”, in Project Syndicate, December 2, 2021.
. “Building Resilient Supply Chains, Revitalizing American Manufacturing, and Fostering Broad-Based Growth. A report by the White House”, June 2021 (www.whitehouse.gov/wp-content/uploads/2021/06/100-day-supply-chain-review-report.pdf).
. See European Commission, “European Chips Act”, (digital-strategy.ec.europa.eu/en/policies/european-chips-act).
. See “Slowbalisation” . The steam has gone out of globalization”, in The Economist, January 24, 2019.
. See A. García Herrero, “What is Behind China’s Dual Circulation Strategy?”, in China Leadership Monitor, September 1, 2021.
. See M. J. Zenglein, “Mapping and Recalibrating Europe’s Economic Interdependence With China”, in Mercator Institute for China Studies (merics.org/en/report/mapping-and-recalibrating-europes-economic-interdependence-china), November 18, 2020.
. See “H.R.1155 – Uyghur Forced Labor Prevention Act. 117th Congress (2021-2022)” (www.congress.gov/bill/117th-congress/house-bill/1155/text).
. See D. Gros, “What Europe’s Energy Crunch Reveals”, in Project Syndicate (www.project-syndicate.org/commentary/europe-energy-prices-and-future-green-transitions-by-daniel-gros-2021-11?barrier=accesspaylog), November 5, 2021.
. See J. P. Ferry, “The economic policy consequences of the war”, in Bruegel (www.bruegel.org/2022/03/the-economic-policy-consequences-of-the-war), March 8, 2022.
. See Q. Dongyu, New Scenarios on Global Food Security based on Russia-Ukraine Conflict, FAO, March 11, 2022.
. See “Después de la pandemia, la guerra en Ucrania agrava el hambre mundial”, in Chicago Tribune (www.chicagotribune.com/espanol/sns-es-despues-de-pandemia-guerra-en-ucrania-agrava-hambre-mundial-20220310-kp7u6srrzzem7jgddo6kfogu2q-story.html), March 10, 2022.
. President of Russia, Joint Statement of the Russian Federation and the People’s Republic of China on the International Relations Entering a New Era and the Global Sustainable Development, February 4, 2022 (en.kremlin.ru/supplement/5770).
. See “The Guardian view on China and Russia: enough in common”, in The Guardian (www.theguardian.com/commentisfree/2022/mar/08/the-guardian-view-on-china-and-russia-enough-in-common), March 8, 2022.
. Cfr Á. Moreno, “La guerra trastoca los planes de China: la apuesta millonaria de Xi Jinping en Ucrania”, in El Economista (www.eleconomista.es/economia/noticias/11648099/03/22/La-guerra-trastoca-los-planes-de-China-la-apuesta-millonaria-de-Xi-Jinping-en-Ucrania.html), March 4, 2022.
. See D. Yergin, The New Map: Energy, Climate, and the Clash of Nations, New York, Kirkus Books, 2020.