The second age of globalisation is beginning to buckle

The ripple effects of the Russo-Ukrainian war are spreading and intensifying. Their impact is being felt in almost every corner of the globe, revealing an international system under duress. The US-led rules-based order has survived and prospered for 77 years through numerous regional conflicts, terrorist outrages and economic shocks. But this time it’s different. Although not the sole cause, the Ukraine conflict is driving a once-in-a-century redesign of the world’s economic and geopolitical plumbing. Like a once-proud liner battered by countless storms, the old order is in danger of listing, beset by numerous cascading external crises. The threat of nuclear war has increased and the world is rearming as security concerns grow. Food and energy spikes are jeopardising economic recovery, fuelling inflation and shaking up global supply chains already disrupted by Covid-19 and the accelerating decoupling of the US and Chinese economies. Climate change is complicating energy choices. Trade and financial power are being weaponised. Protectionist sentiment is on the rise. All this is morphing into a system-altering super-crisis. There will be no return to normal service. The emerging world order will be messier, less stable and more contested than the last, with neither autocratic nor democratic states in charge. The world is again beginning to divide into competing economic and geopolitical blocs, one aligned with the US, another with China, and a European grouping that will be primarily, but not wholly, in the US camp. A fourth group of developing countries may try to maintain their independence from the dominant blocs in a futile attempt to re-energise the moribund non-aligned movement. Non-alignment won’t be a viable option if larger nations continue to flex their muscles. But the most far-reaching consequence will be the end of globalisation as we have known it. The Russo-Ukrainian war has set in motion deglobalisation forces “that could have profound and unpredictable effects”, OECD chief economist Laurence Boone says. Harvard political economist Dani Rodrik agrees. The war has “probably put a nail in the coffin of hyperglobalisation”, he says. Peterson Institute for International Economics president Adam Posen writes in US policy journal Foreign Affairs that globalisation has been steadily corroding since its high point at the turn of the century. The reasons? Populists and nationalists “have erected barriers to free trade, investment, immigration and the spread of ideas”. China’s challenge to “the rules-based international economic system and to longstanding security arrangements in Asia has encouraged the West to erect barriers to Chinese economic integration”. Posen says the Russian invasion of Ukraine and resulting sanctions “will now make this corrosion even worse”. So do John Micklethwait and Adrian Wooldridge in a penetrating analysis for Bloomberg News of the consequences of globalisation’s failure. They write that Chinese President Xi Jinping has spent much of his rule building a Sino-centric economic order on the back of his trillion-dollar Belt and Road Initiative that spans half the globe. The invasion will harden Xi’s determination to reduce China’s dependence on the West, fortified by the “wolf pack” of young Chinese nationalists around him. The breadth and speed of Western sanctions against Russia “is another powerful argument for self-sufficiency”. But there is a deeper reason: the rise of geoeconomics. First coined in 1990 by American strategist Edward Luttwak to describe the willingness of states to use economic and financial power for geopolitical purposes, geoeconomics has become a preferred tool of statecraft. A recent Deutsche Bank report concludes that as great power competition becomes more pronounced, “geoeconomics is likely to be the tool of first resort in addressing international conflicts”. The use of economic warfare to achieve geopolitical ends is not new. Trade blockades were a feature of the Napoleonic Wars. Autocratic German regimes weap­onised trade policy in the first half of the 20th century to achieve global influence. Pre-World War II Germany was a “power trader”, manipulating trade for strategic and commercial advantage. In more recent times, economic statecraft has become an integral part of a distinctive Chinese approach to foreign policy in which economic and trade coercion is used to cement China’s place as a leading global power. During the past decade more than 27 countries, including Australia, have been on the receiving end of such coercion. Much to the surprise and chagrin of China and Russia, the US has taken geoeconomics to another level using its economic and financial clout to devastating effect in support of Ukraine. About $US300bn of Russia’s $US640bn ($899bn) in gold and foreign exchange reserves have been frozen.