Globalisation: Has it gone too far?

https://www.telegraph.co.uk/business/2022/03/19/triple-shock-forces-world-rethink-globalisation/

Interesting article here posing the question of whether we have got the right balance in our trading arrangements with other countries.

Clearly, globalisation has given the world considerable benefits as describe d in the article, but it has also reduced our self-sufficiency.

We learned how important it was in the last world war that we should be self-sufficient so that we were not too dependent on other countries and now it seems we have to learn the lesson all over again with the Ukraine crisis.

Let’s hope our farmers respond to this crisis in good time for the planting season and ensure also that we don’t go short of meat this year. It’s time to step up, and the price farmers will get for their produce this year should make it worth their while.

In case you could not access that link above, here is the copy of the article.

Energy crisis and shortages of food force world to think local again after globalisation

While Covid and the war in Ukraine have shown how vulnerable supply chains can be, self-sufficency comes at a cost

Tom Rees

From Beijing to Berlin, world leaders are making similar sweeping overhauls in the running of their economies. China is building up gas reserves, Germany is rethinking the closure of coal plants and Boris Johnson is promising a new energy strategy for the UK. Britain’s coal stations could be powered up, North Sea production is being revived and even the fracking debate is being reignited.

Such radical shifts in energy policy, in an age conscious of going green, are the most stunning examples of how countries are scrambling to economically realign and become more self-sufficient as the fallout from Russia’s invasion of Ukraine spreads.

Vladimir Putin’s attack is now the third major shock to globalisation and supply chains in almost as many years as Trump’s trade war, Covid and now Russia’s war in Ukraine have shaken faith in world trade.

‘In the globalisation era, trade was growing 6pc, post financial crisis it was 3pc, post Covid it’s maybe 1.5pc’

“We’ve reached peak globalisation,” says Samy Chaar, chief economist at Lombard Odier.

“In the globalisation era, trade was growing 6pc a year, post great financial crisis it was 3pc [and] post Covid it’s maybe 1pc to 1.5pc. It’s a huge drop in the pace, but trade growth continues to expand.”

Bringing supply chains and production closer to home no longer looks like a backwards step towards economic autarky, but a necessity in sectors including energy and food. Experts warn that de-globalisation comes with big costs for consumers, however, and has limits to how far it can go.

Jeff Currie at Goldman Sachs says the drive for resilient supply chains comes in response to the boiling over of trade wars, the pandemic, climate change and geopolitical tensions.

But, he warns: “These inflationary pressures of moving to a “made at home” model, or ‘economic autarky’ in economist-speak, can be viewed as the costs of deglobalisation.”

Russia’s invasion has exposed two key supply chains where Britain and Europe are vulnerable: energy and food.

As the West cuts any funding that could funnel into Putin’s regime, governments have been scrambling to wean themselves off Russian gas at breakneck speed and find new sources. In response, Putin has threatened to weaponise his iron grip on energy supply to Europe, which relies on Russia for 40pc of its natural gas.

The war has also hit the world’s largest grain producing region, sending food prices soaring and reviving calls for more domestic farming and technologies such as gene editing.

Sanctions, such as ejecting Russian banks from the Swift international payments messaging system, also risks fragmenting the world’s financial system into the West, and the likes of Russia and China.

But it is not just the Kremlin that has used supply chains as an economic weapon – even allies have turned to extreme protectionism in times of crisis. Today, countries such as Hungary and Turkey are stopping exports of grains as the invasion threatens to squeeze supplies.

“Geopolitically, you’re getting a reshaping of the world’s alliances,” says Shamik Dhar, chief economist at BNY Mellon. “To some degree, it’s looking a bit like the West versus the rest. The economic relationships that we’ve got used to over the past 25-30 years are bound to be affected by that.”

Mr Dhar says the forces that shaped the global economy in recent decades, making China the world’s factory, and Russia and the Middle East the world’s petrol stations, will not “disappear completely” but “security will matter a lot more”.

Globalisation looked like an unstoppable force until the financial crisis, helping to drive prices lower, improve product choice and ultimately raise living standards.

It has brought “huge benefits and not least lifting a third of the world population out of poverty”, according to OECD chief economist Laurence Boone. “But there are some signs with Covid and with what’s happening now that this may not be what the future will look like.”

A more uncertain world that has emerged in recent years is forcing governments and companies to rethink where they get everything from the gas that heats homes, to the microchips that underpin modern technology – and if it is even realistic to become more self-sufficient in such an interconnected world economy.

Businesses are shortening the length of their supply chains to stop them being disrupted while production is being brought closer to home.

Economists argue, however, that there are limits to the de-globalisation trend, particularly as it will likely raise prices and reduce competitiveness. Consumers will seek out the cheapest products and businesses that have higher costs will lose out.

Samy Chaar at Lombard Odier expects there to be “regionalisation” and reorganisation of supply chains but argues that globalisation will not roll over.

“We still have a globalised world, globalised supply chains, competition and a company is going to try to optimise its production and its cost,” he says.

“If one company regionalises and the price of its products doubled compared to one that says, ‘OK, I’m still going to take the risk to produce in China’ – who wins the market?”

BNY Mellon’s Shamik Dhar agrees there are limits to the de-globalisation shift “because the law of comparative advantage dictates almost that if you’re going to be a viable firm, you’ve got to source from the cheapest possible place”.

Any drive to become more self-sufficient in food is likely to run up against these limits. The UK currently produces around 55pc of what it eats but total self-sufficiency would likely mean reduced product choice and higher prices, as some parts of the world can grow the food more easily and cheaply.

For energy, at least, countries already have the blueprint to help beef up their resilience: turning to renewables can boost energy security while also cutting carbon emissions. Those plans may need to be accelerated if the UK and Europe are to move away from Russian gas at pace.

“We’ve already decided that we want to get ourselves off gas over the next 20 years anyway”, says Sir John Armitt, chairman of the National Infrastructure Commission.

He adds that while efforts by Boris Johnson in Saudi Arabia this week to secure energy supplies “addresses a short-term issue, it certainly doesn’t address our long-term resilience or our long-term infrastructure strategy when it comes to energy”.

Though Russia’s invasion marks the latest blow to globalisation, building resilience by bringing supply closer to home will take time – and come at a cost.