youThis was supposed to be the year things went back to normal. After the collapse of activity during the lockdown months in 2020 and the supply bottlenecks of 2021, the hope was that 2022 would mark the end of an era of seemingly permanent crisis. It hasn’t turned out that way.
Indeed, 2022 is shaping up to be a pivotal year for the global economy, taking its place alongside the end of the Bretton Woods fixed exchange rate system in 1971, the reunification of Germany in 1990, and the near-collapse of banks in the financial crisis. of 2008.
For one thing, the last 12 months have put an end to the cheap money regime that lasted for almost a decade and a half until central banks got spooked by rising inflation. For most Western countries, 2022 was the year that cost-of-living pressures reached a maximum of 40 years, prompting the US Federal Reserve, the European Central Bank and the Bank of England to hit the brakes. The Threadneedle Street Monetary Policy Committee met eight times in 2022 and high interest rates every time.
The return of tougher monetary policy was, albeit merely an adjunct to, a larger story: the dawn of a new era of self-sufficiency caused in part by the legacy of the Covid-19 pandemic, in part by the impact of the invasion. Ukrainian Russian. in energy prices, and partly because of the growing gap between the US and Porcelain.
When the pandemic began in early 2020, the World Health Organization, in a break with previous policies, advised the rest of the world to follow Beijing’s hardline lockdown model to tackle Covid-19, including testing. of contact and periods of rigorously supervised isolation. The year ends with China having just abandoned its zero tolerance approach, covid infections skyrocketed, suspicions grew that the origin of the virus was a Wuhan laboratory and the countries that followed the WHO advice to the letter counting the economic and social cost of the lockdowns. In the midst of all this, President Xi Jinping has become the ruler of China for life. Given the circumstances, it is not surprising that relations between the world’s two largest economies are cold.
That is not to say that globalization is over because it clearly is not. Western corporations have invested too much in low-cost offshore production centers for that to be the case. China will remain the world’s largest exporter. Countries will continue to trade with each other, but they will be more choice with whom and wary of opening up strategically important sectors to competition from states perceived as a threat.
It seems unlikely, for example, that Britain will face another pandemic as ill-prepared with protective equipment for health workers as it did in the spring of 2020. Or that Germany will be left at the mercy of the Kremlin for its supply of gas. Or that the US would be completely comfortable relying on Taiwan for high-quality computer chips, given China’s aggressive stance toward the island.
In the 1990s, when optimism about the post-Soviet new world order was at its height, countries were never supposed to go to war with trading partners. Protectionist policies would be eliminated by rounds of liberalization negotiations orchestrated by the World Trade Organization (WTO), capital would flow to the parts of the world where it could be used most efficiently, and consumers would benefit from lower prices. The mood is somewhat different now. What seemed like an enduring certainty—free markets are always better than closed markets—has had a reality check.
The EU and the UK have opposed the US over the Biden administration’s decision Inflation Reduction Law, which involves a massive package of subsidies designed to green the economy. Companies seeking to reduce carbon emissions will be eligible for tax credits as long as they invest in US production facilities.
Claims that the subsidies go against WTO rules are unlikely to have any impact on US policy. There has always been latent protectionism in the US (as there has also been in the EU) and it is becoming more pronounced. Biden wants to bolster his support in working-class communities that see themselves as victims of globalization. What’s more, he could only get Congress to take action on climate change if it’s seen as good for American jobs. The fact that a more aggressive industrial policy goes hand in hand with US geopolitical objectives is the icing on the cake.
There is no chance of the EU successfully prosecuting a WTO case against the US because Washington has refused to allow the appointment of new judges to the Geneva-based body’s appeals court, leaving it without teeth. Brussels is likely to respond with its own industrial subsidies, leaving the UK in a quandary. Should it offer green subsidies as part of a post-Brexit interventionist industrial strategy or should it stick with its commitment to free trade?
Opting for a largely hands-off approach certainly goes against the current trend. The production bottlenecks of 2021, the large carbon footprint of moving goods around the world, and the US-China struggle for strategic supremacy point to shorter supply chains and offshoring.
Deglobalization has a cost. Trade theory suggests that go-only strategies lead to higher prices as countries stop specializing in what they are most efficient at producing. Inflation may turn out to be a longer-lasting problem than central banks realize. But full globalization also came at a cost. It’s really not a surprise that the pendulum has swung in 2022 and will continue to swing. It’s not a bad thing either.