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The conflict in Ukraine has crystallized a phenomenon that has gradually been developing after the global financial crisis (GFC) of 2008. Until the GFC, measures of globalization in terms of trade, capital flows and networks had been increasing, even accelerating. Since then, those indicators have begun to paint a mixed picture. During the same period, a long trend of disinflation that had begun in the 1980s also began to plateau, as the US Federal Reserve quadrupled its balance sheet from about $1 trillion to some $4.5 trillion over a 10-year period after the GFC. More recently, in response to the covid pandemic, the Fed increased its balance sheet to about $9 trillion in a very short period, triggering fears of sustained inflation. The central banks of other Western countries have generally followed the same approach, though not to the same extent.

There is plenty of evidence that globalization has broadly been of benefit to the world, with nearly a billion people emancipated from poverty. Most of the gains accrued to China and some to India and other developing countries. China benefitted disproportionately because it exploited the global system of commerce by following a targeted industrial policy, managing its exchange rate, and not being rigorous with its enforcement of intellectual property rights. Data also shows that segments of the population in the West got left behind as high-paying jobs migrated overseas. This differential impact has resulted in strong political sentiments in favour of economic nationalism, protectionism and a withdrawal from what some observers have called “hyper-globalization". The rise of Trumpism in the US and the UK’s vote for Brexit were attributable partly to discontent with globalization.

The pandemic and its aftermath and the war in Ukraine have only exacerbated that trend. Many experts are now calling this an age of de-globalization. Others are calling this “slowbalization" in anticipation of a secular stagnation in global growth.

There is not yet significant evidence of de-globalization. Global trade and capital flows have risen sharply after the pandemic, making up for interrupted trade in 2020. Overall global trade has now caught up with its pre-pandemic trend, though aggregate data hides substantial problems in specific supply chains like semiconductors and automobiles. While there is a lot of noise and cross-talk, goods and services trade has generally remained robust.

Russia’s invasion of Ukraine has added a new dimension to this by interrupting food and fertilizer supplies to global markets, with effects that are yet to fully play out. In particular, insurance costs that shot through the roof are unlikely to settle down soon, since the Baltic Sea is on the critical path of many ship movements.

The era of ‘friction-free’ globalization is behind us. Instead, we now have what I describe as ‘impeded globalization’. Some goods and services may increase and even accelerate in terms of global trade, while others will plateau or decrease as economic participants and countries pursue risk mitigation strategies. Yet others may increase within regions or blocs, such as the Regional Comprehensive Economic Partnership and United States-Mexico-Canada Agreement, but see a drop in global trade. Strategic goods like rare earths and piped gas in Europe may indeed face restrictions and the world will find it very hard to argue against agricultural tariffs or bans instituted in the name of domestic security.

Global networks that are based on trust, such as the university ecosystem, may also find themselves impeded. For instance, Chinese students in American universities may no longer have unrestricted access. Though it is difficult to measure, the impedance of learning networks will probably have the biggest long-term impact. Genomic collaborations and big-scale science projects like particle colliders, space telescopes and stations may splinter into ‘trust blocs’ of the West and China.

Whether this world of impeded globalization will inevitably be accompanied by inflation is a more difficult question to answer. Prima facie, and initially, a re-adjustment of supply chains and ‘near-shoring’ of production will increase costs. As the world shifts from ‘just in time’ to ‘just in case’, this shift will most likely add to costs. However, there is no reason to believe though that after a period of settlement, costs will continue to rise chronically. Global inflation will remain primarily a monetary phenomenon. If the Fed and other major central banks are able to deleverage themselves in a constructive way, then we could regain a managed inflation environment. Even impeded globalization allows for supply chains to catch up with demand trends over time.

An era of ‘geo-political friend-shoring’ for some goods and services and old-style global sourcing for some others will likely be the evolving norm. This world of impeded globalization will on average snip growth a bit and push inflation up a little, but the transition will also present many opportunities. Countries that are competitive on talent and labour costs are likely to benefit from this transition: India, Vietnam and Mexico perhaps. India should navigate this transition proactively, especially as it relates to trade in global infotech services, the SaaS industry and the entertainment sector.

P.S.: “The wide world is all about you; you can fence yourselves in, but you cannot forever fence it out," said J.R.R. Tolkien, author of The Lord of the Rings.

Narayan Ramachandran is chairman, InKlude Labs. Read Narayan’s Mint columns at www.livemint.com/avisiblehand

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