THe was supposed to be the year things went back to normal. After activity collapsed during the quarantine months in 2020 and supply bottlenecks in 2021, the hope was that 2022 would turn into a seemingly permanent crisis. It didn’t quite turn 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 the banks in the financial crisis. Year 2008
For one thing, the last 12 months ended a regime of cheap money that lasted nearly a decade and a half until central banks panicked about rising inflation. For most Western countries, 2022 was the year cost-of-living pressures hit their highest levels in 40 years, prompting the US Federal Reserve, European Central Bank and Bank of England to sharply ease their brakes. Threadneedle Street’s monetary policy committee met eight times in 2022 and raised interest rates each time.
The return of tighter monetary policy, though, was merely an addendum to a larger story: the dawn of a new era of self-sufficiency, partly due to the legacy of the Covid-19 pandemic, partly due to the impact of Russia’s invasion of Ukraine. on energy prices and partly on the growing gap between the United States and China.
When the pandemic began in early 2020, the World Health Organization – in a break from previous policy – advised the rest of the world to follow Beijing’s strict quarantine model for dealing with Covid-19, including contact testing and periods of highly supervised isolation. Police. The year comes to an end with China having just abandoned its zero-tolerance approach, covid infections surging, suspicions growing that the virus originated in a lab in Wuhan, and countries following WHO recommendations. They fully follow, calculating the economic and social costs of quarantines. Amidst all this, President Xi Jinping has made himself China’s ruler for life. Under these circumstances, it is not surprising that relations between the world’s two largest economies are cold.
This is not to say that globalization is over, because it clearly is not. Western companies have invested too much in cheap offshore production centers, which is not the case. China will remain the world’s largest exporter. Countries will still trade with each other, but will be more cautious about opening up strategically important sectors to competition from countries perceived as threats.
For example, it is unlikely that the UK will face another pandemic without being prepared with protective equipment for health workers in the spring of 2020. Or for Germany to provide its own gas to the Kremlin. Or that the United States is quite comfortable relying on Taiwan for high-end computer chips, given China’s aggressive stance toward the island.
In the 1990s, when optimism about the new post-Soviet world order was at its height, it was assumed that countries would never go to war with trading partners. Protectionist policies will be eased with rounds of liberalization negotiations organized by the World Trade Organization (WTO), capital will flow to parts of the world where it can be put to best use, and consumers will benefit from lower prices. The mood is somewhat different. What seemed like an enduring certainty—free markets are always better than closed markets—has had a reality check.
The European Union and Britain have clashed with the United States over the Biden administration’s deflationary legislation, which includes a massive package of subsidies to green the economy. Companies that intend to reduce carbon emissions will be eligible for tax credits provided they invest in American manufacturing facilities.
Claims that subsidies violate WTO rules are unlikely to have any impact on US policy. There has always been an underlying protectionism in the US (as there is in the EU) and it is becoming more apparent. Biden wants to strengthen his support in blue-collar communities that see themselves as victims of globalization. Furthermore, he could only take action through Congress on climate change if it would benefit American businesses. The fact that a more aggressive industrial policy is consistent with US geopolitical goals is icing on the cake.
There is no chance of a successful EU prosecution against the United States at the World Trade Organization because Washington has not allowed new judges to be appointed to the Geneva-based body’s appeals court, rendering it toothless. Brussels is likely to respond with industrial subsidies of its own, leaving Britain with a dilemma. Should it offer green subsidies as part of an interventionist, post-Brexit industrial strategy, or should it stick to its commitment to free trade?
Opting for a non-interventionist approach is largely against the current trend. Production bottlenecks in 2021, heavy carbon footprints from moving goods around the world, and the battle for strategic supremacy between the US and China all point to shorter supply chains and land consolidation.
Globalization costs money. Trade theory suggests that arbitrary strategies lead to higher prices because countries are more efficient at producing them. Inflation may be a more persistent problem than central banks think. But high-fat globalization also came at a cost. It’s no surprise, really, that the pendulum has swung in 2022 and will continue to swing. It’s not a bad thing either.