The "economic war": end of globalization and the reign of the dollar? History teaches the opposite. The analysis of Jeffrey Cleveland, Chief Economist of Payden & Rygel
Russia's invasion of Ukraine has sparked a united response from the West, seemingly unprecedented, consisting of a barrage of economic sanctions against Moscow. Commentators promptly declared the end of globalization and the reign of the US dollar as a reserve currency. History provides, however, a more realistic perspective, revealing how the long-term effectiveness of sanctions remains, at best, conflicting. While it is difficult to assess in real time the implications of the latest round of sanctions, interesting historical parallels could help provide a necessary context. Economic coercion, in fact, has long been a key tool for states at war by creating "absolute isolation" alternative to military aggression, which would not be possible without the interconnectedness of the global economy. THE FIRST WORLD ECONOMIC WAR The reason economic sanctions were possible in 1914 was globalization itself. In fact, the decades leading up to World War I marked the first golden age of globalization. The share of trade in global economic output increased from about 5% in 1850 to 14% in 1913. On the eve of the First World War, Germany was a world leader in steel production, but remained totally dependent on imports of manganese (a key factor in steel production), consuming 25% of annual world production, and had to turn to a London agent to place orders from one of the world's many mining companies that had their headquarters there. Manganese was mined in Brazil and any cargo transported across the ocean had to be secured. Lloyd's, the world's leading maritime insurer, covered most of the steamers carrying the products. These steamboats also needed fuel. British coal traders bought and sold coal to steamers around the world. Britain was in a unique position as the centre of the global economy before the First World War, with 60% of world trade passing through its discount market. In other words, a large chunk of the world's savings was entrusted to Britain, its money markets and the pound sterling to invest capital and obtain a return, effectively financing the entire global economy. Today, the United States and its currency play a similar role. Unfortunately, the balance of economic sanctions is not positive. The "economic war" went on long after the end of the physical fighting of the First World War and during the '900 several states were inspired by the conquest precisely to counter sanctions or to avoid them altogether. IS THE WAVE OF GLOBALIZATION COMING TO A CLIMAX? What does history mean for the current conflict? Is de-globalization looming? Will the US dollar be supplanted? Instead of making predictions, we propose historical parallels. First, while the years 1840 to 1914 marked the first heyday of globalization, the two world wars did not mark the end of globalization. On the contrary, a new global regime has favoured cross-border trade and investment like never before. The new regime, however, relied on the dollar system and the US military acting as a "global police". The period from 1950 to 1973 was characterized by rapid economic growth in almost all countries of the planet, with an average annual global growth rate and a per capita increase of almost 2.5 times the much vaunted period from 1850 to 1913. The value of goods exported as a share of the global economy has rebounded from a post-World War II low of 4% to 14% in 1974, a value similar to that of 1913 as a share of GDP, but with much higher trade volumes. Globalization took a further leap after 1973. The share of international trade in GDP rose from 30% in 1973 to 61% in 2008, a six-fold increase in international trade. Most of this increase has occurred since 1999 and with the rise of China as a major global economy. For a less abstract perspective, consider that the wave of globalization after 1973 meant a tripling of the weight of goods shipped. In 1975, China had no container traffic, and U.S. and Japanese ports accounted for half of global activity. In 2018, China accounted for a third of international shipments, while the combined shares of the United States and Japan fell to 10%. Fig. 1. TRADE OPENING INDEX (WORLD EXPORTS AND IMPORTS AS A PERCENTAGE OF WORLD GDP) INSTEAD OF BULLETS AND BOMBS, BLOCKS AND BLACKLISTS? If there really were another wave of globalization, it could involve a disaggregation of China as a source of global transportation and the use of a wider range of countries for production and inputs, which could lead to more cross-border flows, not less. What has history taught us about this latest act of physical and economic aggression? First, all wars are economic. Without interconnected supply chains, countries cannot access the materials they need to wage war nor can they inflict so much economic pain. Secondly, the latest round of sanctions is not unprecedented. The names and details are different and trade today is more complex, but the dawn of economic sanctions in World War I mirrors much of what was implemented in 2022, until the disruption of the SWIFT messaging network used against Russia. Thirdly, the reintroduction of sanctions will not put an end to globalisation. Geopolitical tensions may slow the growth of international trade, but they rarely stop it for long. Finally, unless U.S. money markets find a new rival (as the powerful dollar rivaled the pound in the 20s and beyond), the end of the dollar's reign is not near.