War in Ukraine and decoupling of globalisation
A devastating war, with reported inhumane acts of rape, pillaging, capture, and killing of innocent civilians, rages on while supply shortages, escalating costs, vacillating capital markets and job market uncertainty are global periphery events affecting millions, swirling on economic waves of unpredictability beyond any one person’s or country’s control.
Appalled civilised nations’ governments decisively enforced critical financial sanctions to deter further military actions of the Russian aggressor; while these actions are reported to be severely impacting that country’s economy, they do not appear to be changing its leader’s stated plan for ultimate takeover of the sovereign country of Ukraine.
As of March 30, 500 multinational companies – in finance, law, commodities, energy, retail, multi-media, technology and more (see the full list at Yale School of Management) – have also responded in absolute economic terms, mass exodus from Russian commerce completely. Further actions isolated Russia from financial markets, blocking Russian institutions out of the global financial interchange (Swift) ability to effect international transactions, and barring the Russian central bank from access to its hard currency reserves.
Global finance influencers, almost always ahead in anticipating change, have already begun responses to, and planning for what appears to be a serious transformation in current economic world trade order.
Larry Fink, chairman and chief executive officer of Blackrock, an investment giant with $10 trillion under management, provided a perceptive, straight-talking insight into these change implications, in his 2022 letter to shareholders, here: https://tinyurl.com/2p8z857b
To quote from his letter: “Russia’s aggression in Ukraine and its subsequent decoupling from the global economy is going to prompt companies and governments worldwide to re-evaluate their dependencies and re-analyse their manufacturing and assembly footprints – something that Covid had already spurred many to start doing.
“And while dependence on Russian energy is in the spotlight, companies and governments will also be looking more broadly at their dependencies on other nations. This may lead companies to onshore or nearshore more of their operations, resulting in a faster pull back from some countries. Others – like Mexico, Brazil, the United States, or manufacturing hubs in Southeast Asia – could stand to benefit.
“This decoupling will inevitably create challenges for companies, including higher costs and margin pressures. While companies’ and consumers’ balance sheets are strong today, giving them more of a cushion to weather these difficulties, a large-scale reorientation of supply chains will inherently be inflationary. The magnitude of Russia’s actions will play out for decades to come and mark a turning point in the world order of geopolitics, macro-economic trends, and capital markets.”
Readers, I strongly urge you to read his entire letter.
What will changes in free trade mean to global prosperity?
To further grasp the concern of the prescient words above, we look back at a very brief layman’s history of what globalisation brought to the world’s citizens.
After the Second World War, in 1947, the concept of free trade was brought forward by major countries – moving away from the protectionism of the prior decades that inhibited world trading and contributed to the Great Depression in the 1930s.
As Douglas Irwin described in International Trade Agreements: “By broadening markets, concerted liberalisation of trade increases competition and specialisation among countries, thus giving a bigger boost to efficiency and consumer incomes.”
The General Agreement on Tariffs and Trade (GATT) opened up the world to trade interchange increasing significantly through the 1980s to 1995; then GATT became the World Trade Organisation with more than 140 country members.
Trade agreements, in general, were seen as a good thing although there are detractors and downsides. More mobility of capital, labour, and production, removing barriers to diversification and competition among countries, access to natural resources, oil, rare metals, fewer and lower tariffs, beneficial tax structures, mutual policy focuses, such as the environment.
Mobility of industries meant the spreading out of supervision further from quality control centres.
Personal capital became globally diversified. One could now invest across the world in various funds’ formats, purchase stocks, or high yield bonds from other countries, trade foreign exchange currency platforms, etc.
Global prosperity increased in large measure.
Then Russia attacked Ukraine. Interdependency became a type of sanction that is having an impact on the rest of the world.
This war after-effect could be the catalyst in re-evaluation of supply-side economics with so much interdependency, and where so many vital components were produced in other countries.
Where countries during the pandemic that needed emergency measures, such as masks, ventilators, could not provide enough because most were made thousands of miles and continents away.
Where computer chips and battery manufacturers were unable to meet demand, thus stopping vital production lines (and laying off workers) for vehicles, computers, farm equipment, appliances, building materials, etc.
Where investing in a broad range of diversified countries’ securities will now be perceived far more selectively, given the cost of sanctions on portfolio loss valuations.
Will nations consider economic singularity, far less diversification, joint agreements with only a few countries with recourse built into trade contracts?
Will more or some home countries increase home presence to manufacturing, production, innovation, and self-sufficiency in providing jobs, and lifestyles, instead of seeing food bank lines as small towns closed up, and inhabitants, especially the young, moving away.
Interestingly, a headline in Bloomberg on Thursday this week read: “Profits soar as US corporations have best year since 1950”.
Bermuda islanders are used to supply-chain, natural, and other disruptions, being remotely situated at the far end of the global supply line. We’ve developed and refined a 400-year trove of ingenuity, innovation, and survival techniques.
We know how to make do. In the meantime, there will still be challenges.
Only time will tell what changes in economies will take place!
Part two: The possible personal impact of portended deglobalisation, unpredictable price fluctuations, supply chain disruptions, inflation on consumers’ budgets, savings plans, interest rates, investments, risk protection and lifestyles.
Remember, readers that April 2022 is Financial Literacy Month, promoting financial wellness with the seven concepts: earning, spending, saving, investing, borrowing, protecting, giving back, and most importantly — increasing financial knowledge.
“On the cusp of economic singularity“, Doomberg
“500 companies have withdrawn from Russia — but some remain”, March 30, 2022, Jeffrey Sonnenfeld, Yale School of Management
SWIFT is a global member-owned cooperative and the world’s leading provider of secure financial messaging services.
International Trade Agreements by Douglas A. Irwin, https://tinyurl.com/n7xj7mbv
• Martha Harris Myron, a native Bermudian with US connections, is a former qualified international cross-border financial planner, and the author of Amazon published The Bermuda Islander Financial Planning Primers Series. Book One – the Dawn of New Beginnings. Contact: firstname.lastname@example.org
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