Cold War redux: this is why keeping the economy global is a good idea

Gretar Jonsson, an Iceland supporter sits in a Lada car, on a street in Volgograd, Russia, June 20, 2018. As well as shooting all the matches, Reuters photographers are producing pictures showing their own quirky view from the sidelines of the World Cup. REUTERS/Ueslei Marcelino

A Lada in action in Russia, circa 2018. The brand's revived domestic market share is evidence of a new global economic divide. Image: REUTERS/Ueslei Marcelino

John Letzing
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  • Experts are concerned about growing fragmentation of the global economy along geopolitical lines.
  • Changes in Russia's domestic consumption are evidence of this reordering.
  • A failure to transcend strategic interests with free trade could mean higher costs and greater instability.

The Lada has been an ample source of jokes. A survey of owners of the Russian car found that just 5% would recommend one to a friend. Even a recent review aiming for an upbeat tone hit a downbeat note, by declaring them “not as horrible as people think.”

Workers who assemble Ladas may have more immediate concerns. They were recently informed that their summer holiday has been abruptly moved forward to late May, to buy time to restock necessary parts.

With European and Japanese imports shrinking dramatically, the Soviet-era Lada brand has regained a lot of its former domestic popularity. The only real local competition appears to be from increasingly-prevalent Chinese models.

The shifts in Russia’s car market follow its invasion of Ukraine and estrangement from Western markets. And they’re more evidence of a cleaving of the global economy along geopolitical lines – which has many people worried.

“We need to be ready for the new reality that may well lie ahead,” European Central Bank President Christine Lagarde recently warned. That was shortly after IMF Managing Director Kristalina Georgieva cautioned that a new type of cold war may be in the offing.

The global economy remains mostly framed by winners of World War II. In the decades after that conflict, market-based democracies worked around their centrally-planned peers to strengthen ties with one another in ways that made a lot of people far more prosperous. Even after the Berlin Wall fell and globalization surged, experts fretted about what might happen if, one day, it shifted into reverse.

Image: World Economic Forum

And for good reason. The 1930s, when international trade as a portion of global GDP dipped to about 15% (it’s now over 50%), preceded an ugly cycle of demagoguery and destruction that many political leaders have been trying to avoid repeating ever since – not least by forging stronger commercial bonds.

Experts say global trade levels should endure this time around, but it will increasingly happen within isolated bubbles – as each competing bloc tries to pull “the rest of the world closer to its respective strategic interests and shared values,” as Lagarde put it.

The potential consequences of this forced rerouting, she said, include lower economic growth worldwide, generally higher costs for everyone, and greater instability.

Different ‘camps,’ similar costs

That helps draw a clearer line under the real significance of Russia’s replacement of European cars with Ladas and Chery SUVs, or of Samsung and Apple phones with models from Xiaomi and Realme.

In terms of the ultimate cost of such shifts, experts aren’t exactly sure. But they can guess.

One study published by a Japanese research institute earlier this month divided the world into “Western” and “Eastern” camps. It estimated that a worst-case scenario of nearly non-existent trade between them would cost the global economy $8.7 trillion by 2030, roughly equivalent to a full year of collective economic output in Japan and Germany.

The only “winner” in this scenario would be neutral countries, which according to the study would enjoy a slight economic gain as the blocs in East and West take serious hits.

Russia’s invasion of Ukraine, and the sanctions levelled at Russia by many countries in response, only worsened existing fears of a broader global economic decoupling that had been building for years, according to the study.

Changes in Russia's economy are part of a broader rift.
Changes in Russia's economy are part of a broader rift. Image: World Economic Forum

Those fears grew as issues mounted over everything from access to vital natural resources to the development and use of cutting-edge technologies.

They also grew alongside increasing calls to rewrite the global rules on trade and development that have mostly been in place for roughly three quarters of a century – in ways that better account for the interests of countries that have now become major economic players.

Those rules were originally designed to serve as a stabilizing force, but their benefits may be perceived as far more important in some places than in others. A natural response might be to seek out different ways of doing things, even if it means enduring some discomfort in the process.

That was the general thinking in the Soviet Union around the time Lada cars first appeared in 1970. They were boxy and drab, but also affordable and easy to fix in ways that made them a good fit for a country built around a narrow ideology and not destined to last beyond 1991.

Once again, it isn't clear that people now necessarily desire Ladas more, as much as they just want to be able to buy any car at all.

It’s essential to find ways to discourage launching into such painful exercises to accommodate a political purpose – not least because that pain is likely to be shared far beyond any single country’s borders.

More reading on fears of a global economic divide

For more context, here are links to further reading from the World Economic Forum's Strategic Intelligence platform:

  • “A continuing fantasy that security and economics can be treated separately.” This piece argues that every country wants to make independent decisions to advance its interests, but there’s a distinction between sovereignty and autonomy. (ASPI)
  • Same oil, lower price – this analysis found that Russia has been able to respond to EU and G7 sanctions by redirecting its crude oil exports to alternative markets, albeit at “deep discounts.” (CEPR)
  • How to avoid “runaway fragmentation.” Trade and investment patterns have mirrored a shift in power to emerging and developing economies, according to this analysis, but global governance has not. (VoxEU)
  • Three decades of globalization made markets work better, according to this piece, but policymakers lost sight of its “adverse distributional consequences.” Namely, a lot of people got left behind. (Project Syndicate)
  • Fragmentation within a fragment – the fall of the Berlin Wall set Europeans free to find a new direction together, according to this analysis, but countries there haven’t been immune to “global democratic regression.” (Social Europe)
  • An abrupt halting of exports to Russia and a slower unwinding of Russian imports created a €67 billion trade deficit for the EU in 2022, according to this analysis – but by the end of the year that had begun to evaporate. (VoxEU)
  • “We have all benefited from the open world,” the Dutch foreign minister said in this recent address, “and now that it is rapidly closing, we must adapt.” (ASPI)

On the Strategic Intelligence platform, you can find feeds of expert analysis related to Geopolitics, Trade and hundreds of additional topics. You’ll need to register to view.

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