Tennis staged its first ‘open’ tournament in 1968, when the British Hard Courts were staged at Bournemouth. The open tag meant professionals were welcome to play in national tournaments including Grand Slams, which until then were restricted to amateurs. For more than five decades, prestigious tennis tournaments welcomed players from any country. 1
No more. This year’s Wimbledon has banned players from Belarus and Russia. Their offence? Russia attacked Ukraine, and Belarus was a base for some of the Russian invaders. While no one will call it the Wimbledon Almost-Open, the fracturing in the global nature of sport competitions reminds how the era of hyperglobalisation is over. Hindering the movement across borders of commodities, components, culture, goods, ideas, money, people and services appears an irreversible trend for the foreseeable future.
The most recent impetus is that war between Russia and Ukraine has elevated a strategy known as geoeconomics, 2 when economic and financial tools are used to promote national political goals. About 30 Western countries are choking Russia with the most draconian financial sanctions and export controls ever imposed on a leading power. The freezing of half of Russia’s foreign-exchange reserves is such a breach of trust and property rights it portends an unfixable tear in the US-dollar-dominated global financial system. 3 As too are moves to cut Russian commercial banks from the US (SWIFT) payments system and to confiscate the assets of Russian individuals connected to power. Europe’s move away from Russian hydrocarbons shows how free trade only happens when the world feels secure.
The pandemic was the previous setback to globalisation because it showed that producing essential goods far away from where they are needed is too risky, no matter the cost savings from cheap labour. Washington has no intention, for instance, of allowing China to remain the source of 50% of US penicillin imports. 4
An initial impediment in advanced countries for the globalisation that occurred from the 1980s was the cultural pushback against the loss of local political accountability, and the political reaction from those who lost jobs as manufacturing shifted abroad. The winners were the billion-plus people in emerging countries who soared out of poverty. 5 These countries, foremost China, expanded in political muscle. Beijing’s flexing, often in norm-breaking ways (Hong Kong, for example) counts as another blow to globalisation because it provoked fear, mistrust and retaliation.
The post-hyperglobalisation era too will come with winners and losers and economic and political consequences. Winners will include emerging countries close to, and friendly with, Western powers. Countries such as Mexico stand to gain from any ‘near-shoring’, or ‘regionalisation’, of production. 6 US allies stand to gain from “friend-shoring”, as US Treasury Secretary Janet Yellen described strengthening links among countries that (mostly) share liberal values.7 An example is the new US-led Asia Pacific Economic Framework that groups 13 (anti-China) allies. 8Other victors will include Western businesses producing essential items deserving of tariffs and subsidies. Unworthy winners will be companies of lesser offerings that are talented at ‘rent seeking’. This term describes when businesses manipulate policymakers to boost their profits. Losers will include emerging countries that missed out on investment that would have created local jobs and wealth. A notable loser might be China as it becomes more estranged from the West, even if Western adversaries enjoy cheaper commodities and energy from Russia. 9
Other also-rans will be multinationals that seek customers across the globe and companies that were prepared to have production arrangements that spanned the world. The ‘splinternet’ will be starker as governments block access, protect local data and toughen cybersecurity. For consumers, production ‘misallocated’ to higher-cost locations, steeper tariffs and rent seeking (price gouging) spell lower living standards.
The economic consequences of ‘slowbalisation’ 10 are faster inflation (at least initially) and slower growth. 11 Emerging countries will miss out on know-how and an opportunity to build wealth through exporting. Barriers preventing investment in emerging countries, however, could give workers in advanced countries greater bargaining power. As the global pool of labour deglobalises, Western workers might achieve a greater share of national incomes, which after four decades of hyperglobalisation fell to record lows. 12
While inequality might decline, there might be less wealth to fight over because profits might be lower in a more-fenced world. Returns on capital might be reduced because protectionism will inhibit economies of scale. Companies will carry larger inventories as just-in-time production has proved vulnerable to transport delays and much else. Reduced profits spell lower corporate tax takes.
Hindered capital flows suggest investors might have to stomach lower returns. Governments, especially in the emerging world, might need to pay higher interest rates to woo bond investors. Slowing economies would make it harder for governments to trim debt-to-GDP ratios. If less competition leads to less innovation, reduced productivity would mean lower living standards and reduced long-term investment returns.
Politically the world is likely to split into “distinct economic blocs with different ideologies, political systems, technology standards, cross-border payment and trade systems and reserve currencies”, as IMF Chief Economist Pierre-Oliver Gourinchas, sees it. 13 One US-led group will favour a rules-based order among themselves. The other China-led bunch will group authoritarian countries extolling a power-based world and possibly democracies such as India, Indonesia and South Africa that hang back from a rules-based global system. The Chinese-US “lose-lose tech war” 14 will create a schism across tech platforms and ‘data sovereignty’, 15 and will mean less innovation. The IMF estimates that ‘technology fragmentation’ will cost smaller countries that straddle multiple tech hubs 5% of their GDP. 16
A split world means less international cooperation on global challenges such as climate change, pandemic responses and resolving food shortages. In any emergency, which grouping could save a crisis-hit G-zero world, as the G-20 did in 2008 by standardising the response? 17 Not the WTO. 18 Nor a hyperpolarised US. In a fragmenting world, more military spending might be required, which ties up resources (though often spurs innovation). In emerging countries, hunger and lower living standards might lead to uprisings and defaults.
Within countries, globalists will battle patriots for political power. One destabilising by-product of stronger national identity politics is that it tends to fan secessionist movements, especially when nationalities absorbed into countries such as the Catalonians in Spain have such distinctive identities.
What might remain the same? The US currency is bound to stay the world’s reserve currency because it lacks a credible rival, even as US opponents seek alternatives.
To be determined? The cleverness of policymakers. The West would best avoid a permanent stand-off against a rival bloc, in what would be ‘the clash of civilisations’ that Samuel Huntington warned of in 1996. 19 Advanced countries, through an empowered IMF, might need to rejig the international financial system for a multipolar world to better support emerging countries. 20 But even if policymakers prove sound, the era of inefficient globalisation heralds a poorer future than otherwise. Perhaps people might feel more secure.
Now for the qualifications. Globalisation always proceeded at different speeds and security considerations were never ignored. 21 Globalisation is so layered it’s hard to generalise about its direction or pace. It’s debatable too whether the end of hyperglobalisation is a form of deglobalisation or another type of globalisation. More the latter because trade flows are exceeding IMF pre-pandemic forecasts, 22 China-US trade reached a record in 2021, 23 and authoritarian governments still apply export-led economic models. Note too that any retreat from the recent pace of globalisation has natural limits, as does the China-US split. Too much is intertwined and too many vested interests favour the status quo. Short of China invading Taiwan, the West would be reluctant to incur the costs of suddenly isolating China, while Beijing has an interest in preserving, rather than snapping, ties with the US. The internet might make people feel they are as tied to a globalised world as before.
People and businesses will be connected but not like they were. Their state of mind has turned away from the hyperglobalisation that, for all its drawbacks, enriched the world. A more-stunted form of globalisation points to less prosperous times. Even winning Wimbledon will be tainted.
The Asian financial crisis of 1997-1998 contained lessons for the region. One was the need to assemble foreign-exchange reserves to protect currencies against adverse capital flows if need be. By 2014, China’s symbol of success was that it had amassed a record US$4.0 trillion of foreign reserves, the bulk in US-dollar-denominated securities. 24
By all reports, China was stunned earlier this year when Washington weaponised the US dollar against Russia after it invaded Ukraine, even though the US had so acted against Afghanistan, Cuba, Iran, North Korea and Venezuela. Russia’s central bank could defend the rouble only by raising interest rates to 20% and thereby crush Russia’s economy.
The greater the damage to Russia, the greater the incentive for US opponents to explore ways to shift foreign-exchange reserves away from US-dollar-denominated assets. Included in such efforts are Beijing’s drive to internationalise the yuan and build a cross-border yuan payments system. 25
But it would be hard for rivals to dethrone the US dollar as the world’s reserve currency. 26 At the end of 2021, 59% of global currency reserves of US$12.9 trillion were denominated in US dollars (even if that’s down from 72% in 1999 when the euro appeared). At year end of last year, the next favoured currency was the euro at 21%, the yen at 5.6%, UK sterling at 4.8% and the renminbi at 2.8%. 27
The US dollar has peerless status because the currency of the world’s largest economy is the world’s medium of exchange and unit of account and US securities are the global financial haven. US capital markets are deep and liquid. Investors trust the rule of law and other infrastructure such as an independent central bank that gives them confidence US-dollar-denominated securities will hold their value.
Away from currencies, options for diversifying away from the US dollar include crypto currencies, commodities, namely gold, and a global fiat money such as the IMF’s special drawing rights. But crypto currencies including so-called stable coins are unstable – Bitcoin (not a stable coin) fell more than 70% since it peaked last year to June. They have no intrinsic value, are awkward to trade and the amount on issue is small. The market worth of cryptos on June 20 was US$1.2 trillion, just 9% of global forex reserves. 28 Gold is awkward to trade physically, needs to be stored and its price gyrates. The IMF’s rights would be stillborn as a reserve option.
As for currency rivals to the greenback, the euro is stymied because the lack of a eurozone government limits the sale of the needed securities. A bigger problem is the eurozone monetary union lacks the political, fiscal and banking union a currency union needs to endure. This means the euro’s future is not assured.
Other Western currencies such as the Swiss franc and the yen lack the security issuance to be substitutes for the US dollar. These countries are part of the West’s sanctions on Russia. They aren’t out to undermine the West’s ability to torment Russia.
The yuan, and its digital equivalent, is not a threat to the US dollar because China’s currency lacks the backing of a trusted democratic government and rule of law. Beijing restricts China’s capital account, the country’s financial markets are underdeveloped and Beijing does not want to lose the control over the economy it would forgo if the yuan were market set. China, which sells sovereign bonds denominated in US dollars, is too dependent on the US-dollar-based global financial system to flee from it. 29
Currency composition of foreign exchange reserves since 1999
Over time, however, China could widen use of the yuan among the emerging countries that are its closest and biggest trading partners. The US could undermine the reserve power of its dollar by allowing inflation to get out of control, running massive fiscal deficits that boosted Washington’s debt to uncomfortable levels, or if social cohesion broke down.
But the yuan’s chance of deposing the US dollar in the foreseeable future, even in a split world? About the same as Russians or Belarusians competing under their nationalities had of winning this year’s Wimbledon.