Economic commentators are always looking for historical analogies, and rightly so.
For example, those who had studied past banking crises had a much better understanding of what was happening in 2008 than those who had not.
But there is always the question of which analogy to choose.
At this time, many people remember the stagflation of the 1970s.
I have argued with some exaggeration that this is a bad parallel;
our current inflation looks very different from what we saw in 1979-80, and probably much easier to end.
However, there is good reason to worry that we are seeing an economic repeat of 1914, the year that ended what some economists call the first wave of globalization, a vast expansion of world trade made possible by railroads, ships steam and telegraph cables.
In his 1919 book “The Economic Consequences of the Peace,” John Maynard Keynes—who would later teach us to understand depressions—lamented what he correctly saw as the end of an era, “an episode extraordinary in economic progress of man.”
On the eve of the First World War, he wrote, an inhabitant of London could easily order “the various products of all the earth, in such quantity as he thinks proper, and reasonably expect their prompt delivery at the door of his house.
But it was not going to last, thanks to “the projects and policies of militarism and imperialism, of racial and cultural rivalries.”
Sounds familiar?
Keynes was right to see World War I as the end of an era for the global economy.
To take a clearly relevant example, in 1913 the Russian empire was a major exporter of wheat; it would be three generations before some of the former republics of the Soviet Union resumed that role.
And the second wave of globalization, with its worldwide supply chains made possible by containerization and telecommunications, didn’t really get going until around 1990.
So are we about to see a second deglobalization?
The answer is probably yes.
And while there were significant downsides to globalization as we knew it, there will be even more serious consequences if, as I and many others fear, we see a significant setback in world trade.
Why is world trade being affected?
The failed war of conquest Vladimir Putin of course, spelled the end of Ukraine’s wheat exports, and probably cut off much of Russia’s sales as well.
It’s not entirely clear how drastically Russia’s oil and natural gas exports have dropped:
Europe has shown reluctant to impose sanctions on imports of products on which he irresponsibly allowed himself to become dependent;
but the European Union is moving to end that dependency.
Wait, there’s more.
You may not have expected Putin’s war to have a big effect on car production.
But modern cars include a lot of wiring, held up by a specialized part called a wire harness, and it turns out that many of Europe’s wire harnesses are made in Ukraine.
In case you were wondering, most US wire harnesses are made in Mexico.
Still, Russia’s decision to become an international pariah would probably not be enough on its own to slash global trade, as China, which plays a key role in many supply chains, might if it decided to turn inward.
But while China hasn’t invaded anyone (yet?), there are problems on that front as well.
More immediately, China’s response to COVID, which was highly successful in the early stages of the pandemic, is becoming a growing source of economic disruption.
The Chinese government still insists on using home vaccines that don’t work very well, and still responds to outbreaks with draconian lockdowns, which are causing problems not only for China but also for the rest of the world.
Beyond that, what Putin has taught us is that countries run by strong men who surround themselves with yes-men are not reliable trading partners.
A Chinese confrontation with the West, economic or military, would be wildly irrational, but so was the Russian invasion of Ukraine.
Tellingly, the Ukraine war appears to have triggered large-scale capital flight from China.
So if you’re a business leader right now, you’re probably wondering if it’s wise to stake the future of your business on the assumption that you’ll be able to continue to buy what you need from authoritarian regimes.
Returning production to nations that believe in the rule of law may increase your costs by a few percent, but the price it may be worth it for the stability it creates.
If we are about to see a partial retreat from globalization, will that be a bad thing?
Rich, advanced economies will end up only slightly poorer than they otherwise would have been;
Britain managed to keep growing despite the decline in world trade after 1913.
But I worry about the impact on nations that have made progress in recent decades but would be desperately poor without access to world markets, nations like Bangladesh, whose economic achievements have depended crucially on their garment exports.
Unfortunately, we are relearning the lessons of the First World War:
the benefits of globalization are always at risk from the threat of war and the whims of dictators.
To make the world lastingly richer, we must make it safer.