A changing world order: The decline of globalisation

The end of the Cold War signalled the start of a process of global convergence, where countries around the world became more interconnected than ever before.

Democracy seemed to be spreading to countries previously under staunch autocratic rule, and the standoff between communism and capitalism appeared to be easing. 

These were the early days of globalisation, which would steadily expand over the next five decades through economic, technological, political and social integration. The interdependence of countries served the global economy well, and from this environment emerged a unipolar world order, with the US at the helm as the economically and politically dominant global powerhouse.

A turning point

The global financial crisis of 2007-08, however, marked a turning point in the growth of globalisation. People began to question globalised capitalism as the domino effects of the sub-prime crisis were felt around the world.

Since then, opposition to globalisation has risen in various forms such as Brexiteers, xenophobic nationalists, populists like Donald Trump, and the anti-globalist left. Also in the mix are the global ambitions of China and Russia — intent on usurping the US as world leaders and changing the global pecking order. 

After the 9/11 attacks, the US became increasingly preoccupied with wars in Afghanistan and Iraq, which dominated much of its focus and resources. These military conflicts have left an overly indebted US reluctant to engage in expensive overseas conflicts at a time when China is doing the opposite.

Following its aggressive military moves in Hong Kong and in the South China Sea against Taiwan, China is now the dominant military player in the Asian waters — underpinning its naval and air power by establishing military bases in key strategic positions in the South China Sea. It uses old coral-reef atolls as its infrastructure. 

Russia, too, had been strategically weighing up its military options, steadily encroaching on European territories with its annexation of Crimea and Georgia as it sought to bolster its territory — confident the US and its Western allies would not retaliate.

The rise of the Eastern power bloc

The economic power dynamics are also now shifting. Since its admission to the World Trade Organisation in 2001, China has experienced significant economic growth — and through its well-known Belt and Road Initiative, adopted in 2013, it is expanding its economic power across to the Atlantic Ocean. Russia has also cleaned up its balance sheet with its successful energy trade, emboldening Vladimir Putin in his pursuit of further Ukrainian territory.

But, considering its modest-sized economy, Russia needs its partnership with China. Iran, meanwhile, is also cosying up to China, and this new China/Russia/Iran axis will form the core of the Eastern power bloc — all armed with nuclear weapons. Iran is close to, or has already achieved, nuclear capability and poses a major threat to Middle East stability.

The weakening state of the US and its Western allies has allowed these other powers, particularly China and Russia, to exploit this window of opportunity as they try to assert their own geopolitical ambitions, all while challenging the historically influential role held by the US, which can no longer sustain its position as the sole global superpower.

While the steady decline of globalisation was already well under way before Russia’s invasion of Ukraine, the war has undoubtedly escalated the process. And while the transition towards a more multipolar world isn’t new, what is new is how the various global players have used the conflict and the global connectivity involved to drive their national agendas. 

War and the global power architecture

The Russia—Ukraine war has revealed the complexity of the architecture of global power. For example, while China has supported Russia diplomatically in the war, accusing the US and the North Atlantic Treaty Organisation (Nato) of using the conflict in their attempts to contain Russia and China, this support is not unlimited given China’s concerns over the global economic impact of a prolonged Ukrainian conflict, as well as potential secondary sanctions by the US on Chinese companies. 

Countries such as India and Turkey have also refused to speak out against Russia’s invasion, given their beneficial relationships with Russia, but they have also not lent their outright support to Russia through direct opposition to the US and its Western allies or military support.

However, perhaps one of the most telling indicators of the changing multipolar order is the actual invasion itself, which illustrates — as with Russia's previous military action against Crimea and Georgia — Putin’s expectation that the US and Nato would not intervene directly to stop it.

While he may have underestimated the West’s response and level of sanctions against Russia, its weakened state was certainly one of the factors that emboldened Moscow to carry out the invasion.

The role of excess money

So where does this leave us on the macro stage? The increased money supply of quantitative easing programmes of the US Federal Reserve and other central banks since 2008 has eventually led to rising inflation, which has only been worsened by the Covid-19 pandemic and the war in Ukraine.

Another repercussion of quantitative easing has been that, because the money that was printed went into buying Treasury bonds (the mechanism to get the money into the economy), it lowered the cost of government borrowing (financial repression) — so governments went on a spending spree. Western government debt levels have doubled over the past decade to today’s unsustainable levels. This means the West cannot afford to engage in any meaningful way globally, even if it wanted to.

And the final effect is the one just accelerated by the Fed and European Central Bank sanctions on Russia — an undermining of the status of the US dollar as the world’s reserve currency.

If the dollar’s reserve currency status was effectively revoked — and China and Russia are already looking to price oil and gas in roubles and renminbi, as well as shifting their banking transactions to their own interbank payments system — that prop for the dollar would fall away. It would lead to a long, severe decline. And when a country’s currency is weak, it, too, is weak. This would make the West weak and the Eastern Bloc stronger.

The Russia—Ukraine conflict is a humanitarian disaster. Its repercussions, as well as those of the response of the West, will be felt for decades to come. The conflict has certainly been a product of the changing global power structure, but more change is coming, whether we like it or not.

This article was paid for by Old Mutual Investment Group.