Predicting the Future
As Yogi Berra said, it’s hard to make predictions, particularly about the future. I’m going to try anyway, but rather than focus on the immediate—the war in Ukraine—I will look at longer-term implications, although the war, along with the pandemic and the challenge of China, underlies all of them and suggests the future will be a different world in a number of ways.
Overall, we are heading for a more fragmented, compartmentalized world. It will not be a Soviet Union–style cold war—the world is, and will remain, too economically integrated for that—but we should expect countries to look out for themselves at the expense of the rules-based system and at the expense of poor countries. To the extent there is cooperation, it will be among democratic rule-of-law states on one side and authoritarian states on the other.
Localization of supply chains will accelerate. This began before Trump, as companies worried about price volatility in freight transportation and the increased risks of doing business in some countries like China. It accelerated during the pandemic and is being reinforced by the Biden administration’s interest in reshoring or near-shoring. Companies will do what makes economic sense for them, but world events push them in the direction of shorter and more resilient supply chains.
War is causing revised risk assessments, not only about doing business or investing in Russia, but also about business in other non-rule-of-law authoritarian states, where foreigners have little recourse if things go wrong. Also, we are seeing the increasing injection of social policy issues into business. Issues like forced labor prohibitions or pressures to go green and, conversely, avoiding greenwashing and the activists who monitor these issues, are forcing companies to reassess their risk profiles and alter their supply chains.
Sanctions are accelerating this reevaluation. While they are mostly about Russia right now, they also impact China, among other countries. Because they are the tool of choice short of war, their use will continue to grow.
We may also be in an era of “whack-a-mole” supply chain disruptions. Every month it will be something different, and it’s not the same everywhere: toilet paper in 2020, food now because of the war, critical minerals in the future, now semiconductor chips. Supply and demand seem to be out of whack, and the system is having trouble returning to a stable equilibrium. Global integration guarantees these spill over and are not geographically isolated.
The war is certainly inflationary, particularly on food and energy prices. However, it is not clear how this will play out. The war, like Covid-19, is a highly disruptive development that leads to panic buying, hoarding, and government restrictions on exports. Six months later, governments and people realize they overreacted, and things begin to move back to where they were. That means a new normal—a new equilibrium—but one based on concerns about self-sufficiency rather than greater economic integration.
Food and energy will drive that transition, particularly if Russia is shut out of global energy markets and if Ukrainian crop yields are devastated. Governments will have to think seriously about food and energy self-sufficiency in an increasingly divided and conflicted world. This will particularly be an issue in Europe for energy and the Middle East for grains.
Uncertainties in the energy markets, along with European determination to reduce dependence on Russia, will mean more investment in energy alternatives and, in some cases, more investment in fossil fuels. That will make it harder for developed countries to assist developing countries in their energy transitions. That will slow down their transitions and maintain or increase their dependence on fossil fuels and put the world further away from its Paris Agreement goals.
The weaponization of sanctions will encourage the development of work-arounds in affected countries. That means an accelerated movement away from dollar-based transactions and away from SWIFT and toward Russian- and Chinese-based alternatives, as well as toward nontraditional currencies and interoperable central bank digital currencies (CBDCs). Most likely, the dollar’s status as a reserve currency will remain, but there will be a growing number of alternatives that will make future U.S. sanctions less effective.
Technology regionalization will grow. Access to technology is now both a competitive advantage and a strategic necessity. See the chip debate: this means more industrial policy (EU and U.S. especially), the conflation of trade policy with security policy, and more controls on exports and investment, both inbound and outbound.
The world will also see internet fragmentation among the European Union, China, and the United States, all of which have different approaches. The risk is “splinternet,” or incompatible approaches: China with its “Great Firewall,” the United States with an open, decentralized and industry-led model, and the European Union with a values- and privacy-led ex ante regulatory approach at the expense of technology development and internet expansion.
Finally, it is an open question whether the World Trade Organization (WTO) can withstand the stress. It is already struggling to achieve consensus on anything important, and the decision of 34 members—so far—to withdraw most-favored-nation tariffs from Russia, itself a violation of the rules, albeit for good reasons, might turn out to be a death blow. History suggests organizations do not implode; they fade into irrelevance as they are replaced by others. There have already been discussions about the inability of the WTO to deal with China and suggestions that it is time for a new trade organization of countries that want more ambition on trade liberalization and stronger defenses against those who break the rules. CSIS recommended one approach last year in its Trade Commission on Affirming American Leadership.
It is tempting to rant that this is all Putin’s fault, but these are trends that began before the war and have deeper causes. He has made everything worse and accelerated the transition—and at a terrible cost—but there is more behind the transition than the war, and, knowing that, we should also know that the end of the war will not mean a return to the old normal.
William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.
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