Globalization, which has both fans and detractors alike, is being tested like never before after the one-two punch of COVID and war.

The pandemic had already raised questions about the world’s reliance on an economic model that has broken trade barriers but made countries heavily reliant on each other as production was delocalized over the decades.

Companies have been struggling to cope with major bottlenecks in the global supply chain.

Russia’s war in Ukraine has raised fears about further disruptions, with everything from energy supplies to auto parts to exports of wheat and raw materials under threat.

Larry Fink, the head of financial giant BlackRock, put it bluntly: “The Russian invasion of Ukraine has put an end to the globalization we have experienced over the last three decades.”

“We had already seen connectivity between nations, companies and even people strained by two years of the pandemic,” Fink wrote in a letter to shareholders Thursday.

But U.S. Treasury Secretary Janet Yellen disagrees.

“I really have to push back on that,” she told CNBC in an interview. 

“We’re deeply involved in the global economy. I expect that to remain, it is something that has brought benefits to the United States, and many countries around the world.”

‘An animal that evolves’

Shortages of surgical masks at the outset of the pandemic in 2020 became a symbol of the world’s dependence on Chinese factories for all sorts of goods.

The conflict between Russia and Ukraine has raised concerns about food shortages around the globe as the two agricultural powerhouses are among the major breadbaskets of the world.

It has also put a spotlight on Europe’s — and especially Germany’s — heavy dependence on gas supplies from Russia, now a state under crippling sanctions.

“A number of vulnerabilities” have emerged that show the limits of having supply chains spread out in different locations, the former director general of the World Trade Organization, Pascal Lamy, told AFP.

The global trade tensions have prompted the European Union, for instance, to seek “strategic autonomy” in critical sectors.

The production of semiconductors — microchips that are vital to industries ranging from video games to cars — is now a priority for Europe and the United States.

“The pandemic did not bring radical changes in terms of reshoring (bringing back business from overseas),” said Ferdi De Ville, professor at Ghent Institute for International & European Studies.

“But this time it might be different because (the conflict) will have an impact on how businesses think about their investment decisions, their supply chains,” he said.

“They have realized that what was maybe unthinkable before the past month has now become realistic, in terms of far-reaching sanctions,” said de Ville, author of an article on “The end of globalization as we know it.”

The goal now is to redirect strategic dependence towards allies, what he coined as “friend-shoring” instead of “off-shoring.”

A U.S.-EU agreement Friday to create a task force to wean Europe off its reliance on Russian fossil fuels is the most recent example of friend-shoring.

For Lamy, this shows “there is no de-globalization.”

Globalization, he said, is “an animal that evolves a lot.”

Decoupling from China

Globalization had already faced an existential crisis when former U.S. President Donald Trump launched a trade war with China in 2018, triggering a tit-for-tat exchange of punitive tariffs.

His successor, Joe Biden, invoked the need to “buy American” in his sweeping investment plan to “rebuild America.”

“We will buy American to make sure everything from the deck of an aircraft carrier to the steel on highway guardrails are made in America,” he said in his State of the Union speech.

One concept that emerged during the Trump years was “decoupling” — the idea of untangling the U.S. and Chinese economies.

The threat has not subsided, especially with China refusing to condemn Russia’s invasion of Ukraine.

The United States has warned the world’s second-biggest economy would face “consequences” if it provides material support to Russia in its war in Ukraine.

China already had other contentious issues with the West, such as Taiwan, the self-ruled democracy which Beijing has vowed to seize one day, by force if necessary.

“It is not in China’s interest for now to go into competition with the West,” said Xiaodong Bao, portfolio manager at the Edmond de Rothschild Asset Management firm.

But the war in Ukraine is a chance for China to reduce its reliance on the U.S. dollar. The Wall Street Journal reported that Beijing is in talks with Saudi Arabia to buy oil in yuan instead of dollars.

“China will continue to build foundations for the future,” Bao said. “The financial decoupling is accelerating.” 
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President Joe Biden intends to propose a spending plan for the 2023 budget year that would cut projected deficits by more than $1 trillion over the next decade, according to a fact sheet released Saturday by the White House budget office. 

In his proposal, expected Monday, the lower deficits reflect the economy’s resurgence as the United States emerges from the pandemic, as well as likely tax law changes that would raise more than enough revenue to offset additional investments planned by the Biden administration. It’s a sign that the government’s balance sheet will improve after a historic burst of spending to combat the coronavirus. 

The fading of the pandemic and the growth has enabled the deficit to fall from $3.1 trillion in fiscal 2020 to $2.8 trillion last year and a projected $1.4 trillion this year. That deficit spending paid off in the form of the economy expanding at a 5.7% pace last year, the strongest growth since 1984. But inflation at a 40-year high also accompanied those robust gains as high prices have weighed on Biden’s popularity. 

For the Biden administration, the proposal for the budget year that begins October 1 shows that the burst of spending helped to fuel growth and put government finances in a more stable place for years to come as a result. One White House official, insisting on anonymity because the budget has yet to be released, said the proposal shows that Democrats can deliver on what Republicans have often promised without much success: faster growth and falling deficits. 

Republicans focus on inflation

But Republican lawmakers contend that the Biden administration’s spending has led to greater economic pain in the form of higher prices. The inflation that came with reopening the U.S. economy as the closures from the pandemic began to end has been amplified by supply chain issues, low interest rates and, now, disruptions in the oil and natural gas markets because of Russia’s invasion of Ukraine. 

Senate Republican leader Mitch McConnell of Kentucky pinned the blame on Biden’s coronavirus relief as well as his push to move away from fossil fuels. 

“Washington Democrats’ response to these hardships has been as misguided as the war on American energy and runaway spending that helped create them,” McConnell said last week. “The Biden administration seems to be willing to try anything but walking back their own disastrous economic policies.” 

Biden inherited from the Trump administration a budget deficit that was equal in size to 14.9% of the entire U.S. economy. But the deficit starting in the upcoming budget year will be below 5% of the economy, putting the country on a more sustainable path, according to people familiar with the budget proposal who insisted on anonymity to discuss forthcoming details. 

The planned deficit reduction is relative to current law, which assumes that some of the 2017 tax cuts signed into law by former President Donald Trump will expire after 2025. The lower deficit totals will also be easier to manage even if interest rates rise. Still, Biden’s is offering a blueprint for spending and taxes that will eventually be decided by Congress and could vary from the president’s intentions. 

Economy expands

The expected deficit decrease for fiscal 2022 reflects the solid recovery in hiring that occurred in large part because of Biden’s $1.9 trillion coronavirus relief package. The added jobs mean additional tax revenue, with the government likely collecting $300 billion more in revenues compared to fiscal 2021, a 10% increase. 

Still, the country will face several uncertainties that could reshape Biden’s proposed budget, which will have figures that don’t include the spending in the omnibus bill recently signed into law. Biden and U.S. allies are also providing aid to Ukrainians who are fighting against Russian forces, a war that could possibly reshape spending priorities and the broader economic outlook. 
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The announcement Friday that the United States will help Europe find alternative sources for the 15 billion cubic meters of liquefied natural gas (LNG) that it imports from Russia every year sparked hopes that the region can reduce its reliance on Russia for energy — but it does nothing to reduce the vastly larger amount of pipeline gas that Europe buys from Moscow.

European Commission President Ursula von der Leyen and U.S. President Joe Biden announced the agreement in a joint appearance. Biden is in Europe for a series of meetings with other leaders to coordinate further responses to Russia’s invasion of Ukraine.

In prepared remarks, Biden said that Russian President Vladimir Putin “has used Russia’s energy resources to coerce and manipulate its neighbors.” He said reducing European demand for Russian gas would increase pressure on Russia to stop the war.

He noted that the U.S. had already banned all imports of Russian energy, saying that “the American people would not be part of subsidizing Putin’s brutal, unjustified war against the people of Ukraine.”

“The trans-Atlantic partnership stands stronger and more united than ever,” von der Leyen said. “And we are determined to stand up against Russia’s brutal war. This war will be a strategic failure for Putin.”

A mammoth task

In the wake of Russia’s invasion of Ukraine, countries across Europe have been reassessing their dependence on Russia for energy. Most notable was Germany’s decision to scrap the controversial Nord Stream 2 pipeline, which would have doubled the flow of Russian gas directly to Europe under the Baltic Sea.

Completely detaching Europe from Russian energy supplies will be extremely difficult, however.

While the 15 billion cubic meters (15 bcm) of LNG that the U.S. has pledged to help Europe find would replace virtually all the LNG that comes in from Russia, the countries of Europe buy an additional 150 bcm of Russian natural gas that is delivered via pipeline.

LNG and pipeline gas are the same product in different forms. LNG is compressed into a liquid for storage and transport and is “re-gasified” for use.

Europe ‘at capacity’ for LNG

Experts said that while the new sources of LNG could replace existing Russian LNG imports, they wouldn’t be able to reduce the region’s reliance on pipeline gas.

“Europe has an import capability that is limited, and they don’t have any additional infrastructure that is going to come online,” Charlie Riedl, executive director of the Center for Liquefied Natural Gas, told VOA. “Infrastructure that’s currently operational is basically running at capacity right now, and I would expect that it will run at capacity for the remainder of this year.”

Riedl said that coming into 2022, the amount of gas held in storage by European countries was well below recent averages, making the region especially vulnerable to potential supply disruptions.

In the longer term, Europe will be able to increase its capacity to import LNG, and the U.S. in turn can then increase the amount of LNG it produces and ships to Europe. On Friday, the Biden administration said that it would commit to “maintaining an enabling regulatory environment” with regard to “any additional export LNG capacities that would be needed to meet this emergency energy security objective.”

US energy industry

U.S. energy industry representatives appeared pleased with the announcement.

In a statement sent to VOA, American Petroleum Institute President and CEO Mike Sommers said, “We stand ready to work with the administration to follow this announcement with meaningful policy actions to support global energy security, including further addressing the backlog of LNG permits, reforming the permitting process, and advancing more natural gas pipeline infrastructure.”

He said that the industry had already begun the process of supplying Europe with more U.S.-sourced fuel.

“Over the past few months, American producers have significantly expanded LNG shipments to our allies, establishing Europe as the top U.S. LNG export destination,” Sommers said. “With effective policies on both sides of the Atlantic, we could do even more to support Europe’s long-term energy security and reduce their reliance on Russian energy.”

Reconciling with climate strategy

The creation of new fossil fuel infrastructure might seem difficult to square with pledges by both the European Union and the U.S. to move toward a carbon-neutral future.

However, Biden and von der Leyen on Friday reiterated their commitment to climate pledges and said that new LNG facilities will be constructed in a way that will allow them to be converted for a transition to hydrogen-based power.

In a statement, the White House said, “The United States and the European Commission will undertake efforts to reduce the greenhouse gas intensity of all new LNG infrastructure and associated pipelines, including through using clean energy to power onsite operations, reducing methane leakage, and building clean and renewable hydrogen-ready infrastructure.”

The U.S. and the European Commission also indicated that Europe, with U.S. assistance, will take other steps to reduce reliance on Russian gas, including reducing demand by bringing more renewable power resources online.
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U.N. economists warn prospects for global growth this year are rapidly fading as the adverse impact of the war in Ukraine kicks in.

The U.N. Conference on Trade and Development, UNCTAD, has downgraded a previous more optimistic projection of the world economy to reflect the new reality.

UNCTAD’S updated trade and development report estimates global economic growth will decrease to 2.6% from 3.6% in 2022. It said the main factor behind the significant downgrade is the great uncertainty surrounding the war in Ukraine.

The report said the extent of military destruction, the duration of the war and sanctions against the Russian Federation will compound the ongoing economic slowdown globally and weaken the recovery from the COVID-19 pandemic. It said Russia will experience a deep recession this year.

Director of UNCTAD’s division on globalization and development strategies, Richard Kozul-Wright, said the war likely will increase geopolitical tensions, determine national monetary policies, add to inflationary pressures and hike fuel and commodity prices. He said all regions of the global economy will be adversely affected by the crisis, some more than others.

European Union faces downgrade

“The European Union will see a fairly significant downgrade in its growth performance this year, but so will parts of central and southern Asia as well,” Kozul-Wright said. “… And countries that might not see a very significant downgrade in their growth performance, such as sub-Saharan Africa, are particularly vulnerable to some of the commodity price hikes that we see in those countries that are very large food importers, particularly wheat.”

Kozul-Wright said the very large level of external debt facing developing countries is of particular concern. The report projects developing countries will require $310 billion to service their external public debt this year.

“Partly as a consequence of the additional debt that was acquired during the COVID-19 shock … developing countries still cannot get the necessary fiscal support from the multilateral financial institutions that they need to be able to respond to unanticipated economic shocks,” Kozul-Wright said.

U.N. economists said measures to help developing countries cope with the crisis must be strengthened. They said there must be a more rigorous, serious, effective attempt to restructure their external debt so they can get back to a reasonable growth path.

 
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The number of Americans applying for unemployment benefits last week fell to its lowest level in 52 years as the U.S. job market continues to show strength in the midst of rising costs and an ongoing virus pandemic.

Jobless claims fell by 28,000 to 187,000 for the week ending March 19, the lowest since September of 1969, the Labor Department reported Thursday. First-time applications for jobless aid generally track the pace of layoffs.

The four-week average for claims, which compensates for weekly volatility, also fell to levels not seen in five decades. The Labor Department reported that the four week moving average tumbled to 211,750 from the previous week’s 223,250.

In total, 1,350,000 Americans were collecting jobless aid the week that ended March 12, another five-decade low.

Earlier this month, the government reported that employers added a robust 678,000 jobs in February, the largest monthly total since July. The unemployment rate dropped to 3.8%, from 4% in January, extending a sharp decline in joblessness to its lowest level since before the pandemic erupted two years ago.

U.S. businesses posted a near-record level of open jobs in January — 11.3 million — a trend has helped pad workers’ pay and added to inflationary pressures.

The Federal Reserve launched a high-risk effort last week to tame the worst inflation since the early 1980s, raising its benchmark short-term interest rate and signaling up to six additional rate hikes this year.

The central bank’s policymakers have projected that inflation will remain elevated, ending 2022 at 4.3%.

Earlier this month, the government reported that consumer inflation jumped 7.9% over the past year, the sharpest spike since 1982.
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Kenya’s tea and flower exporters say global sanctions to punish Russia for invading Ukraine have halted millions of dollars of Kenyan trade with Russian importers. While they hope for peace, Kenyan traders are looking for alternative buyers. Victoria Amunga reports from Kajiado, Kenya.
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The world is feeling the effects of the war in Ukraine from the gas pump all the way to the dinner table.

Food prices are climbing just about everywhere, raising the risk of civil unrest, especially in countries dependent on imported wheat from Russia and Ukraine. That includes much of the Middle East and North Africa.

Experts say the food price increases are happening at an especially bad time.

“It’s kind of a perfect storm,” said Cornell University economics professor Chris Barrett. “It’s not just a matter of, food prices are going high. It’s food prices are going high at a moment when many places are already crippled by the challenges posed by COVID, by political disruptions elsewhere, by droughts and floods and other natural disasters.”

“And there’s only so much that people can take before they grow displeased with their political leadership if it’s failing to take care of them,” he added. “So, unrest is, unfortunately, increasingly likely right now.”

Conflict worsens inflation

Russia is the world’s leading wheat exporter. Ukraine is number five. Together, they grow up to a third of the world’s wheat exports.

But when war broke out, the Black Sea became a combat zone. Some cargo ships took fire. It didn’t take sanctions to cut off exports.

“There wasn’t a ban on grain trade, but in effect the ports were closed. And so shipment has stopped,” said Texas A&M University economist Mark Welch.

“Countries that import from Ukraine and Russia have suddenly found their contracts canceled and they’re not getting food shipments they were expecting, which forces them into the market to pay a premium to replace food shipments that just aren’t going to arrive,” Barrett said. “And that bids up the price of food around the world.”

But food prices have been rising for almost two years.

Bad weather cut harvests in some of the world’s breadbaskets. Reserves are low.

That’s helped push prices to record highs even before the conflict started.

“We’ve tipped over that edge where every change, every little thing, has a very large impact,” University of Illinois economist Joe Janzen said.

More problems coming

Now, Ukraine’s next harvest is in doubt. Farmers should be getting ready for the next growing season. But that’s hard to do right now.

“Logistical lines are obviously heavily disrupted right now,” Barrett said. “Seeds aren’t arriving. Fuel isn’t arriving. Fertilizer isn’t arriving.”

Russia’s farmers are getting hit, too. They’re not under sanctions. But Russia’s banks are. That basically shuts Russian farmers out of the financial system.

“We’re not going to say, ‘You can’t ship grain,'” Welch said. “But will they ship it if they can’t get paid?”

Then there’s the sharp increase in energy prices that makes shipping everything more expensive.

Also, natural gas is a main ingredient in fertilizers commonly used to boost grain yields. So fertilizer costs more to make.

“Fertilizer prices last year were already quite high. They had come down somewhat in the last few months and now are very high again,” Janzen said, “in part because Russia and its ally Belarus are major fertilizer exporters.”

And Russia and Belarus are both under sanctions for the Ukraine invasion.

But those are problems for the next crop. People in parts of the Middle East and North Africa are feeling the effects now.

Fragile situations

“Yemen is a good case in point,” Barrett said. “There’s not a lot of wheat being grown in Yemen. They depend entirely upon wheat imports, and that requires transportation to get there.”

“The spike in global wheat prices plus the spike in global oil prices mean that prices for flour and for bread products in Yemen are already increasing significantly in a place where people really can’t afford to face an even higher cost of feeding their family basic daily rations,” he added.

In 2011, rising bread prices were one of the factors that set off the Arab Spring protests. When people already have grievances with their government, food inflation can tip them over the edge. A lot of places fit that description, according to U.N. World Food Program Chief Economist Arif Husain.

“If you look at Yemen, if you look at Lebanon, if you look at Syria, if you look at South Sudan, if you look at Ethiopia, and I can keep going,” Husain said in an interview with The Associated Press. “These countries are already in trouble because of conflicts.”

On the plus side, spring planting hasn’t started yet in some big wheat-growing countries. Farmers will probably switch some land where they planned to grow corn or soybeans to planting wheat. That should eventually bring the price down.

“That seems to be the main way that these crises are inevitably resolved is by production somewhere else in the world responding,” Janzen said. “We are fortunate that we have a global food system. We have the ability to produce and consume commodities like wheat all around the world.”

It will be months before the markets have a sense of how big the new crop will be, however. Those will be nail-biting months of watching the weather. Experts say, be ready for a wild ride.
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What Russia’s war in Ukraine means for food prices around the world
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