How is the war in Ukraine changing globalization? Adam Tooze on the new dynamics of world trade.

“The Russian invasion of Ukraine has put an end to the globalization we have experienced over the last three decades,” Larry Fink, the CEO of BlackRock—the world’s largest asset-management firm—wrote in the latest of his widely read annual letters to shareholders. It’s an idea gaining currency. Adam Posen, the head of the pro-globalization Peterson Institute for International Economics, says in Foreign Affairs—the flagship publication of the influential U.S. organization the Council on Foreign Relations—that the war has accelerated a “corrosion” of globalization. And the prominent American columnist David Brooks wrote in The New York Times that “globalization while flows of trade will continue, … globalization as the driving logic of world affairs—that seems to be over.” Why would a war between two countries with relatively limited roles in the world’s economy cause such a historical transformation in it?

Adam Tooze is the Kathryn and Shelby Cullom Davis professor of history and director of the European Institute at Columbia University, as well as the author of books about World War I, German economic history, the Great Recession, and the economic effects of the Covid pandemic. Recently, on The Signal, Tooze spoke about how the war has worsened already rising commodity prices and redefined global economic power through unprecedented sanctions. Here below, he addresses the ways the conflict is revealing changes in the dynamics of globalization that started a decade ago. The source of these changes, he says, is the growing hostility between the U.S. and China, and Washington’s worries about losing economic power to Beijing. But Russia’s attack put an end to one of the most deep-rooted beliefs about globalization: that countries tied together through trade would become more peaceful and law-abiding. What’s really changing now, Tooze says, is how people think about globalization.

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Michael Bluhm: What’s happening with all the talk about the end of globalization?

Adam Tooze: It’s saying that the Russian invasion of Ukraine has put an end to the globalization we’ve experienced over the last three decades. It’s not saying globalization as such is coming to an end; it’s saying globalization as we’ve known it is coming to an end.

The first wave of contemporary globalization, from the 1990s and 2000s, began to plateau in the early 2010s. That wave had included the North American Free Trade Agreement and China joining the World Trade Organization, which was a massive shock to the foundations of American society. We’re still living through the reverberations. The plateau was partly because of a deterioration in relations between the U.S. and China since 2011—and certainly since the Trump administration—which the Biden administration shows no sign of reversing. Then, Covid-19 raised a question about supply chains, in quite a dramatic way.

But what we’ve seen is not de-globalization but this plateau—a reconfiguration, politicization, and weaponization of interdependence.

Bluhm: What do you mean by that?

Tooze: Weaponization means the geopolitical use of interdependence, as with the current sanctions against Russia. These sanctions are a time-limited tactic. If you do that two or three times, folks who feel that they might find themselves in antagonistic relations with the United States—and it’s a relatively short list of countries—will start to wonder whether it’s safe to hold foreign-exchange reserves in dollars.

Russia thought it had learned that lesson and had a cunning plan: It diversified its foreign-exchange reserves out of dollars into the euro. It turns out that if you invade a European country with an army of 150,000 people and start bombing civilians, the Europeans will join the Americans in sanctioning those foreign-exchange reserves.

We should call it a euro-dollar trap. And it is a trap; it’s weaponized. But it’s not obvious where you can go if you want to get out of it. Rather than the emergence of a new currency system, it’s more as though a cold war has broken out within a currency system that’s very difficult to change. It’s like trench warfare within the financial system. It is antagonistic, but it doesn’t actually shift anything very much, because there’s nowhere for countries to go.

More from Adam Tooze at The Signal:

“Breaking this system was a deliberate choice by the U.S. government. The United States is the first mover. It’s not obvious that even the American microchip firms are very keen on this choice. It is less efficient than the existing arrangements. Will it be a return to the Flintstones? No, because you can compensate, to a degree, through investment. America’s industrial policy is all about trying to grow back, and the Europeans are doing the same. The U.S. and Europe want to build the sorts of networks of innovation, collaboration, and R&D domestically that are now centered in the manufacturing hubs of East Asia.”

“The Cold War model was distinctive; it was like two Lego sets. Everything went together—society, economy, politics, and geopolitics. That’s something we’re going to see locally now in Europe, along the front line. But I don’t think it’s a model that’ll apply to the relationship between, say, Brazil and the United States—or Brazil and China. The government of Brazil feels torn between two poles, but it isn’t confronted with the choice of blocs. You can see the limitations of the bloc model in the difficulty the Biden administration has had in putting together a strategy for dealing with Beijing. They can get potential partners in Asia to line up on security issues. None of them will say no to an American security guarantee against Chinese aggression. But the U.S. won’t be able to get Asian countries to line up on an economic choice between the U.S. and China. If that’s what the Americans were offering, the Asians wouldn’t take it. They’d rather be neutral, because they’re too invested in China’s economic growth.”

“In the 1990s, that idea turned into something more like a metaphysics, a salvation theology, or a social-science theory that said, It was always bound to work. And that was the naivete. Moscow and Beijing said, We can see you coming from miles away. We know what your game is. You want to transform us through trade. Well, we’re going to take the other side of that bet; we’re going to learn from trade, and, with the profits from it, we’re going to consolidate our grip on our societies. Yes, that will mean the transformation of parts of our societies; there will be these cosmopolitan, Western-oriented people, and there will be oppositional Alexei Navalnys. We know there’s going to be a huge middle class that loves the change—and is now panicked and despairing in Russia. … But all of this was a power play by the West; the Russians and the Chinese took the other side; and the West is losing on it. The transformation of society in Russia and China is real; it’s just not complete. It hasn’t given the West historic sway. It’s created victims.”