The long-term effects of the war in Ukraine on global value chains
Geopolitical risk has more than doubled since the beginning of the year: the countries affected are not only Russia and Ukraine but also China, Finland, Sweden, and Taiwan, among others. How will this heightened geopolitical risk affect the decision of multinational on where to locate their subsidiaries?
Higher geopolitical risk raises the insurance premium that firms need to pay to cover the risk of future production disruptions due to economic sanctions or conflict. For a firm, the risk of disruption rises alongside its reliance on imports from the country at risk, so more exposed firms are more likely to leave. But several factors create inertia, suggesting that a reshaping of some global value chains does not imply sudden deglobalisation. Cost differentials between countries are not affected by geopolitical risk. This makes reshoring to high-cost countries unlikely.
How the war in Ukraine may reshape globalisation
By: Michele Ruta – World Bank
Could we end up with a better globalization?
Dani Rodrik outlines the conditions under which globalization can lead to a better balance between the prerogatives of the nation-state and the requirements of an open economy:
- Reviving the spirit of the Bretton Woods era, when the global economy served domestic economic and social goals – full employment, prosperity, and equity – rather than the other way around.
- For great powers, and the US in particular, this means acknowledging multipolarity and abandoning the quest for global supremacy. The US tends to regard American predominance in global affairs as the natural state of affairs.
- Abandon the zero-sum mindset that characterizes the US-China relation: “American policies designed to undermine Chinese firms such as Huawei are likely to make China feel threatened and respond in ways that validate US fears of Chinese expansionism. A zero-sum outlook also makes it more difficult to reap the mutual gains from cooperation in areas such as climate change and global public health.”
A Better Globalization Might Rise from Hyper-Globalization’s Ashes
By: Dani Rodrik – Harvard University
