Why the Ukraine Crisis Puts Globalization at Risk

Why the Ukraine Crisis Puts Globalization at Risk

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The Ukraine crisis will be a turning point for how states think about globalization. For almost twenty years, the United States and all major powers have pursued greater economic, financial, and technological integration as an end in itself. Global integration held the promise of peace, stability, and mutual prosperity.

On several occasions, most notably after the financial crisis in 2008, experts predicted the end of integration and the return of protectionism but it never came. It took the Ukraine crisis to bring the world to the cusp of a period of de-globalization.

The Ukraine crisis shows that at a moment of high tension the major powers will use the leverage they gain from interdependence as a weapon against each other. Thus, this week, the United States imposed sanctions against Russian banks and oligarchs. Russia is employing its own economic weapons against Ukraine and is reportedly considering retaliation of its own against the European Union and America.

The logical response to the prospect of economic warfare is for states and major companies to hedge against the risk of vulnerabilities created by interdependence. They will adopt a strategic approach to integration—pursuing it where it works to their benefit, but stepping away from it when it exposes them to potential actions by a hostile government. This will be a sea change in international economic policy and U.S. grand strategy more generally.

Russian companies have already pulled billions of dollars from western banks, presumably to preempt sanctions, while Putin demanded that Russian companies register “onshore” instead of abroad. Western European governments are acutely aware of their exposure to Russia and are looking for ways to reduce their dependence on Russian energy. Western banks are already paying a price while companies like Boeing and General Electric are closely tracking how sanctions on Russia may detrimentally impact upon their interests there.

We saw some signs of hedging even before the Ukraine crisis. The United States and many of its allies prevented Huawei, a Chinese technology company, from investing in critical infrastructure because of concerns it could be influenced by the Chinese government. Some U.S. analysts have warned against being overly reliant on China’s purchase of U.S. treasuries.

Meanwhile, China was seeking means of reducing its energy dependence on routes controlled by the U.S. Navy while Russia reduced its dependence on foreign sources of finance. Russia even considered economic warfare to destabilize the U.S. economy after the collapse of Lehman Brothers. According to former Treasury Secretary Hank Paulson, Russia asked China to dump its Fannie Mae and Freddie Mac bonds in 2008 to ruin the U.S. mortgage-finance companies. China declined and promptly informed the United States.

The Ukraine crisis will have implications far beyond Europe. Major states are increasingly in geopolitical competition with each other. In Asia, China, the world’s second-largest economy, is a geopolitical competitor of the United States, Japan, and India, and it also has significant disputes with many of its neighbors in South East Asia. By demonstrating the risks of interdependence within geopolitics, the Ukraine crisis will be a catalyst for what would have happened anyway over the course of the next decade.

In Asia, countries will take careful notes about the effectiveness of new economic weapons to utilize in contingencies in their own neighborhood. China will be watching closely to see what actions may be used against it in the event of a harsh crackdown domestically or a conflict over disputed territories in which it is widely perceived as the aggressor. If Russia retaliates succeeds in imposing significant economic costs of its own on the west, reducing U.S. and European exposure to potential rivals will become a priority. Western companies that are collateral damage in U.S. and European sanctions will be more reluctant to invest in countries that could become future adversaries in an economic war.

Globalization was always especially vulnerable to geopolitical shocks. The great power comity of 1991 to 2008 was never going to be permanent. It is perhaps better that this realization comes in a stand-off with Russia, the world’s eighth largest economy and one that has already been distancing itself from the global economy, than a crisis involving China, the second largest economy, which could do real damage to the United States and its allies.

Handled properly, this limited unwinding should not lead to a new era of protectionism. Most trade, as long as it is diversified, is genuinely mutually beneficial and is hard to weaponize. Where countries have tried to do so—such as China with rare earth metals—they have failed.

Major powers will identify areas where interdependence creates a real strategic vulnerability—especially on finance, energy, and cyber—and reduce them gradually over time. Rather than erecting barriers, diversification could achieve the same effect with much less cost.  As they look to deter Russia, the United States and Europe should also be cognizant about the precedent they are setting.

More broadly, the Ukraine crisis is also the end of over two decades of U.S. strategy to build a global order that consists of all of the major powers, including Russia. As U.S. National Security Advisor Susan Rice put it, President Obama’s original effort to integrate Russia into the order “was predicated on an expectation that Russia would play by the rules of the road, the economic and security rules of the road, international law” but Russia’s illegal annexation of Crimea “is obviously a very egregious departure from that.”

From now on, the United States will see the multilateral order as international rather than global. In other words, it will consist of a sub-set of states rather than all countries. The crucial question is whether the narrowing of the order can be limited to just Russia or if, over time, others will fall outside it as well.

Done right, a more strategic approach to integration and international order can put interdependence and globalization on more stable footing, which will serve the world well as it faces what could become a competitive and volatile couple of decades.

 

Thomas Wright is a fellow in the project on international order and strategy at the Brookings Institution. Follow him on twitter at @thomaswright08.

 

Photo credit: Fran Urbano