Out of the rubble of World War II, we collectively and deliberately built an institutional order that established norms of acceptable behavior and placed constraints on powerful nations. While work remains to create broader economic opportunity and some regions have suffered terrible conflict, the economic and financial globalization that this order fostered nevertheless yielded the greatest period of peace and economic prosperity that humanity has ever known. The more than 70 years since the war’s conclusion are, however, very atypical, and we are now returning to a setting far more familiar to any student of history, where strength and power supersede norms and rules. The world is characterized by a renewed struggle between illiberal autocracy and liberal democracy.
What does this mean for business leaders who have to navigate an environment that is fundamentally more dangerous? Among many concerns worth considering, there are three that deserve particular attention: de-globalization, unreliable access to energy and a risk to U.S. dollar dominance.
Without any hyperbole, we are facing a risk of significant de-globalization, yielding a fragmentation of economic activity that will be increasingly delineated by spheres of influence. In such a setting, political risks – or the notion that various governments may engage in actions that negatively affects a firm’s assets or operations – become first order. An obvious consequence is a further acceleration of the conversation about supply chain resilience. While political risks resemble the low-probability/high-impact supply chain disruptions that are now far better appreciated post-pandemic, resilience, like all forms of business insurance, is costly. Further, as capital expenditures and other business initiatives are impeded, otherwise compelling growth opportunities are left on the table. These lost opportunities come not only at the expense of multinational firms and their investors, but also are felt sharply by recipient countries (including many striving to develop). Finally, to the extent that this fragmentation engenders a reversal in the multi-decade reduction in global tariffs, households around the world will pay more for lower-quality products.
Second, critical commodity markets will be less reliable in an economically fragmented world. Given the growing divide between exporters and importers, energy markets are particularly vulnerable and will be characterized by both higher and more volatile prices. Firms will have no choice but to internalize these challenges. However, policymakers need to provide a thoughtful, two-pronged strategy to remove some pressure. We need to use this rift as a spur to push alternative energy technologies that are critical to drive the health of the planet going forward. However, as these technologies cannot replace the current energy needs of the world, we need to lean into the remarkable technological advances in traditional energy extraction that have transformed America into an energy powerhouse. Further, these sources of traditional energy are both relatively cleaner and offer the benefit of sidelining disruptive actors. (On the latter, I can hardly imagine anything more beneficial from a national security perspective.)
Last, while it seems almost inconceivable that the dominance of the U.S. dollar in facilitating global transactions is in doubt, this episode must serve as a reminder that our current institutional order and the centrality of the dollar are intertwined. While this arrangement has offered global businesses tremendous benefits in the form of predictability and limited transaction costs, a fragmentation in trade and finance will risk a balkanization of transaction modes. The current weaponization of the dollar trading system as part of the sanction machinery – while entirely appropriate – does elevate the incentives for potentially sidelined global players to consider alternatives. One must ask whether this is the ultimate push that transforms cryptocurrency. Or might this fragmentation offer new opportunities for the Chinese central bank’s digital RMB experiment? While these are interesting questions, global businesses currently move trillions of dollars around the world every day at extremely low cost. Fragmentation is inevitably costlier.
Amongst the nations committed to liberal democracy, it’s long past time to appreciate and defend our institutional order. The unfortunate irony is that the peace and prosperity that we achieved has been with us for so long now that it has bred a lack of appreciation and even complacency; the generational memory of those who witnessed the treacherous other side, and then engaged in the hard work of building their future, is increasingly no longer with us. Perhaps the inspirational example of the Ukrainian people resisting the danger in the interests of something larger than themselves can rekindle this understanding among the rest of us. No matter what, however, this will not be without inevitable costs that both we as individuals and business leaders must bear.
This commentary was written by Kenan Institute Director of Research Christian Lundblad. Lundblad is also the Richard “Dick” Levin Distinguished Professor of Finance at UNC Kenan-Flagler Business School.
The World Has Changed