The Global Trading Order Is Getting Realigned – Again
The Russia question is dominating nearly every conversation in Geneva these days.
Over the past three weeks most United Nations meetings kick off with some sort of diplomatic row over Russia’s war with Ukraine.
Usually, the Ukrainian delegation will describe the horrors inflicted upon it by Russia and then Ukraine’s allies will clap and offer their support.
When it’s Russia’s turn to speak, delegates will scowl or even leave the room as Moscow’s delegation cynically attempts to deflect or deny the cruel realities of its unprovoked invasion.
For an outsider, the performance may seem like a strange sort of war-time kabuki theatre. But make no mistake, there is an unprecedented shift evolving at the multilateral level that will slowly but surely realign globalization’s trajectory.
Last week, the European Union and the group of seven countries — which includes the U.S., Japan, Canada, and Australia — announced that they would suspend their most-favoured-nation treatment for Russia, putting it in the company of other pariah states such as Cuba and North Korea.
In denying Russia its MFN treatment, these nations essentially rejected the World Trade Organization’s cornerstone principle and cast aside their belief that a rising tide will lift all boats.
If anything, Russia’s invasion and the west’s sanctions are showing that a waning tide sinks all boats.
Global Corrosion
That’s because this situation “will speed up the corrosion of globalization already underway,” argued Adam Posen, the president of the Peterson Institute for International Economics, in a recent Foreign Affairs essay.
“With less economic interconnectedness, the world will see lower trend growth and less innovation,” Posen wrote.
This will have dire effects for the developing world, where rising food and energy costs are hurting people in the poorest nations — many of whom are still struggling to respond to the Covid-19 pandemic.
But if Vladimir Putin is accomplishing anything, it’s that he’s single-handedly strengthened cooperation among the EU’s 27 members and realigned Europe and America in ways unthinkable during the transatlantic nadir of the Trump administration.
The anti-Russia bloc — which collectively accounts for 58% of the global GDP — can now use their renewed ties to foster new opportunities for economic growth.
Whether it’s through defense spending, energy investments, or standards setting, Posen urged policymakers to develop a “common market among democracies” and “create a relatively even playing field among allies that can foster healthy competition.”
If one is really optimistic – which is certainly a challenge these days – it’s plausible to think that western nations could use this crisis to forge a new international trading system focused on common ideals among groups of like-minded members.
Wouldn’t that be something?
This article first appeared here.
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Soaring Eating Expenses
Global food prices are poised to keep climbing even after jumping to a record in February, placing the heaviest burden on vulnerable populations while adding to headwinds for the global economic recovery.
Food commodity prices rose 23% last year, the fastest pace in more than a decade, according to inflation-adjusted figures from the United Nations Food and Agriculture Organization.
February 2021’s reading was the highest since 1961 for the gauge tracking prices for meat, dairy, cereals, oils, and sugar.
The war in Ukraine and sanctions on Russia are upending shipments and possibly production for 2 of the world’s largest agricultural producers.
The two countries account for nearly 30% of world wheat exports and 18% of corn, most of which is shipped through Black Sea ports that are now closed.
Wheat futures traded in Chicago, the global benchmark, recently rose to a record.
The chart illustrates how price shocks will have worldwide impact, especially on poor households for whom food is a higher share of expenses.
Food costs account for 17% of consumer spending in advanced economies, but 40% in sub-Saharan Africa. Though this region is highly import-dependent for wheat, the grain constitutes only a minor share of the total caloric needs.
Differences in diet are also significant.
In Europe, where bread is deeply embedded in many aspects of its culture, wheat makes up about a quarter of diets.
In Southeast Asia, wheat accounts for only 7% vs 42% for rice, for which price increases so far have been relatively contained.
Country-level averages, however, mask substantial differences within nations as poor households tend to eat more cereals but less meat, vegetables, and fruits compared with middle-income households.
Finally, disruption may be even greater for countries with close trade links to Russia and Ukraine, including in Eastern Europe, the Caucasus, and Central Asia. High wheat prices will weigh even more on economies in the Middle East and North Africa, such as Egypt, which are especially reliant on Russian exports.
Looking forward, reduced fertilizer supplies and higher oil prices will increase costs for harvesting, transporting and processing food.
Policymakers must prevent those pressures from fuelling food insecurity by avoiding protectionism and increasing social assistance for the poorest.
The world may also call upon the two largest economies if the situation worsens. In the United States, where about 40% of corn production goes to ethanol, policymakers could reassess that use.
And China, which holds more than half of global wheat and corn reserves, could consider releasing supplies to lower prices.