Indranil Banerjie | Seismic changes lie ahead as world faces hard times

Those who uncorked the bubbly to usher in the year 2023 were either oblivious of the profound upheavals rumbling across the globe or else could not care less. For, there is little to cheer as we look ahead: yesteryears’ global order is fast uncoupling and the world is into the fog of uncertain times.

Russian missiles slamming into Kyiv while the city celebrated a cold and forbidding New Year’s Eve could be the grim paradigm of 2023. The war in Ukraine, the Covid-19 epidemic raging across the People’s Republic of China, exploding populations, unmitigated climate change, food shortages, soaring energy costs and economies broken by the rise of the dollar are the ingredients of the emerging order.

Worse, every economic expert is talking about the inevitability of a global recession. The latest to join the chorus was IMF chief Kristalina Georgieva, who predicted that the new year will be “tougher than the year we leave behind”.

“Why? Because the three main economies, the United States, the European Union and China, are all slowing down simultaneously,” she said. Most severe is the slide in the Chinese economy which is expected to fall below global growth levels for the first time in 40 years.

The United States too is slowing as high interest rates throttle housing and other big-ticket spending, and raise the cost of business investments. In Europe, soaring energy costs are reported to have closed hundreds of small businesses.

This is not just a period of economic downturn — the likes of which the world has experienced several times in the past, the last being the 2008 global financial crisis.

The changes set off last year are seismic: gargantuan systems built up over the years are being torn asunder and new alignments are clanging into place. When Morris Chang, the legendary founder of the Taiwan Semiconductor Manufacturing Company (TSMC), recently declared that “globalisation is almost dead”, world leaders took heed. Chang was not just talking about the computer chip industry of which his company is the undisputed leader, but of the entire foundation of an economic order built upon the idea of dispersion of capital, technology and resources.

Ever since the end of the Second World War, the planet has been globalising as the United States and its allies promoted a system integrating a host of friendly economies into one interconnected whole. The semiconductor industry exemplified the globalised order: chip design was based largely in the United States, chip manufacturing largely in Southeast Asia, chip making equipment was dependent on Europe, chip making raw materials on China and manufacturers using semiconductors were spread out all over the world.

It did not matter where companies were based as long as they made innovative products at globally competitive prices. Thus, manufacturing almost entirely shifted out of the United States and moved to China. Other countries benefited as they filled gaps in the supply chain and world trade and investments kept growing. The global economy was kept lubricated by American dollars.

Chang, a key figure in America’s semiconductor industry, had moved to Taiwan to set up a chip factory because it was cheaper there than back in the US. Over the years his company, TSMC, grew into one of the world’s top ten most valuable companies and a key cog in the world economic system. It continued to invest and grow in Taiwan. Until now.

Geopolitics has thrown a spanner in the globalisation works. With China’s increasing militarisation and violent rhetoric, aimed primarily towards Taiwan, the United States and its allies realise that unfettered globalisation is not such a great idea after all. If TSMC is crippled or forcibly taken over by China, then the US economy will crater and take dozens of other economies down with it.

The Covid-19 pandemic also showed how vulnerable the world was to disruptions in chip supplies from Taiwan. Billions of dollars were lost as a chip crunch hit manufacturers across the world.

Suddenly, it had become too risky for nations to rely on the rest of the world for critical supplies. TSMC, for instance, was told that it must manufacture locally and it is now building massive factories in the United States and Japan, and plans to build in Europe too. This is the reason for Chang’s lament that has resonated in many corners of the world.

Other major changes too have surfaced. A classic example is the dramatic changes in global energy flows. Just a year ago, Europe got most of its gas and oil from neighbouring Russia. This energy supply route was established, relatively cheap and easy to access. On the other hand, India and China, the world’s largest energy consumers after the United States, procured most of their hydrocarbons from the Middle East.

Today, it is the other way around: Europe is perforce sourcing its oil and gas from the Gulf, while India and China are sucking out ever increasing volumes of Russian oil and gas. Thus, Europe’s energy supply lines have got longer and more expensive, while India and China now have more access to cheaper oil than most of the world.

Another major transformation is the visible decoupling of the Chinese economy with that of the United States and its allies, and a concomitant increase in hostilities between the two blocs. The US clampdown on Chinese hi-tech companies such as communication equipment maker Huawei, and the ban on export of high-end chips and related technology to China, has further exacerbated the rift.

The Covid-19 pandemic in China will only hasten the process as companies worldwide rush to decrease their exposure and reliance on China-centric supply chains.

The other trend of great future consequence is the attempt by more and more countries to seek alternatives to trading with the US dollar as the reserve currency. China has already made a deal with Saudi Arabia, the world’s largest oil exporter, to accept the Chinese yuan as much as possible in trade settlements. China is already using the yuan to trade with Russia. Other countries too are looking for similar arrangements to bypass the debilitating effects of an ever-strengthening dollar.

Global economic upheavals match geopolitical shifts. The most far reaching and perilous of these is the increasing confrontation between China, the second pole in global power politics, and the United States, the numero uno. For all practical purposes, this is the dawn of another Cold War.

Celebrations therefore are clearly not in order. For, as Bob Dylan once sang: “And you better start swimmin’/ Or you’ll sink like a stone/ For the times they are a-changin’.”