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From left: Brazilian President Luiz Inacio Lula da Silva, Chinese President Xi Jinping, South African President Cyril Ramaphosa, Indian Prime Minister Narendra Modi, and Russian Foreign Minister Sergei Lavrov in South Africa on August 23. Raise your skills at the BRICS summit held in Johannesburg. , 2023.ALET PRETORIUS/The Canadian Press
Jeff Rubin is the former Chief Economist and Chief Strategist of CIBC World Markets. His most recent book is A Map of the New Normal: How Inflation, War, and Sanctions Will Change Your World Forever, from which this essay is excerpted.
In the early 1960s, only 4 percent of countries were subject to economic sanctions by the United States or the United Nations, accounting for less than 4 percent of world trade.
Currently, 54 countries, a quarter of the world, are subject to some form of sanctions, affecting almost a third of global GDP. And at the rate at which sanctions are currently being applied, they will soon become the bulk of trade.
The world is embroiled in an increasingly intense global trade war. Almost every day new sanctions are imposed and reciprocal actions against Western products are triggered.
Where does this lead? Will the West be able to win these wars as they have in the past? If not, what are the consequences if you lose?
In addition to sanctions, a new world order has emerged in which the United States and its NATO allies can no longer use economic and military power to unilaterally dictate terms to the rest of the world.
A growing number of economic heavyweights from developing countries, including America's main adversaries China and Russia, are joining the BRICS economic alliance, which includes former adversaries Saudi Arabia and Iran. Dozens more countries have signed up to participate.
Together, they are challenging the dominance of Western economic power on a scale not seen in a century. Nowhere is this more evident than in the trade war over Ukraine, which began with a full-scale Russian invasion in 2022.
As more BRICS members join, the scope of Western sanctions will shrink. Instead of isolating Russia as a pariah, sanctions have fragmented the world economy into competing geopolitical blocs.
Of course, Russia itself is used to Western sanctions. What U.S. President Joe Biden and Western allies have not realized is that since Russia annexed Crimea in 2014, if not earlier, it has been trying to avoid economic sanctions in anticipation of economic retaliation from NATO countries. This is something I have been busy working on.
And more importantly, Western countries do not fully understand how the rest of the world, especially the emerging Global South, has changed and the role it can play in removing the blow from sanctions. That is to say.
It turned out to be a fatal miscalculation. In the past, the loss of Western markets, especially Russia's energy exports, the lifeblood of Moscow's war machine, would have dealt a fatal blow to the Russian economy, but that is certainly not the case now.
Russia is pivoting its economy away from Western European markets and toward its BRICS partners in Asia, especially China and India. These countries steadfastly ignore the US threat and welcome sanctioned Russian products into their vast, rapidly growing economies. Last year, Russia's energy export earnings hit a record high.
An even bigger miscalculation by the Biden administration and its allies was ignoring how sanctions could boomerang back into their economies and open a Pandora's box of unintended consequences.
The most obvious of those effects is the resurgence of inflation, which had been dormant for more than 40 years. Sanctions triggered a dramatic resurgence.
Sanctioning shipments from the world's largest energy and grain exporters would affect the prices of alternative supplies. Rising food and energy prices have pushed inflation to levels not seen since the OPEC oil crisis. This forced central banks such as the Federal Reserve and the Bank of Canada to grudgingly raise their target interest rates from near zero to the 5% range, resulting in a catastrophic rise in interest rates.
These central bank interest rate hikes, in turn, caused the largest correction in the otherwise solid but supposedly safe government bond market since before the Civil War (1860 for the benchmark 10-year Treasury bond).
While the North American economy weathered the storm (save for the failure of a few local banks in the US), the European Union was not so lucky. Rising energy costs and soaring interest rates have pushed the entire EU economy into recession, particularly Germany, and a similar situation is occurring in the UK. Meanwhile, the Russian economy experienced a very modest decline in the first year of sanctions, before GDP reached a new peak.
While the short-term consequences were disappointing, the long-term effects of sanctions could be even more alarming.
Historically, trade restrictions have been a regular area of ​​economic warfare, but today sanctions are also spreading like a deadly contagion to capital and currency markets. And just like with trade, there is a boomerang effect.
Sanctioning the ruble and confiscating a third of Russia's central bank's foreign exchange reserves would have crippled the Russian economy. On the contrary, the US dollar has already lost its 50-year status as the world's oil currency, and its once unparalleled status as the world's sole reserve currency for almost the entire postwar period will soon be even greater. There is a possibility that it will happen.
Similarly, the ultimate consequences of a Western company abandoning its operations in Russia or refusing to sell goods or services on the Russian market could ultimately fall on those same Western companies. .
Instead of forcing Russian consumers (and perhaps soon Chinese consumers as well) to live without Western products, sanctions create a vacuum in these markets that is rapidly filled by the growth of indigenous companies. It's coming. These companies may not only displace Western companies in their home market, as Russia is already doing in aerospace, but may also eventually compete with Western companies in third markets, especially in the BRICS countries. unknown.
The same goes for the effectiveness of U.S. sanctions aimed at blocking China's access to cutting-edge semiconductor technology. Nothing could be a greater stimulus to the growth and development of China's chip industry than US attempts to block access to cutting-edge technology. Check out Huawei's new 5G phone. This is technology that Huawei should not have had.
Did the United States and its NATO partners, which have encouraged the development of alternative homegrown industries in BRICS countries, encourage the development of new commercial competitors between their geopolitical rivals?
But perhaps the biggest casualty of sanctions is the world trade order that governments have repeatedly assured us is the foundation of our collective prosperity. At least 11 sanctions (and likely more to come) have failed to crush the Russian economy as promised, but they have managed to disrupt the very global trading order we are all supposed to hold dear. Shattered.
The exclusion of Russian and, increasingly, Chinese products from Western markets, as well as the ban on investment in and from those countries, is a system premised on the free flow of goods, capital and technology. It damages the And it fundamentally changes the way our economy operates.
Instead of promoting the highly specialized division of labor that globalization forces, sanctions encourage economies to turn inward to meet the needs of domestic markets. Adapting to a world of sanctions requires local economies to become jacks of all trades, rather than specializing in production according to their natural comparative advantage. And that transformation is occurring not only in the economies that are subject to sanctions, but also in the economies of the sanctioning countries themselves.
For countries that lack the resources to be self-sufficient (and most countries do), friend-shoring is a new way to secure supplies from abroad amidst the many obstacles currently impeding global trade. We provide chart books. Friend-shoring essentially means doing business with political allies rather than geopolitical rivals.
The goal is to overturn the very dynamics of international trade (comparative advantage), although this may be referred to as “decoupling'' or “risk aversion''.
As any economics student can tell you, if Ricardo's maxim of comparative advantage makes everyone better off, sanctions have the opposite effect. But the logic of economics no longer seems to matter. In a world that seems to be moving inexorably towards world war, economically if not militarily, then certainly, security of supply is all that matters.
In a world where economic warfare has become the norm, friend shoring has the potential to make supply chains even more secure. But the only problem with friend-shoring is that most of America's friends are in high-wage economies like our own. It's the last place a global giant like Apple would want to manufacture its products.
If Apple produced iPhones in its home state of California, where the minimum wage is $15.50 an hour, instead of in China, where its main supplier Foxconn pays $1.50 an hour, it probably wouldn't be able to afford it. And it doesn't just apply to Apple. This applies to virtually everything imported from China.
Generations of Western consumers have become accustomed to reaping the price benefits of cheap labor overseas by reorganizing global supply chains along geopolitical axes rather than considering cost. For many people, world prices will become even higher.
Trade is no longer driven by economic imperatives. Instead, international trade will be driven by geopolitical considerations. Suddenly, a country's government's foreign policy, rather than its industry's cost competitiveness, determines trade flows. At least from an economist's point of view, the emergence of a new world order will be far less efficient than the old one that is rapidly being replaced.
As far as the United States, the leader of the sanctions, was concerned, it did not really matter whether it was under a Democratic or Republican administration. No matter which party is in the White House, sanctions are on the rise. The number of sanctions imposed by the Office of Foreign Assets Control jumped from 540 per year under Obama to 975 per year under Donald Trump and 1,175 under Biden.
Sanctions are no longer an exception. Rather, they have become part of the new normal. And so are the results.
