The fragile global economic balance: Is an unprecedented crisis looming?

At first glance, it seems that the world economy is reassuringly resilient. The United States has grown even as its trade war with China has escalated. Germany has overcome the loss of Russian gas supply without suffering an economic disaster. The war in the Middle East has not caused an oil crisis. The Houthi rebels launching missiles have hardly affected the flow of goods globally. As a percentage of global GDP, trade has recovered from the pandemic and is forecasted to grow healthily this year. But upon closer inspection, we see the weaknesses. For years, the order that has governed the global economy since World War II has been weakened and is now on the brink of collapse. A worrisome array of triggers could lead to a descent into anarchy where power reigns and war once again becomes the recourse of major powers. Even if conflict never arises, the economic impact of a breakdown in norms could be swift and ruthless. The disintegration of the old order can be seen everywhere. Sanctions are being used four times more than in the 1990s; recently, the United States has imposed "secondary" sanctions on entities supporting Russian armies. A subsidy war is underway as countries try to emulate the extensive state support for green manufacturing offered by China and the United States. Despite the continued dominance of the dollar and the resilience of emerging economies, global capital flows are beginning to fragment. The institutions that safeguarded the old system are either extinct or rapidly losing credibility. Next year, the World Trade Organization turns 30, but it will have been paralyzed for over five years due to neglect by the United States. The IMF is experiencing an identity crisis, caught between promoting an environmental agenda and ensuring financial security. The United Nations Security Council is paralyzed. And, as reported, conflicting parties are increasingly using supranational courts, such as the International Court of Justice, as weapons. Last month, some U.S. politicians, including Mitch McConnell, the Senate Republican leader, threatened to sanction the International Criminal Court if it issues arrest warrants against Israeli leaders, whom South Africa has also accused of genocide before the International Court of Justice. So far, fragmentation and deterioration have imposed a covert tax on the global economy: noticeable, but only if we know where to look. Unfortunately, history has shown that there can be more chaotic and profound collapses... and that these can come suddenly when deterioration is already underway. World War I ended a golden age of globalization that many at the time assumed would last forever. In the early 1930s, after the onset of the Great Depression and the Smoot-Hawley Tariff Act, U.S. imports plummeted by 40% in just two years. In August 1971, Richard Nixon unexpectedly suspended the convertibility of dollars into gold; only nineteen months later, the Bretton Woods system of fixed exchange rates collapsed. It seems that a similar rupture may be looming today. Donald Trump's return to the White House, with his zero-sum worldview, would continue to weaken institutions and norms. Fear of a second wave of cheap Chinese imports could accelerate this. An open war between the United States and China over Taiwan, or between Russia and the West, could lead to a collapse of enormous proportions. In many of these scenarios, the loss will be greater than many people believe. It is fashionable to criticize unrestricted globalization as the cause of inequality, the global financial crisis, and a lack of attention to climate change. But the achievements of the 1990s and 2000s -- the peak of liberal capitalism -- are unprecedented. Hundreds of millions of people were lifted out of poverty in China when the country integrated into the global economy. Infant mortality rates are less than half of what they were in 1990. The percentage of the global population killed in state-based conflicts reached a postwar low of 0.0002% in 2005; in 1972, it was nearly 40 times higher. Recent research shows that the era of the "Washington Consensus," which current leaders are hoping to replace, was a time when poor countries began to enjoy growth recovery and narrow the gap with wealthy countries. The deterioration of the system threatens to slow down that progress, or even reverse it. Once fractured, it is unlikely that new rules will replace it. Instead, international affairs will revert to their natural state of anarchy that favors banditry and violence. Without trust or an institutional framework for cooperation, countries will struggle more to address the challenges of the 21st century, from containing an arms race in artificial intelligence to collaborating in space. Issues will be addressed by clubs of like-minded countries. Perhaps that will work, but it will involve more frequent coercion and resentment, such as with carbon tariffs in Europe or China's animosity towards the IMF. When cooperation gives way to imposition, countries have less reason to maintain peace. For the Chinese Communist Party, Vladimir Putin, or other brazen actors, a system where power reigns would be nothing new. They view the liberal order not as an enactment of noble ideals, but as an exercise of raw American power, a power that is now in relative decline. It is true that the system established after World War II achieved a marriage between U.S. internationalist principles and its strategic interests. But the liberal order also brought many benefits to the rest of the world. Many of the world's poor are already suffering from the IMF's inability to resolve the post-COVID-19 sovereign debt crisis. Middle-income countries like India and Indonesia, hoping to forge their path to wealth through trade, are seizing opportunities created by the fragmentation of the old order, but ultimately they will depend on the global economy remaining integrated and predictable. And the prosperity of much of the developed world, especially small and open economies like the UK and South Korea, relies entirely on trade. Shored up by strong U.S. growth, it may seem that the world economy can survive whatever is thrown at it... but it cannot.