Russia’s invasion of Ukraine has led to a new round of predictions that the end of globalization is nigh, much like we saw at the beginning of the Covid-19 pandemic. However, global cross-border flows have rebounded strongly since the early part of the pandemic. In our view, the war will likely reduce many types of international business activity and cause some shifts in their geography, but it will not lead to a collapse of international flows.
To understand why — and to help you think through consequences for your company — it’s essential to start with a baseline of how global flows were trending before the war. The DHL Global Connectedness Index, which our team develops at the NYU Stern Center for the Future of Management, measures globalization based on international flows of trade, capital, information, and people. We look here at the latest trends across those four categories of flows — and consider early signals of how the war might alter their trajectories moving forward.
1. Trade Flows
After plummeting at the onset of the pandemic, world trade in goods bounced back to above pre-pandemic levels before the end of 2020, and was setting new by early 2021. The main reason trade roared back so decisively, despite disruptions records to global supply chains, was a surge in demand for traded goods.
In the US, real personal consumption of physical goods rose 17% from 2019 to 2021. The last time US purchases of physical goods grew so quickly was during the recovery from World War II. In contrast, consumer spending on services (many of which require in-person contact and are less tradable than goods) was down 2% over the last two years. Until 2020, there had never been a year when US spending on goods rose while spending on services declined (according to data going all the way back to 1929).
Surging demand for goods could only translate into more trade and more consumption to the extent that supply could rise to fulfill it. Supply did expand, but it was constrained both by normal limits on how quickly capacity can be increased and by the unique circumstances of the pandemic, including large shifts in which products were in demand, sudden plant and port closures, labor shortages, and shipping delays . Without supply constraints, global trade in goods might have grown several percentage points more than it actually did in 2021.
The war in Ukraine is exacerbating supply constraints and boosting inflation. The consequences are especially severe for food and fuels, key exports from Russia and Ukraine. Countries are racing to reduce their reliance on essential imports from geopolitical rivals, but a wider retreat from international trade — which would further increase inflation — is unlikely. Several countries are actually cutting tariffs to combat inflation. The imperative to preserve cooperation with allied countries should also reduce the risk of a wider spiral of escalating protectionism.
Before the war, trade was expected to grow in 2022 and 2023. The amount of goods traded (world trade volume) is still likely to expand this year, but at a slower pace than previously — not only because of the war but also because of Covid-19 outbreaks in Asia. If demand shifts back from goods to services, that would also reduce trade growth. Meanwhile, expect faster growth in the dollar value of world trade, which is boosted by high commodity prices. Japan’s latest import data illustrate this pattern: The country imported less in February 2022, but the cost of its imports rose sharply.
2. Capital Flows
Much like trade, international capital flows also plummeted at the beginning of the pandemic, and they have also recovered. In 2020, foreign direct investment (FDI) flows (which reflect companies buying, building, or reinvesting in operations abroad) fell below $1 trillion for the first time since 2005. Record levels of economic uncertainty, unsurprisingly, prompted firms to hold off on committing to new investments.
FDI surged back to above its pre-pandemic level in 2021, and the UN Conference on Trade and Development reported a positive outlook for FDI growth as of January 2022. However, international investment in new manufacturing capacity remained weak, signaling ongoing doubts about future prospects for global value chains.
The war in Ukraine has prompted the withdrawal of more than 400 foreign firms from Russia, although this has not yet resulted in a wave of actual divestments of assets, which would reduce FDI. Since Russia hosts only 1% of the world’s inward FDI stocks, the main effects of the war on international corporate investment are likely to result from its negative macroeconomic consequences. The war could cut global GDP growth over the next year by more than one percentage point, and FDI tends to suffer during periods of slower growth, as companies focus on defending their current markets rather than expanding into new ones.
Portfolio investment constitutes another important part of international capital flows. It links financial markets but (unlike FDI) does not involve control over foreign business entities. Portfolio flows plummeted and recovered even faster than FDI at the beginning of the pandemic. But the war in Ukraine has caused a predictable — but still modest — pullback of portfolio investment from emerging markets.
3. Information Flows
International data flows surged as the pandemic sent in-person interactions online. The annual growth rate of international internet traffic roughly doubled in 2020. But that was just a one-time spike. International data flows are still growing, but they grew more slowly in 2021 than in 2019.
That fits with a broader pattern of slowing growth across other information flow measures. The growth of international scientific collaboration (as measured by the proportion of scholarly articles with co-authors in different countries) and international voice call minutes has slowed, and international payments for the use of intellectual property declined in 2020.
Looking forward, the globalization of information flows is clouded with an especially high level of uncertainty. Major are adopting very different approaches to regulating international data flows, with the potential to add substantial frictions. And as international data flows surged during the pandemic, so did cybersecurity threats. Cybercrime complaints to the US FBI roughly doubled from 2019 to 2021. The war in Ukraine increases cybersecurity risks, and it has also led to new restrictions on international information flows via social media platforms, with access to Facebook, Twitter, and Instagram blocked or limited in Russia.
4. People Flows
International flows of people have been severely restricted during the Covid-19 pandemic, due to their potential to transmit the virus and its variants. The number of people traveling to foreign countries fell 73% in 2020 and was still down 71% versus pre-pandemic levels in 2021. The pandemic reversed three decades of growth of international travel, and the war will slow the recovery, especially in Europe.
Beyond impacts on the industry and tourism-dependent tourism, the main challenge these trends have posed for companies has involved restrictions on business travel. Business travel normally plays important roles in both the internal management of multinational firms and the development of their external business relationships. Without travel restrictions, the trade and FDI recoveries might have been even stronger. Business travel is not expected to recover fully until 2025, so managers will need to continue devoting substantial attention to nurturing internal and external relationships from a distance.
Looking beyond travel, the pandemic slowed but did not reverse the growth of international migration. The number of people living outside their birth countries increased by about two million in 2020, but that was 27% less growth than the UN projected before the pandemic. The war has caused a spike in people moving across national borders involuntarily, with more than three million refugees escaping from Ukraine during just the first three weeks of military action (the largest refugee crisis in Europe since World War II).
What to Watch For
The trends we have looked at thus far highlight the resilience of global connectedness during the pandemic. Record levels of international trade and strong rebounds for most other types of international activity hardly endorse the idea that the war in Ukraine might be the last straw for an era of globalization already hobbled by the pandemic, the US-China trade war, and the UK’s exit from the EU. The war does imply a setback for the growth of international flows, but nothing close to a retreat to a world of self-contained national habitat.
Could the war, nonetheless, have a large effect on the geography of international flows? Yes, but the pivotal country to watch in this context will be China, not Russia. To gain some perspective, consider how much of the world’s trade — and other flows — takes place between countries on different sides of the current conflict.
On March 2, 2022, the United Nations General Assembly voted on a resolution condemning the invasion and demanding the withdrawal of Russian troops from Ukraine. The 141 countries that voted in favor of the resolution (plus Taiwan, which is not a UN member but has aligned with the countries voting in favor) 61% of world merchandise trade among themselves in 2020, and 70% of the world’s combined trade , capital, information, and people flows took place within this group of countries. The high proportion of international flows among this set of countries, which includes the US, EU, Japan, and South Korea, suggests some limits on the extent to which this conflict itself could reshape the geography of globalization.
Of the 39% of world trade that was not between countries that voted for the UN resolution condemning the invasion, the majority was with China:
- 23% of world trade was between China and countries that voted for the resolution
- 2% was between Russia and countries that voted for the resolution
- 9% was between other countries that did not vote for the resolution (such as India and Vietnam) and countries that did not vote for the resolution
- Just 5% was among countries that did not vote for the resolution (including trade between China, Russia, India, and all others in that category)
Looking at globalization more broadly — based on trade, capital, information, and people flows — the patterns are fairly similar, with China dominating the flows among countries that did not support the UN resolution. (The same message also comes through, though to a lesser extent, if countries are classified based on sanctions policies rather than their UN votes.)
These data highlight China’s pivotal role in the extent to which the geography of globalization will shift moving forward. Relations between China and its geopolitical rivals have been deteriorating for several years, and the war is likely to accelerate that trend. Two key developments to watch are 1) how far the decoupling trend broadens beyond the strategic technology sectors where it is already apparent and 2) whether it continues to advance gradually or if a crisis causes a sudden break. The gradual scenario is still much more likely, but the war in Ukraine provides a vivid illustration of how quickly individual countries can disconnect in the face of extreme threats.
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As companies contemplate adjustments to their global strategies, it is important to recognize how much continuity there is still is even in a period of wrenching change. The idea of a world where economic efficiency alone drives patterns of international flows was always a myth. Globalization has always been an uneven process, with cross-country differences and international conflicts significantly dampening international flows. That’s a big part of why — even before the present crisis — only about 20% of the global economic output ended up in a different country from where it was produced.
The growth and geographic reach of international flows can rise and fall over time, but the fundamental drivers of success in global strategy remain unchanged. The similarities and differences between countries define the landscape for international value creation, and the task of the global strategist is to navigate the opportunities and threats presented by both the bridges and the barriers between markets. As the landscape shifts, global strategies must be updated, but managers should avoid the costly overreactions that tend to follow major shocks to globalization.