The global economy enters an era of upheaval

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One word has been popping up increasingly on earnings calls and in corporate filings of some of the world’s biggest companies. From Wall Street giants like BlackRock Inc. to consumer titans like Coca-Cola Co. and Tesla Inc. and industrial mainstays like 3M Co., S&P 500 chief executives and their lieutenants have used the word "geopolitics" almost 12,000 times in 2023, or almost three times as much as they did just two years ago.

It’s not just talk. Hard evidence is now emerging that all the discussions of strained international relations and more than a decade of warnings over the end of an era of globalization are finally spurring corporations to pick sides with their capital. Western multinationals that for years have avoided geopolitics in favor of pursuing profits in less mature markets are increasingly building the factories of the future in like-minded nations.

As the world’s leaders gather in New York this week for the annual United Nations General Assembly, a Bloomberg Economics analysis of UN foreign-direct investment data points to a world reorganizing into rival — though still linked — blocs that reflect UN votes on Russia’s invasion of Ukraine. Of the $1.2 trillion in greenfield FDI invested in 2022, close to $180 billion shifted across geopolitical blocs from countries that declined to condemn Russia’s invasion to those that did, the analysis found.

"This is a historic change," said Yeo Han-koo, a former South Korean trade minister, who sees a world entering an era of upheaval. "A new economic order is being formulated and that will cause uncertainty and unpredictability."

Countries that have voted to condemn Russia’s invasion account for more than two-thirds of global GDP. Photographer: Angela Weiss/AFP/Getty Images

The accelerants for the shift are obvious. Pandemic-scarred governments are pressing companies to keep national interests in mind and providing subsidies and other incentives as a carrot to bring production home. Russia’s invasion of Ukraine and a building US-China rivalry have hastened the end of a fragile post-Cold War model that saw trade and globalization boom.

So too are the potential costs and consequences that are worrying policymakers. In unusually direct language, European Central Bank President Christine Lagarde declared earlier this year that "we are witnessing a fragmentation of the global economy into competing blocs, with each bloc trying to pull as much of the rest of the world closer to its respective strategic interests and shared values."

World Remains Split Over Russia’s War in Ukraine

2023 United Nations vote calling for Russia to withdraw from Ukraine

Note: Map shows votes for distinct UN members that were present for the proceeding. Source: United Nations

There’s a good reason for the angst. Economists at the International Monetary Fund earlier this year calculated that in the most extreme scenarios in which the global economy divides into hard blocs it would destroy as much as 7% of output in the long term, a shift akin to wiping out both the French and German economies, they determined.

To be clear, the break is neither balanced nor clean. Led by the US and European Union powers like Germany, countries that have voted to condemn Russia’s invasion account for more than two-thirds of global gross domestic product. China sits at the core of the other bloc and its race to overtake the US economy as the world’s dominant one is being hit by a slowdown in growth that many see reflecting longer-term problems.

QuickTake: What ‘Friend-Shoring’ Means for the Future of Trade

Even if there is a new economic Iron Curtain descending on the world, it is a remarkably porous one. The globe’s economies are more integrated today than they have ever been and their relationships are complicated. The war in Ukraine and resulting sanctions have snarled trade in particular commodities and other events like the US-China trade wars have caused their own disruptions, but the reality is that global commerce has been resilient.

Read full article on Bloomberg.com

Reporting by Shawn Donnan and Enda Curran
Data and Analysis by Maeva Cousin
Graphics by Jennah Haque

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