It may have been simply a matter of time before the Age of Economic Globalization came to an end, with the emergence of an increasingly assertive authoritarian bloc led by China and Russia, but Russia’s invasion of Ukraine appears to have ended it with a thud.

In a speech to the Atlantic Council on April 13, U.S. Secretary of the Treasury Janet Yellen presented a very plausible basis for the politico-economic order of the near future, assuming Russia and its authoritarian allies don’t back down at this time — a world of trading blocs, much like the original Cold War. On April 22, Christine Lagarde, president of the European Central Bank, echoed Yellen’s thoughts in a keynote speech at the Peterson Institute for International Economics in Washington, D.C.

This probable breakdown in the global economic order has the potential to be a massive boon for Canada’s energy sector, old and new — including so-called green metals — alike, with the ‘True North strong and free’ firmly planted at the heart of the democratic bloc. This is especially the case with many of our present and future energy competitors either sitting on the fence in the budding non-aligned bloc, or worse.

At the same time, the demise of globalization will have substantial negative economic impacts. These include a slower pace of innovation and technological advancement, according to Adam Posen, president of the Peterson Institute, in a recent article in Foreign Affairs. Since green hydrogen has a long way to go to be economically competitive with blue hydrogen, a slower pace of technological advancement could mean a wider window of opportunity for Canadian gas producers to bring on world-scale clean hydrogen projects.

In Part 1 of this two-part series, I will discuss Yellen’s speech to the Atlantic Council, provide a thumbnail sketch of the likely composition of the trading blocs of the near future, and discuss the economic impacts of global economic de-integration, as put forth by Posen, including the reasons for our less vibrant technological future.

In Part 2, I will show how the New World Economic Disorder could provide a golden opportunity for Canadian producers and exporters of crude oil, LNG and/or blue hydrogen and green metals, especially if the federal government adopts a more supportive regulatory regime.

The New World Economic Disorder

As a rule, since the end of World War Two, the U.S. has attempted to promote global economic integration through the Bretton Woods system — International Monetary Fund (IMF), World Bank (WB), and what became the World Trade Organization (WTO) — with the twin goals of greater global economic prosperity and a peaceful international order. The U.S. as much as achieved global economic integration, but not its twin goals, with the collapse of the Soviet Union in 1991 and China’s accession to the WTO a decade later.

But during her speech to the Atlantic Council, Yellen said the U.S. may have to prioritize security concerns over economic integration in the aftermath of Russia’s unprovoked invasion of Ukraine. In particular, she introduced the new concept of “free but secure” trade, which would reorganize previously global supply chains around “friend-shoring” — a limited set of trusted countries who have supported Western economic sanctions against Russia. Yellen went on to say that America’s potential shift in trade policy was primarily dependent upon China’s response to Russia’s invasion, as much as drawing a line in the sand for the rising authoritarian bloc.

Lagarde, in her speech to the Peterson Institute, was even move explicit, saying Russia’s invasion could be a tipping point, shifting the global economy from “efficiency to security, and globalization to regionalization.”

Yellen’s threat of global economic de-integration appears to have fallen on deaf ears with the Chinese government. For example, on April 29, Chinese Foreign Ministry spokesman Zhao Lijian said: “An important takeaway from the success of China-Russia relations is that the two sides rise above the model of military and political alliance in the Cold War era [and] commit themselves to developing a new model of international relations.” Ironically, the new model is based on not causing confrontations or targeting other countries, Zhao added.

Since the invasion, China has also repeatedly said that it stands behind the ‘no limits’ friendship that Chinese President Xi Jinping and Russian President Vladimir Putin announced between their countries in early February, shortly before the Beijing Winter Olympics.

This may be because Xi has already accepted the world may again be splitting into trading blocs. Speaking to a political meeting on March 6, shortly after Russia invaded Ukraine, Xi said food security is now a core issue for his country — the U.S. Navy continues to control the global sea lanes.

New trading blocs

The ideological basis for the trading blocs should be similar as during the original Cold War — democratic versus authoritarian, and a non-aligned bloc of fence sitters — but the composition of each is likely to differ somewhat.

Based on Yellen’s concept of friend-shoring, as well as voting in the UN General Assembly to condemn Russia’s invasion of Ukraine and the human rights abuses its armed forces are committing in the country, the democratic bloc should be made up of Canada and the U.S. in North America, numerous European countries, and Australia, Japan, New Zealand, Singapore and South Korea in Asia-Pacific. To date, Singapore is the only non-democratic country actively supporting Western economic sanctions against Russia.

The rising authoritarian bloc is led by China and Russia, and should include other Asian members of the Shanghai Cooperation Organization (SCO) — with the probable exception of democratic India, and including Iran once its membership is finalized — and the usual suspects elsewhere in the world — including Cuba, Nicaragua, North Korea and Venezuela. The non-aligned bloc is likely to be even larger this time around because global economic integration has made far more countries dependent upon both the democratic and authoritarian blocs for trade, finance and aid.

It is important to note that the West’s long-time allies in the Mideast Gulf region have neither supported the economic sanctions against the Russia nor agreed to provide lost volumes of oil to the global market as they have done during past oil crises, such as Iraq’s invasion and annexation of Kuwait in 1990 and the U.S. invasion of Iraq in 2003. And as of now, the absolute monarchies of the Mideast Gulf may see their interests more closely aligned with Russia, a fellow OPEC+ member, and the authoritarian bloc than they do with the democratic bloc.

According to Chinese state television, Crown Prince Mohammed bin Salman, the de facto leader of Saudi Arabia, and Xi spoke on April 15, discussing the Ukraine situation as well as the possibility of “high-level” energy, trade and high technology co-operation between China and the Kingdom. 

Economic impacts

In the previously mentioned Foreign Affairs article, published on March 17, Posen wrote “it now seems likely that the world economy really will split into blocs” and that “the economic consequences for the world will be immense.” He expanded on these thoughts as follows:

“The invasion and sanctions … will speed up the corrosion of globalization already underway, a process that will have broad impacts. With less economic interconnectedness, the world will see lower trend growth and less innovation [and that] will have negative consequences for technology. Innovation is faster and more common when the global pool of scientific talent is engaged and can exchange ideas and share proof, or disproof, of concepts. But there is a politically compelling reason for states to try to make sure that only allies have access to their technology, even if restrictions are of dubious military relevance … The likely result will be a decline in innovation, as U.S. and other Western research institutions deprive themselves of many talented Chinese and Russian students and scientists.”

Part 2 will show how the New World Economic Disorder could provide a golden opportunity for Canadian producers and exporters of crude oil, LNG and/or blue hydrogen and green metals.