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Our world is in upheaval

Where are globalisation and trade relations heading? And how does this fit with our efforts to protect the environment? Prof. Lisandra Flach and Dr Guido Baldi shed light on the current situation.

Credits: DIW, IFO
The calls by society for change are becoming increasingly louder. Have we reached a point where our world is radically changing – irrespective of whether we’re talking about reglobalisation, transformation or paradigm shifts?
The pandemic and the war in Ukraine are turning points, in a way. Many companies are rethinking their supply chains and their procurement strategies. They’re reassessing the global risks, especially in view of the geo-economic tensions. But this doesn’t mean the end of globalisation, rather a reassessment of it and changes to it.

Baldi:It’s definitely true that our world is in upheaval. Whether we should call it radical in a historical context is up for debate, but there are far-reaching structural changes on the horizon, without a doubt. Restructuring our energy supply in light of climate change as well as the current war in Ukraine is an enormous short-term challenge.

Globalisation will probably not recede completely, but its face is changing. At the moment, indications suggest that we could end up with a world consisting of different blocs, led by the USA and China. Nevertheless, we shouldn’t forget that such structural changes can always take us in a new direction that we can’t really visualise yet. For example, only a few people foresaw the fall of the Soviet Union and German reunification.

What – in your view – will change most dramatically as the world economy progresses towards a new order, compared to how it is at present?
Companies are calculating global risks more and recognise the importance of investing in more resilient supply chains. Policymakers recognise the importance of the environment and politics when shaping trade policy.

Baldi: Global risks are on the rise as more and more events are transpiring throughout the world that we can’t imagine. International rules are less likely to be enforced or bent, for example in conflicts or in international trade. Russia justified its war of aggression on Ukraine very adventurously under international law, so as to give the impression that it was legal. International trade rules are less respected, which increases the risks of unexpected tariff increases or other trade restrictions.

“Indications suggest that we could end up with a world consisting of different blocs, led by the USA and China.”

Dr Guido Baldi, Research assistant in the Department of Economic Policy at DIW Berlin



Which path is better for Germany and for Europe in the future – more or less global trade? And what’s the best response to China’s economic dominance?

Flach: We can’t turn back globalisation, but the way we understand globalisation will change. For example, globalisation in services – such as financial services and software engineering – will continue to develop rapidly.

Baldi: We shouldn’t underestimate the benefits of trade, which is why a general call for less trade wouldn’t work. But diversification is important. We should become less dependent on individual countries for supplying us with important raw materials, such as natural gas, rare minerals, lithium and so on. Diversification is also important in export markets as the “Chinese economic miracle” is ending. High growth in exports to China can no longer be expected, even if the country’s size means it should remain a significant market.

What must happen for economic interests and environmental protection not to interfere with each other?
As I see it, we should focus primarily on shaping trade policy according to climate protection interests.

Baldi: It’s always argued that economic interests and protecting the environment are mutually exclusive, but that doesn’t have to be the case. Greenhouse gas emissions do usually constitute what is known as a negative externality. Companies or households that emit these greenhouse gases, for example when flying or generating energy, don’t bear the costs of the resulting climate change without government intervention, and the economic interests don’t then harmonise with environmental protection. Actually, though, we know very well how state regulation can cause private companies and households to reduce their greenhouse gas emissions. This can be done through direct taxation of greenhouse gases, through tradable emission rights, or through direct regulations in which, for example, the combustion engine is banned after a certain year. Furthermore, subsidies play a key role, for example in promoting the renovation of buildings or the development of new technologies. Economic interests and environmental protection are thus not mutually exclusive, but some state intervention is required to steer private parties towards the latter. The problem in the past was that politics tended to act too hesitantly. (bre)

“We can’t turn back globalisation, but the way we understand globalisation will change.”

Prof. Lisandra Flach, Professor of Economics, in particular the Economics of Globalisation, and Head of the Centre for Foreign Trade at the Ifo Institute in Munich

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