The War in Ukraine and Globalization 

We will cripple the Russian economy by cutting off their access to world markets. They will have to buy Russian.

We will strengthen the American economy by cutting off our own access to world markets. Buy American!

Both sentiments are circulating in the U.S. at the same time. If you don’t see the contradiction, you should probably stop reading. Cutting Russia off from external markets will definitely make it poorer but it will also hurt its former trading partners.

Without specialization and trade, we would all (the 99% of us) be poorer than dirt. See my very elementary explanation: “Econ-101-Trade in Very Simple Terms” This is why reducing Russia’s access to trade beyond Russia’s borders (cross border trade) will punish Russia and make it poorer. But this is often not properly understood even by very smart people: “Tony Judt on trade”

Trade is win-win, meaning that both the seller and buyer are better off as a result of their trades (assuming that their transactions are voluntary). Obviously then, restricting trade is lose-lose. Both sellers and buys are worse off as a result of restricting trade. I note this fact in my discussion of restricting trade with Russia: “How to Stop Russia in Ukraine” However, the rest of the world will have to scramble to replace Russian oil, gas, Ukrainian wheat, etc, and will pay higher prices for the substitutes.

Countries that impose trade restrictions on themselves (e.g., via tariffs) are often indulging in a form of corruption by enriching (“protecting”) favored industries or firms by reducing the competition they face from abroad (so called cheap Chinese labor, etc.). But trade policies and decisions can be more complicated than that.

Trade creates interdependencies. If a truck strike, or bad weather, or a cow disease, prevents the yogurt you no longer produce yourself from reaching your market (the local Safeway), you will go without it for a while. If semiconductors produced in Taiwan can’t reach American auto manufacturers on time and in sufficient numbers, car production is slowed. In short, supply chains that generally lower the cost of producing whatever, thus benefiting consumers, also increase the risks of supply chain interruptions. Businesses must (and do) evaluate the cost-risk trade off seeking a reasonable (profit maximizing) balance.  

Some products, e.g., those related to our national defense, are sufficiently critical that the government forces producers to forgo the economic efficiencies of importing them in order to minimize the risks of supply interruptions, especially in war time. While this is often justified, the line between risk reduction for national defense and corruption to buy votes or benefit friends is sometimes fuzzy. But no one can believe that buying steel from Canada is a national security risk as Trump claimed and as I note here: “Econ-101- Trade Deficits”  Buy American policies are more often in the corruption rather than the national interest category.

There is also an interesting political dimension to trade currently in our faces. The dramatic growth in trade in goods and services (from $63 billion in 1950 to $17,249 billion in 2020 “Worldwide export volume in trade since 1950”), has produced a dramatic reduction in poverty around the world (from 76% of the global population in extreme poverty in 1820 to 10% in 2018 “Extreme poverty in brief”’). It has also created significant interdependence between countries. This has positive and potentially negative aspects. While depending on Russia, China, Mexico, etc. for many of the things we enjoy (and sometimes even need) creates economic incentives to retain peaceful relationships, it also (the other side of the same coin) creates vulnerabilities and thus economic weapons to punish bad behavior. If the trade didn’t exist in the first place, cutting it off couldn’t be used to punish Russia. While we can inflict economic pain on Russia for its war on Ukraine by cutting off its access to our goods and services, Russia can and is inflicting pain on those of us who invested in Russia and who depend on Russian oil and enjoy Russian caviar.  

The pain some in the West have inflected on themselves (and the rest of us) out of their anger at Putin by canceling our enjoyment of Russia’s rich culture, is beyond comprehension coming from so called adults. “Russian musicians, artists, athletes and other cultural figures are facing broad backlash as Russian President Vladimir Putin has continued to press his relentless and increasingly brutal invasion of Ukraine.” “Ukraine war-be careful canceling Russia”

Among the tragedies of the physical and human losses in Ukraine, and the disruption of the lives of millions of Ukrainian refugees, are the damage to trading relationships and the global order. See my commons in:  “Ukraine-Russia-Nato”  We failed to deal properly with Russia and its concerns the first time around after the USSR was dissolved. It will take a long time to repair the damage done to the international order by Russia’s attack on Ukraine. We need to do a better job next time around.  “Western sanctions on Russia are like none the world has seen” We also need to better address the costs to those who must seek out new jobs and skills as a result of new technology and greater labor productivity, to which trade contributes. “Our Social Safety Net”

Author: Warren Coats

I specialize in advising central banks on monetary policy and the development of the capacity to formulate and implement monetary policy.  I joined the International Monetary Fund in 1975 from which I retired in 2003 as Assistant Director of the Monetary and Financial Systems Department. While at the IMF I led or participated in missions to the central banks of over twenty countries (including Afghanistan, Bosnia, Croatia, Egypt, Iraq, Israel, Kazakhstan, Kenya, Kosovo, Kyrgystan, Moldova, Serbia, Turkey, West Bank and Gaza Strip, and Zimbabwe) and was seconded as a visiting economist to the Board of Governors of the Federal Reserve System (1979-80), and to the World Bank's World Development Report team in 1989.  After retirement from the IMF I was a member of the Board of the Cayman Islands Monetary Authority from 2003-10 and of the editorial board of the Cayman Financial Review from 2010-2017.  Prior to joining the IMF I was Assistant Prof of Economics at UVa from 1970-75.  I am currently a fellow of Johns Hopkins Krieger School of Arts and Sciences, Institute for Applied Economics, Global Health, and the Study of Business Enterprise.  In March 2019 Central Banking Journal awarded me for my “Outstanding Contribution for Capacity Building.”  My recent books are One Currency for Bosnia: Creating the Central Bank of Bosnia and Herzegovina; My Travels in the Former Soviet Union; My Travels to Afghanistan; My Travels to Jerusalem; and My Travels to Baghdad. I have a BA in Economics from the UC Berkeley and a PhD in Economics from the University of Chicago. My dissertation committee was chaired by Milton Friedman and included Robert J. Gordon.

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