As anyone who drives knows, gasoline prices have risen significantly from their 2020 lows. First, the global economic recovery boosted demand for oil, then Vladimir Putin’s invasion of Ukraine reduced Russian oil exports. But pump and wellhead prices have stabilized, at least for now. By historical standards, real gas prices—prices relative to the overall cost of living—are not that high; in fact, they’re lower than they were from 2006 to 2014. And as of this morning, Texas crude oil is back below $100 a barrel.
Yet while the energy crisis may be a little less severe than some imagine, there is a huge global food supply crisis. Indeed, over the past year, the spike in wheat prices has been much larger than the spike in oil prices:
It hurts here in America, but it hurts much more in poorer countries, where a much larger share of family spending goes to food. What’s behind the food crisis?
One piece of the story is obvious: Ukraine is normally a major agricultural exporter, but that’s hard to do when Russia is bombing your railroads and blockading your ports. But there is more to the story: Russia halted much of its own grain exports, apparently in an effort to contain domestic prices. Kazakhstan, the region’s third-largest agricultural exporter, followed suit.
Then there is the fertilizer. Modern fertilizer production is energy intensive. Before the war, Russia was the world’s largest exporter, but Russia has now suspended those exports. However, it is not just Russia. As new analysis by Chad Bown and Yilin Wang of the Peterson Institute for International Economics points out, China – another major fertilizer producer – cut off much of its exports last year, again in an apparent attempt to keep domestic prices low. And as they point out, such export bans are, in fact, a bigger problem than the tit-for-tat tariff hikes of the US-China trade war.
All of this is causing big problems for agriculture around the world, especially in emerging markets like Brazil.
It’s bad. It is also an important lesson on the relationship between geopolitics and globalization.
A lot of people, I think, imagine that globalization is a fairly recent development. Economic historians know, however, that a surprisingly integrated global economy emerged between about 1870 and 1913, made possible by the advanced technology of the time: steamships, railroads, and telegraphs. At the beginning of the 20th century, the British were already eating Canadian wheat, Argentinian beef and New Zealand lamb.
Then geopolitics – wars, the rise of totalitarianism and protectionism – killed much of this first wave of globalization. Trade only resumed with the post-war establishment of the Pax Americana, and it took about 40 years to restore world trade to 1913 levels:
What is true is that this first wave of globalization was relatively simple and largely consisted of an exchange of manufactured goods from advanced economies for primary commodities like, well, wheat. The complex value chains that characterize the modern global economy, in which, for example, cars made in rich countries include chips from Japan and wiring harnesses from Mexico and Ukraine, are indeed a development largely post-1990, made possible in large measure by containerization and modern information technologies, and propelled world trade to new heights.
But it turns out that both forms of globalization depend on a relatively stable geopolitical environment — which we seem to be losing. We’re not in August Canons territory, at least not yet, but there’s a whiff of 1914 in the air.
And a surprising aspect of recent economic problems, at least to me, is that they so far seem to be doing more harm to old-fashioned globalization — should we call it Globalization 1.0? — than to the complex economic relations that developed after 1990. Despite the shortage of containers, safeguards at ports and all that, it is still quite easy to buy electronic gadgets that include components from a dozen country. What’s really hit hard now is the grosser stuff, like the wheat and fertilizer trade.
In any case, even before the invasion of Ukraine, there were growing reasons to wonder about the future of globalization. We are often told that trade promotes peace, which may or may not be true. One thing is certain, however, and that is that peace promotes trade. And as the world becomes a more dangerous place, things we take for granted, like the large-scale food trade, may be far more vulnerable than anyone realized.
The global fertilizer trade is not new, but it mainly involved bird droppings.
The bloody and forgotten war for control of South American nitrate deposits.
A look at Shanghai’s lockdown nightmare.
…and what it does to the global supply chain.