Russian President Vladimir Putin speaks with Chinese President Xi Jinping in Samarkand, Uzbekistan, on Sept. 16, 2022.SPUTNIK/Reuters
Todd Hirsch was the Calgary-based chief economist of ATB Financial and is the author of The Boiling Frog Dilemma: Saving Canada from Economic Decline.
Thirty years from now, high-school students will likely have an entire chapter in their social-studies curriculum about the events of 2022, the year the global political order was rewritten and events started to spiral into situations unthinkable in the late 20th century.
Of course the geopolitical events we are watching unfold at the moment had their origins long before 2022. The Russian invasion of Ukraine, the posturing of China around Taiwan, the revolution in Iran, North Korea firing missiles around, Saudi Arabia’s cozying up to Russia – none of this is entirely unexpected. But 2023 may be the year that these events start having even larger consequences.
It would be a mistake to think that these developments will be confined to politics. The impacts are also economic. The geopolitical events of 2023 will nudge the global economy closer to what seems like an inevitable recession.
Consider the negative effects that war – and indeed even threats of war – have on consumer sentiment. Developed economies in North America and the EU are heavily driven by consumers. The 24-hour news cycle bombarding us with dire reports from Ukraine, China, North Korea etc. weighs on the enthusiasm to spend. Coupled with inflation, rising interest rates and slumping stock markets, consumer optimism is being beat down even lower with every sad geopolitical news update.
Then there’s the trade disruption. The global economy of the second half of the 20th century was built largely on vastly expanded trade. From the origins of the GATT (which became the World Trade Organization) after the Second World War to the creation of major trading agreements such as NAFTA, the EU and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, our global economy is based on trade.
But who’s talking about trade deals today? It’s hard enough to get a former G8 country (Russia) to play nicely in the sandbox, never mind come together with other countries to co-operate on trade deals. Global trade is certainly not over, but it may be diminishing as the 21st century looks to be more about conflict than co-operation. And that will cost every trading country through lost export markets, higher import costs and less efficient production.
And it will be especially disruptive if the Taiwan situation goes too far and Western countries such as Canada find it necessary to impose trade sanctions against China. The sanctions against Vladimir Putin’s Russia in the wake of the Ukraine war have been relatively painless for us, since Canada doesn’t trade all that much with Russia. But China is a completely different story – it is Canada’s second-biggest trading partner.
Ultimately, geopolitical conflict will also erode the economy through displaced public spending: more tax dollars spent on tanks, missiles and aircraft carriers and less spent on more productive things such as education, transportation infrastructure and medical research.
NATO members are expected to spend 2 per cent of their GDP on their militaries. Hardly any member country meets that expectation. But if geopolitics worsen over the coming years, members will have no choice but to increase military spending. In Canada, for example, the Parliamentary Budget Office estimates Ottawa would have to spend an additional $75-billion by 2027 to meet NATO requirements. That’s a considerable increase in public spending, which would have to be financed through higher taxes, reduced spending elsewhere or additional public debt.
Worsening consumer sentiment, disruptions to global trade and higher public spending on defence are all likely if global geopolitical developments continue on the path set in 2022.
Companies, industries, countries and even individuals need to prepare for what could be prolonged geopolitical conflict and the economic disruption it will bring.