What’s next for the global world order? Bipolarity may be in the offing — with the two poles being the US and China, suggests President of the Peterson Institute for International Economics Adam Posen in a discussion with Goldman Sachs. Posen suggests that the dual force of the covid-19 pandemic and the ongoing Russia-Ukraine war will “hasten the corrosion” of globalization “as the world becomes increasingly bifurcated into two economic blocs aligned around the US and China.”

What do the twin shocks of covid + war have to do with it? The drawbacks of a world that is deeply integrated on the economic side became particularly evident with the onset of the pandemic, which supplied global supply chains and resulted in delays and shortages, and therefore spiking commodity prices, Posen notes. These effects were exacerbated by the political costs of integration as Russia’s invasion in Ukraine led Western countries to impose a series of sanctions and trade bans to apply pressure on Moscow — but ultimately cut off the supply of critical goods such as oil and gas, wheat, and metals. “Both crises have called into question a multi-decade process that has led to the freer flow of goods, services, people, and ideas around the world. In doing so, they’ve raised the prospect that globalization could reverse in the coming years, potentially leading to greater global fragmentation.”

So is the “golden age,” so to speak, of globalization really behind us? The jury is out. While Posen suggests that globalization is rapidly eroding, other pundits describe the forward trends in less aggressive terms. Goldman Sachs senior global economist Daan Struyven and Goldman Sachs head of global investment research and chief economist Jan Hatzius postulate that we’ve been seeing an era of “slowbalization,” wherein cross-border flows have slowed, and that we’re moving towards “newbalization,” which will see the nature and dynamics of globalization shifting, without a net difference in its pace. Others, such as Harvard Kennedy School of Government Professor Dani Rodrik, suggest that we will see a slowdown — but from a hyperglobalized starting point. “My guess is that we will try to find a happy medium that avoids some of the excesses of hyperglobalization and the dangers of autarky,” Rodrik says.

The hypothesis that we’re entering an era of deglobalization — or decoupling — isn’t necessarily new. Allianz economic advisor Mohamed El Erian is among those who flagged this as a possible scenario moving forward back in the early days of covid-19 in 2020, suggesting that continued globalization would be difficult because of the pandemic, which yielded a geopolitical shock and simultaneously affected corporate behavior. Supply chains are going to continue becoming localized as businesses move away from relying on “just-in-time” models that previously saw them depending greatly on distant markets for much of their inputs and operations, El Erian suggested at the time.

But there is general consensus that “significant reshoring” of critical supply chains isn’t something we’re going to see in the short term. Many companies are opting for oversupplied inventories when they can get their hands on the goods and commodities they need, considering the “punitively high” costs and other shortcomings of reshoring certain supply chains, such as semiconductors. Although the shortage of semiconductors has wreaked havoc for businesses across the world and in Egypt alike, and some major global corporations are investing heavily in domesticating their semiconductor production, it’s a massively capital-intensive venture and requires technology that is not necessarily developed in every market.

How would this new(ish) global order affect the business world?

#1- Global investments: While countries may be forced to be generally aligned with one pole, it would not necessarily mean that engagement with the other pole would be altogether impossible. And businesses would probably be able to continue working in and selling to markets in opposite poles — although they “may need separate lines of production, standards, and networks” for different markets, Posen said. This would translate into a short-term “investment boom” as they pour money into building capacity that would make its operations and markets more independent, which would initially support economic growth, but would eventually “reduce economies of scale and drive down the real economic returns of such investments,” he suggests.

#2- Inflation: Remember that commodities supercycle that was prophesied last year? It could actually materialize soon, this time driven by “great power competition and rising political pressure,” say Goldman Sachs’ commodities researchers and strategists. Deglobalization and a shift towards localized supply chains would fuel price increases by making it pricier to produce physical goods, as “countries trade greater inflationary pressures for security of supply,” they say.

#3- The USD’s status as a global currency: Again, there are diverging views on whether the greenback will hold onto its position as the globally dominant currency, which has been a point of contention for years, and for different reasons (see here and here). As it currently stands, the USD comprises some 59% of global reserves, while the CNY accounts for a very small percentage — but the USD has been “losing ground” over the past few years, and the CNY has been gathering steam. That trajectory could continue to hold up, argues Goldman Sachs co-head of global FX, rates, and EM Strategy Zach Pandl, saying that “US foreign policy choices may discourage heavy reliance on the USD in some cases.” Countries may take the scenario with Russia as a warning that their reserves being USD-heavy could come back to bite in times of crisis, if their relationship with Washington is not on solid ground, Pandl says. At the same time, China has been moving to “modernize and open up its financial system,” leading to an influx of fixed income portfolio investments and stiffer competition to the USD. A possible future trend in the world of finance is a shift towards more non-sovereign assets, such as gold, rather than trying to make the right choice of which currency (CNY vs USD vs EUR) to pile into, suggests Posen.

You can read through the full Top of Mind report here (pdf) or catch the podcast version of Exchanges at Goldman Sachs here (runtime: 27:53).