What ruptured globalisation means for international finance

Canadian Prime Minister Mark Carney does not mince his words. Writing for The Economist last November, Carney argued the post-Cold War had collapsed and said the world was “entering an era of ‘variable geometry’” involving “pragmatic coalitions, built around shared interests, and occasionally shared values, rather than shared institutions”.The essay, it turns out, was the prelude to a hard-hitting speech at the World Economic Forum in Davos, Switzerland, on January 20. Carney told attendees that it was important to recognise that the international system was “in the midst of a rupture, not a transition”. Great powers were “using economic integration as weapons. Tariffs as leverage. Financial infrastructure as coercion. Supply chains as vulnerabilities to be exploited”.He urged the world’s middle-sized countries to reduce “the leverage that enables coercion … diversification internationally is not just economic prudence – it is the material foundation for honest foreign policy”. Carney, a former central banker, also argued it would be a mistake to mourn the demise of the rules-based order. “Nostalgia is not a strategy”, he said.Few leading policymakers have spoken so frankly and publicly about the damage wrought by US President Donald Trump’s assault on the global trading system and the profound consequences of his administration’s evisceration of the rule of law.Yet Carney deserves praise not just for his candour, but also for his lucid arguments. While the unravelling of globalisation has been a major theme for some time, the primacy of national security and geopolitics – in particular the extent to which trade is subordinated to political exigencies – is a relatively new phenomenon that is reshaping the global economy and markets.Carney put his finger on two increasingly important yet underappreciated megatrends: economic fragmentation and geopolitical realignments. While a number of investment banks, notably Morgan Stanley, have published research on the economic and market implications of the shift to a multipolar world, investors are notoriously bad at assessing and pricing geopolitical risk.