Tipping the balance: Deglobalisation is a climate threat

The deliberations at this year’s United Nations Climate Change Conference (COP27) suggest that while policymakers realise the urgency of combating climate change, they are unlikely to reach a comprehensive collective agreement to address it. But there is still a way for the world to improve the chances of more effective action in the future: hit the brakes on deglobalisation. Otherwise, the possibilities for climate action will be set back by the shrinkage of cross-border trade and investment flows, and by the accompanying rise of increasingly isolated regional trading blocs.

Deglobalisation is being accelerated through a combination of old-fashioned protectionism, newfangled “friend-shoring” (limiting trade to countries with shared values), and geo-strategically motivated bans and sanctions. To see why this trend will frustrate global responses to climate change, consider the three categories of climate action: mitigation (emissions reduction), adaptation, and migration to better conditions. The sequence here is important, because the challenges implied by each category will become more difficult if less is done in the category preceding it. If we do too little on mitigation, we will need more adaptation, and if we do too little on adaptation, we will see more climate refugees fleeing their increasingly uninhabitable homelands.

New international agreements are needed to manage each of these problems. But rising geopolitical rivalries will make mitigation agreements more difficult. How can China and the United States agree to meaningful emission cuts when they both suspect that the other’s top priority is to secure an economic, and hence strategic, advantage? Agreements will be easier to reach and enforce in a world that has not fragmented economically. When there is ongoing bilateral trade and investment, both China and the US will have more reasons and occasions to talk to each other, and there will be more chips (literally!) with which to barter – a technology transfer here in exchange for an emissions commitment there, for example.

Mutual openness, including the free movement of businesspeople, tourists, and officials, will also make it easier to monitor climate action, whereas further isolation will only breed more suspicion, misinformation, and mutual incomprehension.

Deglobalisation will also hinder the production, investment, and innovation needed to replace carbon-intensive production processes with climate-friendly ones. Consider battery production, which is necessary to store power from renewable energy sources. The key inputs for batteries – lithium, nickel, and cobalt – are projected to be in short supply within the decade, as are the rare earths used for electrodes. Global battery production will suffer if manufacturers have to “friend-shore” these commodities. After all, most of these resources are mined in unstable or conflict-ridden countries, like the Democratic Republic of the Congo, and much of the existing refining is done in China and Russia.

Yes, some supply chains could be altered over time to pass through friendly countries. But businesses will struggle to determine who counts as a “friend” and who will remain so over the duration of a thirty-year investment. It was not so long ago that a US president raged even at Canada. Moreover, in the short run, reshuffling supply chains would severely limit production capacity and increase costs, reducing the world’s chances of keeping global average temperatures below critical thresholds within the narrowing timeframe that we have left.

Adaptation to climate change will also be harder in a deglobalised world. Higher temperatures and changing weather patterns will make traditional agriculture unviable in many places. New crops and technologies can help, but these will require innovation, investment, and financing. Many developing countries outside major regional blocs will be shut out from such flows. And even the most heroic efforts at adaptation will not preserve agriculture’s viability in the tropics. Many farmers will have to look for new livelihoods.

The surest way for developing countries to create new jobs is to export, tapping into the dependable demand in more highly developed (and less heat-affected) countries. Yet rising protectionist barriers in more developed regions will impede such growth, thereby limiting adaptation. Meanwhile, isolation will not necessarily give developed countries the security they seek. While possibly diminishing some political risks, confining supply chains within one’s own country or region will increase their exposure to climate catastrophes and other risks. Just look at how higher energy costs are currently affecting all of Europe, but not North America.

Global diversification, by contrast, would bring greater resilience. Ideally, a supply chain would have multiple suppliers across different regions and continents in every segment, enabling it to shift quickly from a climate-hit supplier to a supplier elsewhere. Similarly, in the case of commodities, the best insurance is a well-connected, freely accessible global market where disruptions can be smoothed over, and where no producer has undue leverage. The more local or regional the market, the more adversely it will be affected by severe weather or a malevolent supplier.

If mitigation and adaptation fail, people in badly affected areas will be forced to migrate. Those in less-affected regions should not myopically assume that they can continue to live comfortably behind border walls. Not only will the humanitarian tragedy occurring outside be hard to ignore, but desperate climate refugees will scale or break down any wall.

It would be far better to forge new global agreements to direct climate refugees toward the countries that can absorb them, and to provide potential migrants with the job and language training they need to be productive on arrival. Deglobalisation will only hamper such efforts. Globalisation may have fallen out of favor in recent years, but preserving it is imperative. Even if countries have a legitimate security interest in restricting trade and investment in strategic and sensitive sectors, we must prevent these policies from degenerating into isolationism.

At a minimum, the international community should negotiate a Geneva Convention-style pact to create safe spheres of continued global interaction that are protected from sanctions and bans in most circumstances. These should include trade in food, energy, medicines, and other essential goods, such as those needed for climate mitigation and adaptation. We should set stringent conditions for denying countries access to the global payment infrastructure and for applying secondary sanctions (sanctions against sanction breakers). Even if we cannot currently agree on a global climate action plan, we still must preserve the basis for cooperation. There can be no effective climate action without continued globalisation.

Raghuram G. Rajan, former governor of the Reserve Bank of India, is Professor of Finance at the University of Chicago Booth School of Business