Commentary
European gas prices are skyrocketing by at least 30 percent as one of the main Russian pipelines, Nord Stream 1, will be shut down indefinitely. Global inflation has been its highest in decades as tightening monetary policy threatens to cause a global recession. As hedge fund manager Ray Dalio stated in his book, The Changing World Order: “The times ahead will be radically different from those that we’ve experienced in our lifetimes, though similar to many times before.”
Globalization allows for buying cost-effective materials, manufacturing abroad, and expansion to overseas markets for increased profitability. About half of Facebook’s revenue, for example, is overseas. More than half of Apple’s business revenue is often generated outside of the United States, and Tesla on average collects 25 percent of its revenue in China alone. Outsourcing has allowed for innovative ideas, new jobs, and overall higher standards of living across the world. Without the benefits of globalization, iPhones on average would cost $600 more to make, and fabrics would be substantially more than their current retail price.
As the world is so interconnected, a downturn in one country can have the potential to impact many other countries. There are a multitude of factors happening simultaneously leading to such high prices.
The Russia–Ukraine war resulted in a sudden increase in oil and gas prices as production was disrupted. Wheat and aluminum had big increases since the war started, of which Russia is a significant producer, according to Business Insider.
According to VentureBeat, Ukraine supplies 90 percent of U.S. semiconductor-grade neon, and 35 percent palladium is sourced from Russia. Computer chips and semiconductor production have become more strained as a result. These parts are essential for cars, video games, phones, solar panels, and everything with a computer.
Increasing used car prices are a stark example of the impact of the scarcity of computer chips for new cars. According to data for the month from the U.S. Bureau of Labor Statistics, the Consumer Price Index, a measure of inflation, for used cars and trucks jumped up by 7.5 percent between August 2021 and August 2022.
China’s zero-COVID policy hampered the supply-chain distribution. As a result, the Chinese economy has harshly slowed down, with a second-quarter expansion of only 0.4 percent. The slowdown in China has resulted in fewer exports in the United States, as mentioned by Bloomberg. Germany and Italy are already showing signs of a recession as two of the largest European economies.
Overall, one falling economy can affect demand of another, while increasing the costs of another and causing cascading effects to others.
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