Globalization and the liberal world order can be understood through market arbitrage and the law of one price. In a globalized world based on free trade, higher prices in one country will be offset by imports that increase supply and take advantage of price discrepancies. For commodities, there will likely be one world price after accounting for transportation costs, tariffs, and processing. In the case of energy, oil or natural gas will converge to one price. Of course, this may not fully represent reality, but it is an ideal that drives market behavior.
The law of one price also applies to capital and labor. As markets equilibrate to one price, there will be winners and losers, but uncertainty will decrease. Investment decisions can be based on the law of one price. Access to commodities will be at the world price, so plant-location decisions will be based on labor costs and proximity to consumers. The law of one price will increase economic efficiency.
In a world where it is more difficult to achieve a world price for commodities, trade and manufacturing will have to be reconfigured. If trade breaks down, as will the free flow of labor and capital, market inefficiencies will arise, and optimal global growth will not be achieved. Those without access to supply will see growth languish as resources are squandered to support an inefficient world.
Equity and bond markets will not be integrated, return dispersion will increase, and correlation across markets will decline. Holding international portfolios will become riskier; at the same time, diversification will increase. Some will profit by exploiting inefficiencies, but consumers will be net losers. Country and regional assessments will need improvement because declining integration creates structures to address supply shortages. Finance and investing will be harder with a greater focus on local market dynamics. We have not seen this type of disorder in decades, and it represents a headwind that reduces consumer welfare.
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