Rising inflation and deficits are just a few facets of the crisis that has dealt an estimated $1.6 trillion blow to the global economy, Bloomberg writes.

New fault lines are likely to run through globalization, which has tied the world economy together and provided an abundance of goods.

The situation in Ukraine and quarantine restrictions in China due to COVID-19 have disrupted supply chains, undermined economic growth and pushed inflation to record highs. All of these were major reasons why Bloomberg Economics cut its 2022 global GDP forecast by $1.6 trillion.

Still, the underlying problem is an even greater division of the world along geopolitical fault lines that looks set to get worse.

Bloomberg Economics has built models of how the current situation could unfold over the long term. Nothing good, it seems, awaits us: the world will become significantly poorer and more productive, and trade levels will return to the scale that existed before China joined the World Trade Organization. An additional blow will come from inflation, which will be higher and more volatile.

The first scenario assumes that fragmentation will remain. In 2022, commodities whose shortages drive up prices were among the top beneficiaries, as were the companies that produce or trade them. Defense stocks also posted gains amid rising global tensions.

Robert Koopman, chief economist at the WTO, expects a “reorganized globalization” that will come at a cost: “We won’t be able to utilize low-cost marginal production as much as we used to.”

A major feature of the world economy over the past 30 years has been its ability to produce more and more goods at ever lower prices. The entry of more than 1 workers from China and former Soviet bloc countries into the global labor market, combined with lower trade barriers and super-efficient logistics, has been an age of abundance for many.

But the last 4 years have brought a series of disruptions: rising tariffs during the US-China trade war, restrictions due to the pandemic, and now sanctions and export controls that disrupt the supply of raw materials and goods.

All of this combined could leave advanced economies facing a problem they have long ago solved: deficits. Developing countries may face more acute threats to energy and food security, similar to those experienced by many Sri Lankans to Peru. Both countries will also have to contend with inflation.

To give a more illustrative example, it turns out that: 1. U.S. trade tariffs on Chinese goods have increased from 3% to about 15% during Donald Trump’s term; 2. Restrictions due to COVID-19 in China this year have jeopardized hundreds of billions of dollars in exports and disrupted supply chains for a range of companies from Apple Inc. to Tesla Inc.; 3. The share of the trade flow affected by export or import embargoes has grown to more than 5 times global GDP in 2019. And a raft of bans on Russian raw materials and efforts by countries to secure their own supplies by banning sales abroad, such as India’s recent ban on wheat exports, have further increased this figure.

Whatever may be said about the regimes ruling in the West, Russia or China, one thing is clear: about $6 trillion worth of goods, equivalent to 7% of global GDP, circulates between Western countries and all other countries. As a result of imposing a 25% tariff on all this volume of goods in the global economy model, which corresponds to the highest rates imposed by the US and China against each other, global trade has fallen by about 20% compared to what it would have been without such bans, back to the levels of the late 1990s, before China joined the WTO.

Another consequence is that all countries in the world will now have to redirect their resources to production, in which they are not necessarily strong, and even lose some of the productivity associated with trade. In the long run, a pullback of the world economy to the levels of the late 1990s would make the world 3.5% poorer than if trade stabilized at the current share of production, and 15% poorer compared to the scenario of stronger global linkages. Specifically, this could mean that factories that produced goods for a market in the US or Europe would move from China to, say, India or Mexico. As we can see from historical examples, even in such a situation there will be winners. But such a transition would take time and create serious obstacles, opening up a period of high and volatile inflation.

The second scenario is a split into the so-called rival camps. Of course, the reality of the split is unlikely to develop along clear ideological lines. While in 1983 non-Western (in the West they are called authoritarian) countries accounted for about 20% of global GDP, in 2022 this share has risen to 34%. In the coming years, China’s economy will outgrow the US and Europe, and this share will be even higher. The current conflict in Eastern Europe shows that rival political systems are creating opposing camps. Xi Jinping still supports his Russian ally Vladimir Putin, while Europe and the US impose sanctions against Moscow. India, the world’s most populous country, continues to buy Russian oil and weapons. Whether this is determined by ideological divisions or simply divergent interests in a multipolar world is not important; what matters is that the fault lines are real.

China is determined to demonstrate its self-sufficiency and avoid dependence on foreign innovation, but its 1.4 billion people lack the protection against the virus that Western populations have. According to a study published in Nature Medicine, if the Omicron strain continues to break, it could kill 1.6 million people. Therefore, Beijing sees no choice but to continue its draconian restrictions. As a result, China’s economy takes a crushing blow, and the rest of the world will face even more supply chain disruption as Chinese factories fail and cargo ships idle outside Chinese ports.

“Such seemingly purely regional issues as China’s 2010 ban on selling rare earth metals to Japan – essential materials for everything from smartphones to electric car batteries – could also add fuel to the fire. Russia has cut off gas to Poland and Bulgaria and could go further and cut supplies to Germany, France and Italy, putting 40 percent of EU supplies at risk, leading to a recession right after the recovery from the pandemic.

This year, tariffs imposed by Trump during the trade war with China are still in effect, the ongoing COVID-19 crisis reinforces the need to localize supply chains, and raw materials and products from Russia are locked out of the market in the US and Europe.