Stay informed with free updates
Simply sign up to the Global Economy myFT Digest — delivered directly to your inbox.
The writer is an FT contributing editor, a visiting fellow at the Hoover Institution, and author of a forthcoming book on globalisation
In the Strait of Hormuz, tankers have been burning, along with what remains of the post-1945 American-led order. Meanwhile, the IMF’s new baseline forecast for global growth this year is exactly the same as it was six months ago and stock prices have gone up. The contrast between a world order on fire and a world economy on autopilot is glaring. Some argue that geopolitical crises only have transitory economic effects. Yet if you look closer, strange and profound changes are under way.
A prime example is the law of one price. It holds that similar products that are tradeable across borders should have similar prices. After 1990, free trade, supply chains and new global rules on intellectual property reinforced the power of this law. The idea of a unitary market for fungible products, in which the nationality of the buyers and sellers didn’t matter, went from a fantasy to a day-to-day reality. Superstar firms built business models to exploit this, which is one reason why iPhones and Bloomberg terminals cost roughly the same everywhere.
Now the law of one price is in retreat. A less reliable America means more wars and crises that disrupt trade. Sanctions and economic nationalism create barriers, making markets less fungible. You can see the alarming results in commodities. The recent prices of nearly identical barrels of oil traded in Texas, Guyana, the North Sea and Russia ranged between $97 and $147, some of the biggest gaps ever recorded. Last year the price of gold, the ultimate fungible asset, divorced in Europe and New York. Copper, silver and nickel have seen similar dislocations.
But it goes beyond commodities. Some Chinese product prices are violently out of whack with American ones as the economies decouple. In tech the gaps can be huge. AI tokens, units of data processing, cost about 80 per cent less in China than in California, while Nvidia B200 chips cost about 50 per cent more. Because China-US trade in cars is minuscule, electric vehicles in Dalian cost at least 30 per cent less than their equivalents in Detroit. There is more to come. China’s biotech boom is unleashing cheap breakthrough drugs.
Some of these exceptions to the law of one price will prove transient. But the trend is not. In the cold war, political crises over Cuba or Berlin had little economic relevance. Today, globalisation means that about 50 per cent of all trade and capital flows pass through places or sea lanes with high military tensions, from the Baltic Sea to Taiwan.
That means there is widespread exposure to low-probability but severe events. Meanwhile the global embrace of industrial policy is just getting started, suggesting more barriers to open markets are coming. Politicians are more likely to try to protect firms they have subsidised from foreign low-cost competition.
There are three implications. First, a golden age of arbitrage is under way as traders who exploit disparities, for their own profit or for clients’, thrive. Thanks to volatility and price gaps, JPMorgan’s markets arm has just booked the best result in its history. Energy and metals traders are making a killing.
Business models dismissed as relics are relevant again. Japan’s trading houses, often created in the 19th century, are on a tear. A rush of macro-hedge funds, which bet on geopolitical events and disparities, is opening, 14 years after their patron saint George Soros quit and they were written off as obsolete. There are experiments in digital arbitrage, with so-called neocloud firms renting out remote access to AI chips to users in different countries, without too many questions asked.
Arbitrageurs’ profits can be thought of as a tax that the world pays to incentivise firms to try to bridge fractured markets. The numbers are getting big: commodity firms and Wall Street trading desks are making $140bn a year, double the level in 2019.
Second, there will be consequences for inflation. During the 1990s and 2000s, inflation was low and converging across the world. But if the erosion of the law of one price becomes widespread and sustained, overall inflation rates could diverge more. Already in the past five years, US consumer prices have risen by a cumulative 25 per cent, versus 51 per cent in Russia and a mere 4 per cent in China. Big differences in inflation will eventually feed through into bigger gaps in interest rates and exchange rates. Places with higher prices could ultimately have weaker currencies and lower asset valuations.
Finally, the age of arbitrage could catalyse innovation. Entrepreneurs have a major incentive to invent products that bypass trade barriers and geopolitical flashpoints. The 20th century’s Middle East oil crises led to new deepwater drilling techniques in the North Sea, pipelines in Alaska and larger, faster oil tankers. A new wave of geopolitical innovation could now be upon us.
Breakthroughs in energy and materials science could cut the reliance on products imported through chokepoints. Manufacturing automation could lower the need to rely on factories abroad. AI agents could get ever better at masking users’ nationality, running rings around the digital barriers governments erect. All this is hard to imagine today. The law of one price seemed like second nature. But there is another law: the world always adapts.
