Stay informed with free updates
The writer is editor of the FT, visiting scholar at the Hoover Institution and author of a forthcoming book on globalization.
In the Strait of Hormuz, tankers are burning, along with what’s left of the post-1945 American-led order. Meanwhile, the IMF’s new baseline forecast for global growth this year is exactly the same as six months ago and stock prices have risen. The contrast between a world order on fire and a global economy on autopilot is stark. Some argue that geopolitical crises have only temporary economic consequences. But when you look closer, strange and profound changes are happening.
A good example is the law of one price. It states that similar products that are tradable across borders should have comparable prices. After 1990, free trade, supply chains, and new global intellectual property rules strengthened the power of this law. The idea of a unitary market for fungible products, in which the nationality of buyers and sellers did not matter, turned from a fantasy into an everyday reality. Superstar companies have built business models to take advantage of this, which is one reason why iPhones and Bloomberg terminals cost about the same everywhere.
Now the law of one price is disappearing. A less reliable America means more wars and crises that disrupt trade. Sanctions and economic nationalism create barriers, making markets less fungible. You see the alarming results in terms of raw materials. Recent prices of nearly identical barrels of oil traded in Texas, Guyana, the North Sea and Russia have fluctuated between $97 and $147, some of the widest gaps on record. Last year, the price of gold, the ultimate fungible asset, separated in Europe and New York. Copper, silver and nickel have seen similar dislocations.
But it goes further than raw materials. Some Chinese product prices are diverging wildly from U.S. prices as economies decouple. In the technology sector the differences can be enormous. AI tokens, data processing units, cost about 80 percent less in China than in California, while Nvidia B200 chips cost about 50 percent more. Because car trade between China and the US is minuscule, electric vehicles in Dalian cost at least 30 percent less than their equivalents in Detroit. There’s more to come. China’s biotech boom is leading to cheap, breakthrough medicines.
Some of these exceptions to the law of one price will prove to be fleeting. But the trend is not. During the Cold War, the political crises surrounding Cuba or Berlin had little economic relevance. Today, globalization means that about 50 percent of all trade and capital flows take place through places or sea lanes with high military tensions, from the Baltic Sea to Taiwan.
This means that there is widespread exposure to low-probability but serious events. Meanwhile, the global embrace of industrial policy is just beginning, suggesting that more barriers to open markets are on the way. Politicians are more likely to try to protect companies they have subsidized from foreign competition at low costs.
There are three implications. First, a golden age of arbitrage has begun in which traders who exploit inequality, for their own gain or for customers, are flourishing. Thanks to volatility and price differentials, JPMorgan’s market division just posted the best performance in its history. Energy and metals traders make profits.
Business models that are dismissed as relics are relevant again. Japan’s trading houses, often founded in the 19th century, are in turmoil. There is a rush of macro hedge funds, betting on geopolitical events and inequalities, fourteen years after their patron saint George Soros resigned and they were written off as outdated. There are experiments with digital arbitrage, where so-called neo-cloud companies rent remote access to AI chips to users in different countries, without asking too many questions.
Arbitrage profits can be seen as a tax the world pays to incentivize companies to bridge fragmented markets. The numbers are big: Commodity companies and Wall Street trading desks are making $140 billion a year, double the 2019 level.
Secondly, there will be consequences for inflation. In the 1990s and 2000s, inflation was low and converging around the world. But if the erosion of the law of one price becomes widespread and persistent, aggregate inflation rates could diverge even further. Over the past five years, US consumer prices have already risen by a total of 25 percent, compared to 51 percent in Russia and just 4 percent in China. Large differences in inflation will ultimately translate into larger differences in interest rates and exchange rates. Places with higher prices may end up having weaker currencies and lower asset valuations.
Finally, the age of arbitrage could catalyze innovation. Entrepreneurs have a strong incentive to come up with products that circumvent trade barriers and geopolitical bottlenecks. The Middle East oil crises of the twentieth century 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 be upon us now.
Breakthroughs in energy and materials science could reduce dependence on products imported through chokepoints. Production automation could reduce the need to rely on factories abroad. AI agents could become increasingly better at masking users’ nationalities by bypassing the digital barriers put in place by governments. All this is difficult to imagine today. The law of one price seemed second nature. But there is another law: the world always adapts.
