AIQ - The Now Normal

Cutting loose

COVID-19 deals globalisation a further blow

Globalisation’s image problem may have been further tarnished by the pandemic, but can political leaders use the crisis to reform it for the better?

Anti-globalisation sentiment, having begun to proliferate due to the deep economic scarring left by the global financial crisis, looks to have been dealt a further blow from COVID-19.

Just as in 2008 many reckoned the free movement of capital worsened the global financial crisis as the bursting of a US housing market bubble reverberated around the world, today the relatively free movement of people is being associated with the rapid spread of a deadly pathogen.

Globalisation’s image was further tarnished when international supply chains fractured. A lack of cooperation, even among supposed allies, quickly led to shortages of essential products as nation after nation banned various exports.

People were especially disturbed in the spring, when countries entered cutthroat competition against each other in a desperate race to secure personal protective equipment (PPE) for healthcare workers. No sooner had PPE shortages been alleviated, nations began vying with one another to secure supplies of vaccines.

End of the globalisation cycle

Over the past dozen years, de-globalisation has manifested itself in several ways. World trade, for so long a major driver of global economic expansion, has stagnated; global supply chains have been reconfigured and, in some cases, demolished; while foreign direct investment has contracted. There are solid grounds for believing the pandemic will accelerate these trends and others.

Globalisation depends on common rules, values and standards

For instance, when asked about the lessons to be drawn from the pandemic, French President Emmanuel Macron recently responded: “It was clear this kind of globalisation was reaching the end of its cycle”.1 If that is true, one of the biggest questions exercising investors’ minds is: What comes next?

Stephen King, senior economic advisor at HSBC, former specialist advisor to the House of Commons Treasury Committee, and author of the 2017 book Grave New World: The End of Globalization, the Return of History, says answering that question is fraught with difficulty given China’s challenge to US hegemony has created an “unstable equilibrium”.

While he remains hopeful the two sides can find a way to co-exist more harmoniously by modifying globalisation, it is hard to see that happening at present. US efforts to undermine bodies such as the World Trade Organization and World Health Organization are not helping.

“Globalisation, above all else, depends on common rules, values and standards. If the international institutions upholding them are undermined, it begins to collapse,” King says.

Economic decoupling

Charles Parton, senior associate fellow at the Royal United Services Institute, a defence and security think tank, says it has become increasingly clear the values and political systems of the US and China, far from aligning as leaders in the West once hoped, are diverging. That means their economies will inevitably diverge too.

Parton believes unless Xi Jinping’s China changes tack, two competing and, in certain areas, distinct forms of globalisation are likely to eventually emerge, with one set of rules established by the US and its allies and another by China.

An increasingly authoritarian Chinese regime grows more assertive in challenging Western interests

The danger is that attempts by different countries to bend the rules to better suit their own needs descend into autarky. It already appears governments are treading a tightrope as an increasingly authoritarian Chinese regime grows more assertive in challenging Western interests.

Even if autarky is avoided, and globalisation is simply amended in favour of more locally sourced production, this could still come at a cost. While poorer countries that depend heavily on exports would be worst affected, even richer ones such as the US, with a highly diversified economy, world-leading technology and plentiful natural resources, would almost inevitably suffer.

“Once you start building borders and barriers and begin to cut countries’ economies off from each other, you’re likely to end up with lower growth and a squeeze in living standards,” says King.

Fortunately, there are grounds for optimism that a similar episode to the 1930s, which ultimately led to World War Two, will be averted, and not just because politicians have learnt from history.

Economics and profits still matter

As Michael Grady, Aviva Investors’ head of investment strategy and chief economist, explains, the same economic forces that made it hard for Donald Trump to cut the US’s bilateral trade deficit with China and re-shore production on a large scale offer countries a strong incentive to avoid taking protectionism too far.

Companies will continue to conduct their affairs in a way that is consistent with maximising profits

“With the world once again having to deal with a period of economic hardship, governments can ill afford to do anything that damages growth or slaps extra costs on companies. For their part, companies, many strapped for cash, will continue to conduct their affairs in a way that is consistent with maximising profits,” he says.

Witness French automotive parts maker Valeo, which says it has no plans to alter its supply chains even though it was forced to shutter operations in China at the start of 2020, a move that had sizeable knock-on effects on European automakers.

“Our final customers and auto parts clients aren't ready to pay more if our supply chains were relocated… So, if neither of them puts a value on the risk, there is no chance supply chains will be relocated,” chief executive Jacques Aschenbroich said in July 2020.2

Even where companies do shift production out of China, that will take time. As Rosemary Coates, executive director of the US Reshoring Institute, said in February 2020: “You can’t just flip the switch and go from China to Vietnam and produce the same products.”3

Globalisation was driven in large part by the idea trade between nations is economically efficient. Since it helped lift billions of people in poorer countries out of poverty, significantly lowered income inequality between nations, provided cheap goods to consumers in richer nations and boosted profits of multinational corporations, economists generally view it favourably.

Nonetheless, few would deny it has also had several adverse consequences that for too long went ignored. For a start, it is partly to blame for a massive increase in income inequality within nations, especially richer ones. It has also arguably worsened an even bigger crisis than the pandemic, at least in the long term: man-made climate change.

According to a 2013 report commissioned by the OECD, the sharp rise in industrial production, consumption and energy usage in recent decades has been “nurtured” by globalisation.4

Re-wiring globalisation for the better

The pandemic, by exposing the threat to people’s health posed by complex supply chains based on just-in-time production and a single-sourcing model, has highlighted other crucial shortcomings.

However, it would be wrong to view the pandemic as vindicating those who have been arguing in favour of protectionism. Despite the obvious challenges and dangers globalisation now faces, Grady is optimistic it can be re-wired for the better.

Despite the obvious challenges and dangers, globalisation can be re-wired for the better

“This is not really a problem with globalisation per se. It turns out we were too reliant on single suppliers, especially in China, for essential goods such as healthcare equipment and drugs,” he says.

It is possible to envisage a reformed version of globalisation paying dividends in other ways. Environmental economists have long argued economic decisions all too often failed to allow for the impact of carbon emissions. For them, it made little sense for the US and Europe to be curbing carbon emissions while importing carbon-intensive products such as steel from China and other countries, which were simultaneously increasing their pollution levels fastest by building coal-fired power plants.

If, as part of their efforts to reform globalisation, countries were to agree to harmonise the taxation of carbon emissions, the world could make big strides towards tackling the climate crisis.

Where do we go from here?

Although there is no shortage of commentators proclaiming the pandemic has put another nail in globalisation’s coffin, such assertions may be premature. Globalisation evokes images of massive container ships transporting manufactured goods from Shanghai to Los Angeles or Rotterdam. Even if such shipments have now peaked, the quantity and value of data now whizzing between countries shows no sign of slowing.

The quantity and value of data whizzing between countries shows no sign of slowing

Moreover, many companies have now seen the benefits of videoconferencing via Zoom or Teams. It is possible that as firms get used to managing workers remotely, they begin to see merit in shipping more jobs overseas.

While reforming globalisation is arguably long overdue, it is to be hoped leaders resist more reckless protectionist urges. As King says, it would be paradoxical if globalisation were now to be threatened by a pandemic that has shown “we are quite closely connected, need to share knowledge and have a series of common standards for dealing with such events”.

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