COVID-19 Trend Booster: Unwind Globalisation

COVID-19 has sent shockwaves through the global economy, with many fearing an end to globalisation.

COVID-19 has sent shockwaves through the global economy. New challenges are emerging, and longstanding trends have been disrupted, accelerated or sent over the cliff-edge. In a series of briefs over the coming weeks, the various systemic effects of COVID-19 on the global economy will be explored.

The first and most prominent trend is the end of globalisation. Considering the amount of times globalisation has been declared dead or defunct over the past years, it seems to have at least nine lives.

It is true that in many ways the COVID-19 pandemic has created unprecedented circumstances for the entire world and has placed it in conditions that echo the darkest days of the Great Depression. A twin economic shock of this kind, a contraction in demand and supply alike over such a short period of time, exposed critical vulnerabilities in supply chains that left governments scrambling for solutions to save the economy from a complete paralysis – let alone finding ways of galvanising it during a re-opening phase. As early as March, 75% of US supply chains were reported to have broken down. A similar picture was painted across the world, which quickly prompted calls for self-reliance and a turn away from opaque and distant supply chains, lacking the flexibility needed to respond to crises efficiently. Specifically, the over-dependence on China has been identified as a major impediment to creating more agile supply chains.

China plays a central role in the globalised economy. Not only is it the world’s manufacturing hub but its growing domestic market has attracted considerable attention and offers tremendous growth opportunities, as it is expected to overtake the US as the world’s largest consumer market by 2034. Additionally, Beijing’s Belt and Road Initiative has been actively encouraging companies to build those supply chains, with an eye on connecting China’s consumer market with Europe, more effectively. Equally, it has also been at the centre of much controversy due to its authoritarian regime, its muscle flexing with Hong Kong, and disputes with the US; but is also fuelling the global economic engine making it challenging to turn away from.

While it is undeniable that shortcomings have been exposed and require a rethinking and restructuring of supply chains, it does not necessarily mean that their shortening or diversifying would have averted the global shock caused by COVID-19. A restructuring will likely develop according to the various industries’ needs and structures. Industries such as automotive would face potentially staggering costs if it were to restructure sourcing practices and supply chain geography in an effort to fully mitigate the risk, as it has been suggested. Whereas those options are more viable for garment manufacturers “which can undertake simpler exercises in labour cost arbitrage and can switch more simply”; a restructuring resulting in near-shoring would also allow the industry to respond faster to changing consumer demands, making it a much more flexible supply chain in comparison to the automotive sector.

A much less predictable aspect, however, will be the diminishing American leadership from the global scene and globalisation in particular. In other words, while economic globalisation is experiencing tumultuous times, it will not cause a complete unwinding of supply chains or even signal the end of the global system; nonetheless, political globalisation is faced with a much more bleak future. The US’ seeming withdrawal from global leadership will leave a dangerous vacuum. In the face of China’s economic power and firmer decision-making ability, the EU will be ill equipped to manage the transforming situation while it is looking after its 27 member states, as well as going through a divorce. Even with a Biden presidency in November, the once indisputable global leader will have relinquished a high degree of leadership and trust in just four years.

While only the biggest economies might be able to sustain a more inward-looking economy, protectionism would have disastrous effects especially for developing countries, particularly after the pandemic shocks and having left a weakened economy in its wake. The assumption that a repatriation of production lines once outsourced and having brought many gains is going to resolve all economic grievances is ill-informed. Deglobalisation is not a guarantor for resilience; instead governments should pursue policies that can offer it. After all what COVID-19 did was not expose vulnerabilities of international supply chains but those of highly-concentrated just-in-time operations working like clockwork. Among the suggestions for resilience-building are:

  • Stress-test supply chains,
  • Minimum period of operating requirement, similar to liquidity requirements for banks,
  • taxation + regulation: favourable taxation and regulatory allowances for investment in stockpiling/larger inventories to create buffer and supply chain diversification,
  • subsidise/invest in industrial capacity: to ensure diversification of supply chains.

By tying together national economies in a symbiosis such as globalisation, “each country has a selfish interest in helping others. That is a source of stability that anti-globalist rhetoric can only serve to dilute”, says Robert Armstrong, FT’s financial editor. Thus, similarly to previous predictions, the outcome this time, too, will see globalisation land on its feet.

Source: Transport Intelligence, June 16, 2020

Author: Dila Cebeci