This is not the first time that globalisation is facing a serious threat to its existence. In the 1930s, globalisation did, in fact, come to an end with the onset of two world wars which brought the notion of global trade to a halt.
Globalisation has been with us since the end of World War II with an acceleration in the 1990s following the end of the Cold War. Companies have been relying on fragile, cost-cutting, just-in-time global supply chains in line with the theory of comparative advantage.
Over the past decade, a number of events have been culminating towards deglobalisation: the global financial crisis, the populist movements of 2016 (most notably the Trump election and Brexit) and the US-China trade war.
All these events have paved the way for deglobalisation, with COVID-19 exacerbating this conundrum even further. As the globalisation ship sails away, it may be time for company and world leaders alike to start shifting their focus on more resilient, self-sufficient means of delivering health, economic and business prospects for their shareholders and constituents.
The so-called ‘new normal’ may, in fact, be something abnormal. The economic impact of this crisis has been extraordinary so far, as we experience mass unemployment and a collapse of the oil, transportation and hotel industries across the world. It has also exposed deep problems within the EU as well as an intensification in the rhetoric between the two largest economies in the world, namely China and the US, which represent 40 per cent of the world economy.
During the global financial crisis of 2007-2009, the G20 came together to orchestrate a coordinated economic policy response. Nothing of the sort was seen this time round. Instead, an international blame game ensued with liberal international order nowhere to be found.
The novel coronavirus has shed a harsh light on existing global realities, particularly EU solidarity (or its absence), the effectiveness of states, the vulnerability of finance and the capacity for global cooperation.
Moreover, the virus has also revealed weak competences and a lack of decency of the world’s biggest superpowers. Emerging from China’s Hubei province, the virus has wreaked social and economic havoc. The Chinese government has been criticised by many for not intervening sooner than it did, possibly even trying to cover up the outbreak. The US had its own forms of denial, emanating from its own president, coupled with failures in mass testing and medical equipment provisioning.
The very existence of this new world pandemic poses new questions on the premise that underpins globalisation itself. The concept of globalisation is all about price and manufacturing efficiency, regardless of place. That said, its stability can only be guaranteed by mutual dependencies.
Times like these demand individual leadership but, above all, collective leadership should prevail
Taking the US and China as an example, these two economies were bound together by supply chains on which they both relied. However, it turns out that individual businesses, industries and global economies do care about their supply-chain origins. With Wuhan immobilised, international trade came to a complete halt, causing a global economic seizure.
Geopolitical tensions are flaring up even though markets do not seem to be pricing this in – apart from US Treasury yields. The two-year Treasury has been hovering around a record low yield of just 18 basis points. Reports of derailing US-China relations have begun emerging once again. Reuters published a report quoting anonymous officials saying that the Trump White House is going to “turbocharge” the extraction of supply-chains from China. This is expected to be an all-in approach which would include reducing financial incentives, higher tariffs and targeted sanctions of Chinese individuals.
The report also mentions the US’s intention to bring other countries on-board in what is being called the new ‘Economic Prosperity Network’. Ultimately, the question of whether Donald Trump will follow through still remains, considering it is an election year.
In a separate report, Reuters has also made mention of an internal Chinese report seen by President Xi Jinping which concluded that in the post-pandemic era, Beijing will face the toughest international anti-China pushback since 1989.
The trend towards deglobalisation has been in motion for some years now and the coronavirus pandemic has only accelerated it for both economic and geo-economic reasons. The world has been thinking about the rebalancing of supply chains, particularly because of environmental concerns and changing consumer preferences in wanting to address the climate crisis.
Also, the technological advances in additive manufacturing, commonly known as 3D printing, has enabled companies to bypass supply chains and procure the required parts on-site. Just-in-time production chains that we got used to over the course of the 1990s and 2000s were already beginning to fray as geo-economic tensions caused businesses to come up with contingency plans.
The world is now rethinking the current state of affairs and its heavy reliance on China as the world’s leading manufacturer. As China and all the top manufacturing nations shut down production simultaneously due to the deteriorating crisis, it sent a real supply shock to the rest of the world economy. Nations are quickly realising the importance of supply chain diversification, pushing forward the already existing trend towards localisation.
Paradoxically, the COVID-19 pandemic has shown us that all nations of the world must coordinate in order to contain the spread of the virus which can be done through the sharing of resources, particularly medical knowledge.
Times like these demand individual leadership but, above all, collective leadership should prevail. Arguably, the virus has revealed the limits of populism and when the pandemic is over, globalisation will be different and less intense than what we have known up to now.
The writer and the company have obtained the information contained in this document from sources they believe to be reliable but they have not independently verified the information contained herein and therefore its accuracy cannot be guaranteed.
Adrian Borg, Portfolio Manager at BOV Asset Management Ltd