LAGUNA BEACH, California: Having already been buffeted by two big shocks in the last 10 years, the global economys highly interconnected wiring is suffering a third because of the COVID-19 pandemic.
Globalisation thus faces a three-strikes-and-out situation that could well result in a gradual but rather prolonged delinking of trade and investment, which would add to the secular headwinds already facing the global economy.
Appeals to recommit to the current globalisation process are almost certain to fall on deaf ears – particularly because this latest shock will be driven simultaneously by governments, companies, and households in developed countries.
GLOBALISATION ALREADY UNWINDING
Those keen to preserve globalisation in the longer term would instead be better advised to focus on minimising the disruption caused by the coming period of deglobalisation and laying the groundwork for a more sustainable process thereafter.
For starters, it is already clear that many firms will look to strike a more risk-averse balance between efficiency and resilience as they emerge from the damaging pandemic shock.
The corporate worlds multi-decade romance with cost-effective global supply chains and just-in-time inventory management will give way to a more localised approach involving the reshoring of certain activities.
This inclination will be reinforced by government mandates to secure safer inputs for sectors deemed to be of national security interest.
We are already seeing such requirements in the United States for energy generation, telecommunications, health-care materials and pharmaceuticals. It is only a matter of time until this trend spreads to other sectors and countries.
THE GEOPOLITICS OF IT
The aftermath of the current crisis-management phase is also likely to feature an intensified blame game, adding a geopolitical impetus to deglobalisation.
Already, the US is complaining that China didnt do enough to contain the spread of the virus and inform other countries of its severity.
Some US politicians have even called for China to pay reparations as a result. And many in America and elsewhere perceive Chinas initial COVID-19 response as yet another example of the country failing to live up to its international responsibilities.
Moreover, the worsening geopolitical situation will likely intensify the weaponisation of economic-policy tools that accelerated during the recent China-US trade war – the second recent blow to the globalisation process.
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That in turn will confirm many multinational companies fears that they can no longer rely on two key operating assumptions: the ever closer integration and interconnectedness of global production, consumption, and investment flows; and the orderly and relatively predictable resolution of trade and investment conflicts through multilateral institutions applying the rule of law.
Todays anti-China rhetoric will also give fresh momentum to the first pushback against globalisation that emerged a decade ago.
WEAK GLOBAL POLICY COORDINATION
With some segments of the population feeling alienated and marginalised by the process, the anti-establishment backlash gave rise in some places to more extreme political movements that have scored some surprising successes, not least Brexit.
Such developments greatly weakened global policy collaboration, as has been starkly evident in the worlds uncoordinated approach to containing COVID-19.
This is not an ideal time for the world economy to undergo secular deglobalisation.
Most countries, and virtually all segments of their economies (companies, governments, and households), will emerge from the crisis with higher levels of debt.
Absent a major round of debt restructuring, developing countries in particular will find their ability to service this debt hampered by high levels of unemployment, lost income, more sluggish economic activity, and, perhaps, less dynamic consumption.
A GRADUAL DEGLOBALISATION
Against this background, those who appreciate the power of cross-border interconnectivity to unleash win-win economic oRead More – Source