Navigating Deglobalization
Appeals to recommit to globalization are highly unlikely to gain traction in the wake of the COVID-19 pandemic. Those keen to preserve globalization would instead be better advised to focus on minimizing the disruption caused by the coming period of deglobalization and laying the groundwork for a more sustainable process thereafter.
LAGUNA BEACH – Having already been buffeted by two big shocks in the last ten years, the global economy’s highly interconnected wiring is suffering a third because of the COVID-19 pandemic. Globalization 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 globalization 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. Those keen to preserve globalization in the longer term would instead be better advised to focus on minimizing the disruption caused by the coming period of deglobalization 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 world’s multi-decade romance with cost-effective global supply chains and just-in-time inventory management will give way to a more localized 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 aftermath of the current crisis-management phase is also likely to feature an intensified blame game, adding a geopolitical impetus to deglobalization. Already, the US is complaining that China didn’t 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 China’s 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 weaponization of economic-policy tools that accelerated during the recent China-US trade war – the second recent blow to the globalization process. 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.
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