Why the Coronavirus is killing globalization as we know it.

US President cancels all flights from the EU except the UK even the president of Canada has to go into quarantine because his wife came back from the UK flight affected with the virus, Wall Street suffers worst rout since Black Monday as virus response eludes Washington, Belgium not only closes schools but also bars, and restaurants.

Thus in the world of things, the coronavirus has infected the global supply chains that connect manufacturers and consumers. So for example also port traffic in Los Angeles, the largest U.S. port, declined by 25 percent in February. Container traffic in general was down over 10 percent last month.

Manufacturers that depend on the sourcing of components in far-off countries had already been rethinking their participation in the global assembly line because of tariffs, the costs of transport, and increased automation. This “reshoring” will get a boost from the disruptions of the coronavirus.

Given the examples at the start of this article people, too, are not moving around as much. Airline service in and out of emerging hot spots has been canceled. Airline ticket sales last week were down 10 percent over the same period last year. The cruise industry, after outbreaks on a couple big ships, has taken a major hit.

After blithely ignoring the coronavirus outbreak in China for most of February, markets took a major dive in the final week of the month. The stock market lost $6 trillion in value last week, its worst showing since the financial crisis of a decade ago. This is a testament to both the persistence of the disease and the incompetence of certain national leaders, notably Donald Trump. Despite the intervention of the Federal Reserve and other central banks, market volatility continues.

It might seem ridiculous to expect that a pathogen, even one that spreads at the rate of a pandemic, could reverse an economic trajectory that’s more than a century in the making. But the coronavirus outbreak coincides with attacks on economic globalization from many different quarters.

Environmentalists, for instance, have long been skeptical of unrestrained global economic growth. The threat of climate change has sharpened that critique and placed it squarely in the middle of mainstream debate.

Meanwhile, worsening economic inequality has called into question the capacity of economic globalization to lift all boats in a rising tide. Even the IMF has acknowledged the pernicious impact of this inequality (but without engaging in the necessary institutional overhaul to address the problem).

A slowing of global economic integration over the last decade suggests that the world may already have passed peak globalization.

                               

What next?

Until recently, most policymakers and investors remained complacent about the potential economic impact of the coronavirus crisis. As late as the end of February, most wrongly assumed that it would have only a brief, limited, China-specific impact. Now they realize that it is generating a global shock, which may be sharp, but which most still expect to be short. But what if the economic disruption has an enduring impact?

The coronavirus crisis has highlighted the downsides of extensive international integration while fanning fears of foreigners and providing legitimacy for national restrictions on global trade and flows of people.

Beijing is using the outbreak to boost its reputation for global cooperation while Washington plays the blame-Beijing.

All sorts of businesses have suddenly realized the risks of relying on complex global supply chains that are specific not just to China, but to particular places such as Wuhan, the epicenter of the pandemic. Chinese people, and now Italians, Iranians, Koreans, and others, have become widely seen as vectors of disease; senior Republican politicians in the United States have even labeled the condition the “Chinese coronavirus.”

Meanwhile, governments of all stripes have rushed to impose travel bans, additional visa requirements, and export restrictions. The travel ban on most arrivals from Europe that U.S. President Donald Trump announced on March 11 is unusually broad, but far from unique. All of this is making economies more national and politics more nationalistic.

Much of this disruption may be temporary. But the coronavirus crisis is likely to have a lasting impact, especially when it reinforces other trends that are already undermining globalization. It may deal a blow to fragmented international supply chains, reduce the hypermobility of global business travelers, and provide political fodder for nationalists who favor greater protectionism and immigration controls.

The complex China-centered global supply chains on which so many Western companies have come to rely are, particularly at risk. The complex China-centered global supply chains on which so many Western companies have come to rely are, particularly at risk. The cost advantage of producing in China has eroded in recent years as the country has become more affluent, and wages have soared. The chances of doing so were highlighted by President Trump’s imposition of punitive tariffs on imports from China in 2018 and 2019, leading businesses to scramble for alternatives.

While the January deal marked a fragile truce in the U.S.-China trade war, the perils of producing in China remain; both Democrats and Republicans increasingly view China as a long-term strategic rival that needs to be contained. And no sooner had the trade war abated than the coronavirus intervened. The extended shutdown of many Chinese factories has pushed exports down 17 percent in the first two months of the year compared with a year earlier, and it has disrupted the production of European cars, iPhones, and other consumer goods.

Inertia is a powerful thing. And there are still many advantages to producing in China, such as scale and efficient logistics. But the coronavirus crisis could mark a tipping point that prompts many businesses to remodel their supply chains and invest in more resilient and often more local patterns of production.

One option is to shift and diversify operations across other Asian economies, such as Vietnam or Indonesia. Another is to shorten supply chains, with U.S. companies moving production to Mexico and European ones to Eastern Europe or Turkey. A third is to invest in robots and 3D printing within advanced economies, producing locally closer to consumers.

A second enduring consequence of the coronavirus crisis may be reduced business travel. Technology gurus have long argued that videoconferencing and chat apps would eliminate the need for most business travel and allow many people to work from home more. Yet until the coronavirus crisis, business travel had continued growing, seemingly inexorably.

Now, whether because of government bans, business decisions, or proper caution, all but the essential international travel has been canceled, and those who can work from home are increasingly staying put.

Particularly (no not just Italy and China) in the USA the outlook is increasingly bad. Even now that test kits are being delivered, researchers are reporting another problem, a shortage of the components needed to extract genetic material from samples. The White House promised capacity of 1m tests by 6 March. But the latest cobbled-together estimates, as of 11 March, are of 7,000 tests in total, well behind almost every developed country with an outbreak.

So is Covid-19 killing globalization as we know it? Given the available evidence so far, we think so.

 

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