By Eric Vandenbroeck
and co-workers
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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