The COVID-19 pandemic has accelerated the trend towards de-globalization and may increase countries' impulse towards protectionism. It has highlighted vulnerabilities in heavily globalized supply chains that rely on few suppliers like China. Countries are now looking to diversify suppliers or bring production home. It has also damaged trust between countries as some acted opportunistically in their responses. Going forward, countries may boost local production of essential goods and focus on food and energy security, leading to a less globalized economy unless leaders resist protectionist urges.

1. The De-Globalisation Impulse

2. There is something about the speed that this catastrophe played out in
the financial markets that points at the existing problems that made it
almost inevitable. Part of it has been covered in earlier articles (equities
at near all-time highs, record amounts of global debt based on
sustained historically low interest rates). But there is another bubbling
problem that may begin to accelerate in the aftermath of the
pandemic: the de-globalisation impulse.

3. Over the last three years we have seen the rapid change in US policy
away from multilateralism and global institutions under the Trump
presidency. This pandemic has the potential to accelerate that process.
There is a growing mistrust between countries and open blaming,
opportunism and the breaking of contracts during the course of this
outbreak is lowering trust levels worldwide which hold the globalised
world together.

4. One of the issues that looks like it may surface for policymakers going
forward concerns the vulnerability economies have to global supply
chains. Intricate chains bind economies together from online ordering
making the business of striking deals and signing contracts seamless
across borders, to highly efficient production facilities located in low-
cost, tax efficient locations with trade agreements that allow for the
free trade of goods and services, speedy delivery and instant payment
systems thanks to computerisation. In other words, trade is a highly
efficient mechanism that has utilised technology to the fullest, it is
backed up by financial, tax and trade agreements agreed to by
multilateral countries. But, like any system, it is only as robust as its
weakest links.

5. The swift breakdown of these supply chains during this pandemic has
highlighted these vulnerabilities; the excessive exposure to and reliance
upon one manufacturer for the world, i.e. China. This one country
accounts for 16% of global GDP- almost entirely based upon
manufacturing. In contrast, the largest contributing country to global
DGP, the US, is 70% service industry oriented. Whether as a buyer of
raw materials or as a supplier of finished goods the world relies heavily
on Chinese production capacity. And, when that country shuts down a
province with 55 million people and thereafter puts nearly 700 million
people under some form of quarantine, the disruptions ripple across
the world. This we have seen and are witnessing in real time.

6. How do countries avoid this form of economic hostage taking? One can shift
production away from China; one can diversify its sourcing to other low-cost
centres; or one can bring production back home. The middle-option seems
the most sensible since reduced purchasing power in a recessionary globe
would make moving back to the home country (likely higher cost) less viable
a proposition than in a normal functioning situation. Already many buyers
have been forced to look at alternative manufacturing sources which is not in
itself a problem from an overall trade level perspective, but it does signal a
period of significant change in sourcing policies for both companies and
countries alike. This is likely to see a rise of competitive undermining of
currencies in order to remain in contention. This has been happening over
the last few years and we have seen devaluations in the Indonesian and
Malaysian Rupiahs as well as the Indian Rupee amongst others.

7. Another problem is the damage being done to the multilateral agencies
such as the WTO by the Trump administration which is sabotaging its
functioning by stalling the appointments to the appellate body of the
dispute settlement system. Discarding established alliances and pulling
out of multilateral bodies has become the hallmark of an instinctively
protectionist and isolationist president. There is a danger that the
world’s largest economy may look to bring back production within its
own borders and this crisis may provide the opportunity to do so. As
the well-known saying in political circles goes: never waste a good
crisis.

8. This is potentially damaging: previously disputes were being arbitrated
by a global agency meant to show impartiality. This is being
undermined in favour of bilateral settlement. This works in the US’
favour being such a dominant global economic and military giant
unafraid to flex its muscles. Other countries do not have that advantage
and we could see a surge in protectionist tit-for-tat measures in the
future.

9. Trade is based on trust. Given that countries often have competing
interests the undermining of a neutral resolution authority will
contribute to an erosion of trust. This is being accelerated by the
eschewing of normal channels of re-negotiation and replacing it with
tweets announcing the end of adherence to trade deals (like the US
with NAFTA and the non-participation in the TPP in January 2017) and
the impulsive imposition of escalating tariffs (on China for example)-
again by the US. These disruptions only get raised by the rhetoric that
accompanies any Trump announcement- with the crude, demeaning
tones only adding to the hostility or animosity.

10. We now add into this scenario a global pandemic which has infected 2.5 million people
officially so far in a little less than 3 months killing over 160 thousand. China was aware of
the danger posed by this virus far earlier than it let on. At one stage it even suggested to
the World Health Organisation that there was no evidence of human to human
infectiousness. This failure to be upfront at the outset when mitigating actions could have
been taken has fuelled anger against them. German newspapers have been reported to
have estimated the damage done to the German economy at 150 billion Euros which does
not represent the government’s stance but is indicative of public sentiment. Add also the
clumsy response by the WHO to the news and the US cutting their contributions to that
organisation, stir in the subsequent actions in bad faith by various parties and we are
seeing some negative fallout for globalists going ahead. Specifically: incidents like the US
attempts to buy out the work of a German laboratory for exclusive US licensing and use
(foiled by the German government), the hi-jacking of masks in transit by the US- meant for
Germany but repatriated to the US, the unilateral announcements of border closures
without informing the other countries and the opportunistic investments being made in
weakened global equity markets by Chinese investment firms and we can see that there
has been a bit of a free-for-all which will have some backlash sooner rather than later.

11. The erosion of trust is not to be underestimated as the Indian government swiftly
announced a policy for monitoring (approving) investments made by
‘neighbouring’ countries. This was aimed at a specific country as this came
immediately after it became public knowledge that the Chinese had been buying
into HDFC- India’s largest-by-far, housing finance company, during the 40% fall it
witnessed in its equity prices immediately after the discovery of the Covid-19 virus
that emanated out of…China. Their holdings had crossed 1% and this angered the
Indian government. This is rank opportunism of an almost shameless level. But- to
be fair, India viewed the closure of Hubei province as an opportunity to market to
Chinese customers worldwide to look at India as an alternative investment avenue
and production base. But little can top the Trump administration’s attempt to buy
out the potential vaccine for the Covid-19 virus from an allied nation exclusively for
American use (and possible source of profits if they chose to sell it outside again).
These are all acts in bad faith and suggest a poisoned atmosphere of low trust
levels amongst a comity of nations.

12. Strategic necessity also plays a role in the de-globalisation story. The lack of
availability of essential protective equipment for medical workers and the
chaotic procurement attempts has also sparked calls for onshoring critical
goods production. Re-tooling existing production lines has been slow and has
potentially cost thousands of lives. There is a need in some countries to
ensure ready onshore capability- especially in large nations. Some countries
immediately slapped bans on the export of essential medicines in the event
that they would require them- another reason to ensure either an
emergency stock, or domestic production capability. This also extends to
food security in situations where delivery disruptions have been severe.
Countries may look to boost local production of essential crops and ensure
that it remains for internal consumption.

13. Of course, the last straw in this may be the imposition of global capital
curbs. Thankfully, there’s been no sign of that yet but the recent flight
to USD cash seriously worried central bankers and caused alarm (and
crashes) in most markets. Hopefully, the cooperation extended by the
world’s central bankers will keep calls for stricter capital controls at bay.

14. The trend towards a less globalised economy has been given an
unexpected impetus by this pandemic. What may be visible anecdotally
in terms of fewer tourists and international travel restrictions may spill
over- as we have seen, to lower levels of trade because of security
concerns, perceived overexposure to one supplier, lower levels of trust
and so on. It is imperative that leaders realise the benefits that have
accrued for billions from free trade and not give into protectionist
impulses. For that, you will need a set of leaders with broader vision
than some of the ones at the helm today.