The Economy is Deglobalising. What Happens Next is Up to Us

By Gene Lin

When China announced its economy had shrunk for the first time in almost three decades this month, the market was taken aback by yet another devastation caused by the coronavirus. The 6.8 per cent plunge in the world’s second largest economy signalled that most manufacturing activities around the world have been put on hold due to the pandemic, kicking off what some are calling the beginning of deglobalisation.

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For 28 years, China’s GDP had been growing continuously until the COVID-19 pandemic brought the economic powerhouse to its knees. (Photo: unsplash.com)

China’s further economic downturn amidst COVID-19 is kicking off a chain reaction that prompts businesses to begin looking elsewhere for contractors and suppliers. By the end of April, governments are starting to pay companies to move manufacturing operations out of China, fearing that over-reliance on the country makes them vulnerable to more economic shocks.

In March, the United Nations Conference on Trade and Development (UNCTAD) found that COVID-19 had negatively impacted direct foreign investments globally, with an estimation of 30 per cent to 40 per cent drop in investments from multinational enterprises between 2020 and 2021.

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Among the top 100 multinational enterprises that the United Nations are tracking, 61 per cent had issued a revised earning guidance since the COVID-19 outbreak. (Photo: unsplash.com)

“The trade had frozen for a couple of weeks, you can see cities that literally cannot see human beings walking around as if they are totally abandoned… and this definitely impacted the whole commodities related to trade,” said Bassel Karameh, Head of Product – Leadership Management Team at DHL Global Forwarding (Danzas AEI). “The business models that are traditional will definitely disappear, we are not looking at a normal environment anymore”.

With the global lockdown stretching indefinitely, some are hoping for a rapid recovery once the pandemic passes. But most experts say the prospect for this scenario is highly unlikely. The challenge that every business will be facing would not be how quickly they can resume former operations, but how well they can adapt to the post-COVID environment.

For the logistics and supply chain sectors, any strategy to survive the pandemic would likely involve automation, restructuring of internal cultures, and decentralisation of the supply chain network, where possible, in order to reduce risk.

“Globalisation itself as a factor is great, but try not to rely on what is happening overseas,” said Karameh. “At the end of the day you have a social commitment to the environment and people around you, and you need to make sure that you are agile enough, and solid enough, and cash-rich enough in order to sustain [yourself]”.

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In the aftermath of COVID-19, businesses that rely too much on the global supply chain might need to consider localising distribution where necessary. (Photo: unsplash.com)

As the global supply chain – the backbone of every advanced economy – experiences indefinite paralysis, the ripple effect is starting to impact nations in various ways. While some players may find unexpected opportunities amidst a deglobalised economy, there are no real winners during a pandemic.

“If you look at the collapse of trade in 2008 and 2009, it dropped by around 15 per cent, and my assessment this year is that it is going to be multiple times of that,” said Dr Tang Hei-wai, an international trade expert at The University of Hong Kong. “Everyone loses, so the question is which countries are going to lose less, that would be the so-called relative gain”.

According to Dr Tang, large economies that are service-oriented and self-sufficient such as the United States and Germany are expected to lose less than those who depend heavily on international trade such as China, Hong Kong, and Singapore. Meanwhile, some small economies might see a relative gain due to trade diversion from China, namely Vietnam, Mexico, Taiwan, and less developed European nations. But these markets also lose out on foreign direct investments, capital and knowledge exchange opportunities due to the pandemic, which might offset their relative economic gain.

In a deglobalised economy, Dr Tang Hei-wai expects inequality to increase, low-skill workers to suffer, and businesses to be generally more risk-averse. (Photo: pexels.com)

With global trade and interdependence among nation states slowly disappearing, human mobility remains as the last factor that underpins the globalised economy. But today’s widespread social distancing policies and travel restrictions threaten to pull the last thread out of the globalisation fabric.

“It’s tempting to just consider [globalisation] inevitable. But when you look back, so many things needed to happen and come together at the same time. If you could rewind time and play it again, it might not have worked out that way,” said Dr Benjamin Iaquinto, human mobility and sustainability expert from The University of Hong Kong.

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Experts fear that a deglobalised economy can revert the international world order back to the era of WWII, when countries are less dependent on each other and are prone to conflicts. (Photo: unsplash.com)

Factors which facilitate globalisation – such as open society, relative affluence of average consumers, consistent supply and demand of oil, and a functional global supply chain – are all under question during the COVID-19 pandemic. In a world where immigration policies are tightened, where the world is on track to face another recession, where oil prices go negative and the global supply chain is heavily disrupted, deglobalisation may seem inevitable in the foreseeable future. Experts generally agree that this process is likely to widen inequality and escalate international conflicts.

“I wish there were more coordinated efforts across superpowers to deal with the [COVID-19] crisis. I don’t want to see an intensified Cold War, which has started already,” said Dr Tang.

“It’s not all doom and gloom. We can still live relatively well even if society is not as affluent, but that also depends on whether leaders have people’s best interests at heart and introduce good social policies,” said Dr Iaquinto. “If people are willing – if our leaders are willing – there’s no reason that we can’t have high standards of living despite not being able to enjoy a lot of benefits of international trade”.