I think we are going towards a new normal post COVID. Already damaged by the financial crash and the US- China trade war, the pandemic has dealt globalization another body-blow.
When the world was hit by economic recession in 2008, global trade dipped by almost 10% in 2009 while there was a 3% decline in global GDP. This to an extent indicated towards localization. The World Trade Organization (WTO) has currently estimated that in a worst-case scenario, global trade could dip as much as 32%, indicating the kind of dislocation they expect in large economies.
With this pandemic, there is recognition of the vulnerability that global economic interdependence creates. So while some countries like European Union (EU) are facing difficulties in getting medical supplies, some like Japan find their manufacturing can’t run as value chains are linked with China. This has further been aggravated by the ban on international travel & transportation across various nations. Thus countries will reconfigure their economies to look at import substitution with a greater clarity now, as the perils and pitfalls of over-dependence on foreign supplies become clear. Import substitution, that had become a bad word, may be back in focus.
US President Donald Trump and Brazilian President Jair Bolsonaro have used the widespread push to close national borders, and to keep foreigners, tourists and migrants out, to exploit pre-existing sentiments of xenophobia and racism among their supporters.
US companies were already leaving China due to the trade war. They will leave even more due to the pandemic. Last year saw companies actively rethinking their supply chain, either convincing their Chinese partners to relocate to Southeast Asia to avoid tariffs, or by opting out of sourcing from China altogether. The threat going forward of political anger toward China, not to mention future pandemics stemming from China, means that companies will want to hedge their supply chain strategy by spreading their risks. In addition US have begun a crackdown on Chinese companies listed on American bourses and a bill to delist them is already under consideration.
India on its part is seeking to lure US businesses to relocate from China as President Donald Trump’s administration steps up efforts to blame Beijing for its role in the corona virus pandemic. The government in April reached out to more than 1,000 companies in the US and through overseas missions to offer incentives for manufacturers seeking to move out of China.
Japan on it part has earmarked $2.2 bn of its record economic stimulus package to help its manufacturers shift production out of China as the corona virus disrupted supply chains. China is Japan’s biggest trading partner under normal circumstances, but imports from China slumped by almost half in February as the disease closed factories, in turn starving Japanese manufacturers of necessary components.
A Member of the European Parliament (MEP), last month strongly urged Europe to produce enough goods of critical importance in order to reduce “excessive dependence on China.” The current crisis has shown that the EU must be able to produce enough goods of critical importance on its own, even if it costs a little more than what is made in China. Chinese face masks, ventilators, protective gears, test kits supplied were found to be faulty, thereby putting lives at stake besides adding insult to the injury. Thus EU members plan to cut dependence on Chinese suppliers. British PM Boris Johnson has told civil servants to draw up plans for how the UK can end its reliance on China for vital medical supplies and other key imports.
With a view to prevent opportunistic takeover of Indian firms weakened by the COVID-19 pandemic, the Indian government on 22nd April, 2020 made an amendment in its FDI policy whereby government approval has been made mandatory for foreign investment from countries that share a border with India. While this could affect a number of countries sharing their borders with India (such as Bangladesh, Bhutan, and Nepal), the policy was largely aimed at & would most affect China which has been aggressively investing in India over the past few years. India is considering additional checks on foreign portfolio investments from China and Hong Kong. The fear is that Chinese companies may acquire stakes in strategically important companies at a time when stock prices are volatile.
Lately the scaling up of aggression by China on the Indian border is not an isolated case, with an assessment forming that Beijing is upping the ante on territorial disputes across Asia, possibly to pre-empt investments from departing to neighboring countries in the post-COVID world. From India to Indonesia, Vietnam, Taiwan and Malaysia, territorial aggression seems to have got fresh wind.
As economies reopen, activity will recover, but I don’t expect a return to a carefree world of unfettered movement and free trade. The pandemic will politicize travel and migration and entrench a bias towards self-reliance. This inward-looking lurch could in turn spread geopolitical instability.
Going forward, most economies, with the exception of China, are going to see a very different kind of dynamic as they will try to build up from where they would be in a few months’ time and then think in terms of how to integrate themselves again with other countries. Thus we could witness a change in dynamics of globalization post COVID-19.
Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 12 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata. He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’