Back door to deglobalisation

Dass: Today, the era of open markets and open borders – where trade and transnational capital flows rose rapidly as a share of global output may have run its course. It could be happening as a result of geopolitics, economic sluggishness, rising inequality, failure to develop new political structures to manage globalisation, and the response to new threats.

CURRENT global economic environment clearly points towards a more downside risk following slower growth and trade environment.

For the first time since 2009 global recession, the world economy is expected to grow below 3%, with a challenging global trade environment, likely to expand between 1% and 2%. As opposed to 2019 where trade tension took centre stage besides political and geopolitical issues, today, the biggest challenge comes from the outbreak of coronavirus.

In the past, global health crises and other disasters such as SARS; the Sept 11,2001 attack; Hurricane Katrina in 2005; and the meltdown at the Fukushima Dai-ichi nuclear power plant in 2011 have impacted global supply chain.

Today, quarantine in China and lack of labour will hurt global economic activities. It has obstructed production, sales and shipment by damaging the global supply chain. In part, because the Chinese economy has become an indispensable part of world business, besides growing to become the global factory since the 2003 SARS outbreak. This economy accounts for one-third of the global GDP and 34% of world trade comes from China, compared to only 3% and 1.2% respectively in 2000.

Hence, the virus impact could be long-lasting. It is because the process of globalisation has encouraged companies to build supply chains that cut across national borders. It has made economies more interconnected. Today, companies and businesses are more reliant on Chinese factories than they were during the SARS outbreak in 2003. In part because their business strategies is to lower costs by keeping stocks at low levels with the confidence that they can replenish their inventories “just in time”.

However, such confidence is now being misplaced despite companies increasingly having disaster recovery plans and are trying to anticipate the consequences of unexpected events on their suppliers and shippers. The setback to some of their plans is that it may not have considered the delays in production and transport. Thus, investments are slowing down, growing weakness on discretionary spending and rising financial market volatility, all impacting business and companies bottom line. Job market will turn soft with rising retrenchment.

It will now take some time before production gets back to normal levels. Backlog with limited transport space will see transport and shipping costs rise substantially. Locating for alternative suppliers and shippers to circumvent delays remains challenging.

Effects of this virus outbreak might also affect the compromise in the US-China trade war. The “phase one” trade deal was signed on Jan 15 where the US administration promised US$200bil in sales to China.

The trade war has opened competitive production markets in Mexico, India, Vietnam, Malaysia, and Indonesia, among other places. But there is little, if any excuse, not to have identified other production centres that can make up the shortfall in the event of a disaster.

The World Health Organisation (WHO) on Feb 24 declared that the world should prepare for a possible coronavirus pandemic. Outbreaks in South Korea, Iran and Italy have caused alarm. Clearly, the virus has travelled widely and rapidly. Although WHO raised the risk assessment of coronavirus as it has spread to at least 49 countries in a matter of weeks to “very high” at a global level, still they are yet to declare it as “pandemic” as the current figures does not warrant.

If this virus is declared as “pandemic”, that means every human on this world will be exposed to it. China has clearly shown that it is not necessary for such declaration with everyone taking the necessary action collectively to address it quickly. Clearly, this virus is now “black swan” with an unpredictable effect on companies and businesses – global economy and trade remains unclear.

Knock-on effect from this virus has been easily visible in commodity prices. Commodity prices like industrial metal such as copper and oil prices fell as investors predict that the world’s factory shut down will see less demand for raw materials. Appetite for safe haven assets like gold and currencies remained attractive. Besides manufacturing, the service industries are also affected such as tourism related industries and the domino effects on indirect industries.

Fears could be heightening in China on the negative short- and long-term impact from this virus. There are growing concerns of a “backdoor” deglobalisation although barriers are being put up not to halt trade and migration flows but to prevent the spread of this virus.

Still, the economic effects remain the same, hurting global supply chain, lowering business confidence and a weaker global trade. Policymakers are unveiling stimulus measures to support growth. But they can do little given the shock the economy is experiencing in supporting the capacity to produce goods and services due to supply and shipping disruptions. This leaves the world economy largely at the mercy of nature. How bad the impact on global growth remains on how quickly the virus can be contained.

Globalisation was sold as a way of boosting prosperity for all by making markets bigger and more efficient. For a while the model worked, but when it blew up and caused extensive collateral damage, a backlash was inevitable. Now, the risk of a “backdoor” protectionism cannot be ruled out. Every movement of globalisation requires a champion to spread free trade and open markets. That role fell to Britain in the late 19th century and the United States in the second half of the 20th century.

Today, the era of open markets and open borders – where trade and transnational capital flows rose rapidly as a share of global output may have run its course. It could be happening as a result of geopolitics, economic sluggishness, rising inequality, failure to develop new political structures to manage globalisation, and the response to new threats. Besides the virus and trade war, there is global heating which looks certain to add to the deglobalisation pressure. It suggests the world is at the mercy of nature as the threat posed by the climate emergency is forcing governments, businesses and consumers to ask some questions about the way the global economy works.

Deglobalisation has happened in the past, notably between 1914 and 1945. It could also be happening now. Today, governments are less keen on dismantling trade barriers. They are focusing more on safeguarding jobs, protecting intellectual property theft and rising cybercrime. Businesses and companies are realising that lengthy global supply chains which should provide advantage by reaping on low wages in the developing world have costs as well as benefits from this virus attack. Hence, it is more likely to further encourage the return of production that was offshored in the 1990s and 2000s. Deglobalisation is the result.

Anthony Dass is chief economist/head of AmBank Research & Adjunct Professor, Faculty of Economics, UNE, Australia. The views expressed are the writer’s own.

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