Did Covid-19 kill globalization?

The Economist, - Even before the pandemic, globalization was in trouble. The open trading system that dominated the world economy for decades was damaged by the financial collapse and the Sino-American trade war. Now it is recovering from its third blow in a dozen years as lockdowns sealed borders and disrupted trade. Passenger numbers at Heathrow fell 97% year-on-year. Mexican car exports fell 90% in April. And 21% of transpacific container voyages in May were canceled. As economies reopen, activity will recover, but don't expect a quick return to a carefree world of movement and free trade. The pandemic will politicize travel and migration and create a bias toward self-sufficiency. This internal shift will weaken the recovery, leave the economy vulnerable, and spread geopolitical instability.

The world has had several periods of integration, but the trading system that emerged in the 90s went further than ever before. China became the world's factory, and borders opened to people, goods, capital, and information. After the collapse of Lehman Brothers in 2008, most banks and some multinational companies retreated. Trade and foreign investment stagnated relative to GDP, a process this newspaper later called 'slowbalization'. Then came President Donald Trump's trade wars, which mixed concerns about blue-collar jobs and China's autocratic capitalism with a broader agenda of chauvinism and disdain for alliances. By the time the virus began to spread in Wuhan last year, the US tariff barrier had returned to its highest level since 1993, and America and China began to decouple their technology industries.

Since January, a new wave of disruptions has spread westward from Asia. The closure of factories, shops, and offices has caused a drop in demand and prevented suppliers from reaching customers. The damage is not universal. Food is still arriving, Apple insists it can still manufacture iPhones, and Chinese exports have held up so far, boosted by sales of medical equipment. But the overall effect is savage. World merchandise trade could shrink by 10% to 30% this year. In the first ten days of May, exports from South Korea, a trading powerhouse, fell 46% year-on-year, likely the worst decline since records began in 1967.

The underlying anarchy of global governance is being exposed. France and Britain have clashed over quarantine rules, China is threatening Australia with punitive tariffs for demanding an investigation into the origins of the virus, and the White House remains at war over trade. Despite some instances of cooperation during the pandemic, such as the Federal Reserve's loans to other central banks, the United States has been reluctant to act as a world leader. Chaos and division at home have damaged its prestige. China's secrecy and bullying have confirmed that America is unwilling – and incapable – of reclaiming the mantle. Around the world, public opinion is turning away from globalization. People have been disturbed to discover that their health depends on a scramble to import protective equipment and on migrant workers toiling in nursing homes and harvesting crops.

This is just the beginning. While the flow of information is largely free outside of China, the movement of people, goods, and capital is not. Consider people first. The Trump administration is proposing to further reduce immigration, arguing that jobs should go to Americans. Other countries will likely follow. Travel is restricted, limiting the scope for finding work, inspecting plants, and collecting orders. About 90% of people live in countries with largely closed borders. Many governments will only open to countries with similar health protocols: one such “travel bubble” is being discussed to include Australia and New Zealand and perhaps Taiwan and Singapore. Industry is signaling that the disruption to travel will be long-lasting. Airbus has cut production by a third, and Emirates, a symbol of globalization, does not expect recovery until 2022.

Trade will suffer as countries abandon the idea that companies and goods should be treated equally regardless of where they come from. Governments and central banks are asking taxpayers to subscribe to domestic companies through their stimulus packages, creating a huge and ongoing incentive to favor them. And the effort to bring supply chains back home in the name of resilience is accelerating. On May 12, India’s Prime Minister Narendra Modi told the nation that a new era of economic self-sufficiency had begun. Japan’s Covid-19 stimulus includes subsidies for companies that repatriate factories. European Union officials speak of “strategic autonomy” and are creating a fund to buy stakes in companies. The US is asking Intel to build factories at home. Digital commerce is thriving, but its scale is still modest. Overseas sales by Amazon, Apple, Facebook, and Microsoft are equivalent to just 1,3% of global exports.

Capital flows are also suffering as long-term investment plummets. Chinese venture capital investment in America fell to $400 million in the first quarter of this year, 60% below its level two years ago. Multinational companies may cut their international investment by a third this year. The United States has just instructed its main federal pension fund to stop buying Chinese stocks, and so far this year, countries representing 59% of global GDP have tightened their foreign investment rules. While governments try to pay off their new debts by taxing companies and investors, some countries may be tempted to further restrict the flow of capital across borders.

It's lonely out there.

Don't be fooled into thinking that a trading system with an unstable network of national controls is more humane or safer. Poorer countries will find it harder to catch up, and in the rich world, life will be more expensive and less free. The way to make supply chains more resilient is not to domesticate them, which concentrates risks and loses economies of scale, but to diversify them. Furthermore, a fractured world will make it harder to solve global problems, including finding a vaccine and ensuring economic recovery.

Tragically, this logic is no longer fashionable. These three bodily blows have so severely damaged the open trading system that the powerful arguments in its favor are being overlooked. Say goodbye to the greatest era of globalization – and worry about what will take its place.