HomecontentGLOCAL DEVELOPMENTGLOCAL TRADEWhat is in store for Globalisation post Covid-19? Analysing the Idea of Reverse Globalisation – Will it be effective?

What is in store for Globalisation post Covid-19? Analysing the Idea of Reverse Globalisation – Will it be effective?

  • July 4, 2020
  • Posted by: Hritik Ganju
  • Category: Featured, GLOCAL DEVELOPMENT, GLOCAL TRADE, Latest Work, OPINION
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Often considered as a phenomenon that arrived just three decades ago, the ideas of globalisation have instead been prevalent since centuries. Contact between people of diverse backgrounds, culture, specialities and occupations is not new. Trade networks such as the Silk Route which was central to the economic, political and cultural interactions between the East and the West for over 2000 years, dates back to 2nd Century, BCE. Certainly, globalisation has been considered to be a key engine for economic growth for a long time. However, the ideas of free trade and libertarianism have only been formalised and been widely accepted by countries all around the world after the Second World War. Nevertheless, with all benefits that come with globalisation in terms of economic efficiency and a better standard of living, the recent intensity that it has gained brings its own set of systematic risks. With easier travel, higher availability of cheaper goods, the possibility of offshore production, and access to the world wide web, countries today are much more dependant on each other than they ever were. This interdependence has led to an escalation of the crisis caused by the recent Coronavirus pandemic.

One of the biggest drawbacks of a globalised economy is that it makes the country vulnerable to external economic shocks. Globalisation has allowed many multinationals to fragment their supply chains to take advantage of cheaper labour, economies of scale and efficient production. This fragmentation can be further classified into Vertical and Horizontal Foreign Direct Investment (FDI). Horizontal FDI takes place when the corporation sets up the same production activities in multiple countries whereas Vertical FDI occurs when the company fragments its production process internationally, locating each stage of production in a country where it can be done at a lower cost. Both these types of direct investments have suffered immensely due to the current epidemic, however, the severe impact on Vertical FDI insinuated a backlash on current globalisation trends.

 The initial shocks to these multinationals were felt when China, the original epicentre of the disease went into lockdown. China has been an important element of the global supply chain since the early 2000s, expanding Chinese trade at a breakneck pace. The Chinese imports and exports in 1995 totalled just $280.9 billion, which accounted for about 3% of the global trade. 23 years later, in 2018, China accounts for about 12.4% of the global trade with imports and exports valuing to $4.6 trillion. In 2019, China was the world’s second-largest economy with a GDP of $13.6 trillion and a Value Added to Exports (VAX) ratio of around 80% indicating the world’s heavy dependence of China as a trading partner. Due to improper labour laws, lower wages and high population, certain production activities are the cheapest in China. However, this interdependence led to severe disruptions in supply chains during the pandemic. Being the hub of the world’s consumer technology production, most of the products are either made in China or depend on components which are produced there. Wuhan is the hub for China’s booming car parts and accessories exports. Consequently, most of the world’s biggest companies like Fiat, Apple, Nike and Disney had to halt their production in China due to the outbreak. Furthermore, countries around the world depend on China for many essential pharmaceutical goods. According to the Minister of chemicals and fertilisers, two-thirds of the total imports of Bulk Drugs/Drug Intermediates in India are from China.  These supply routes were impaired when factories were shut down in China. Similarly, essential industries like agriculture, automobile and energy are also dependent on these fragmented supply chain networks.

As the health crisis unfolds, trade and trade policies can be a part of the solution or a part of the problem. Broken supply chains and uncooperative trade policies can lead to shortages of critical medical supplies and higher prices of essential commodities in vulnerable and fragile countries. Based on the WTO projections, world trade may fall by about 13-32% in 2020. The range is based upon the uncertainty regarding the eradication of the virus. To put it in perspective, even the optimistic scenario is worse than the 12% drop seen at the height of the Global Financial Crisis in 2008-09. The pessimistic scenario will be on par with the drop seen during the first three years of the Great Depression from 1929-1932. However, even though non-essential trade is affected by closing down of factories and manufacturing, essential commodity trade is also affected due to fear of shortage of domestic supply and rising prices within the country. Hence, recently imposed trade restrictions by leading exporting economies like the EU, China, USA, Japan and India might significantly impact supplies in developing nations and increase prices of medical equipments. Figure 1 shows the main sources for Covid-19 products for the 20 most-affected developing countries. Most countries have imposed bans on exporting critical medicines and medical and Venturi masks. Figure 2 shows the expected impact of export restrictions on world prices for these essential Covid-19 products. In the short run, the expected increase in prices of medical masks is 20.5% and that of Venturi masks is 9.1%.

This shortage of products and an increase in prices in terms of need has brought up the need to think about a phenomenon called ‘Reverse- Globalisation’. Reverse Globalisation as the term suggests is pulling back of production centres to close-by regions and consolidating supply chains to hedge against future shocks. The idea is to create economies more self sufficient in terms of production of essential and semi-essential goods and services such that future calamities could be internally handled without worrying about national trade policies. Another feature that is expected through internalisation of production activities is employment creation within home-borders. With economic shutdowns containment measures, unemployment rates have soared. India saw a 3 fold increase in unemployment rates to 26% in rural areas and 31% in urban areas during the first phase of the lockdown. Similarly, in the third week of April, the United States Bureau of Labour Statistics revealed that about 6.6 million people filed for unemployment benefits. The number has historically always remained below 1 million. Bringing production activities back home, the number of available jobs could increase, diluting the current labour market crisis.

However, these theoretical benefits of reverse globalisation come with a lot of caveats – some even overweighing the benefits. Theories of international economics and finance have explained the unparalleled benefits of trade of merchandise and services. The Ricardian Model of International Trade given by David Ricardo emphasises on the founding principle of trade and specialisation – Comparative Advantage. Comparative advantage is defined as the ability of an economy to produce goods at a relatively lower opportunity cost as compared to others around the world. The Ricardian Model suggests that there exist differences in labour productivity among countries due to varying technological advancements. Due to this, some countries can produce and consume more by specialising in the good they have a comparative advantage in and trading it for other goods. Though this model explains benefits of trade in the short run (as technology can change over time), it explains the importance of specialising in an economy to reach maximum efficiency.

Benefits of trade have also been explained in much more complex models like the Heckscher-Ohlin Model. The H-O model, explains the concept of comparative advantage by observing that different countries have different endowments of each factor of production. A country with excessive labour would specialise in labour-intensive goods (like Bangladesh’s cloth industry), and countries which have excessive capital would focus on capital intensive industries (like Japan’s automobile industry). This model is different from the efficiency theory and hence can be used to explain long term effects of trade. Each country would specialise in the factor that they have in abundance and then trade it for other commodities. This free movement of labour and capital across borders would lead to the increasing availability of cheaper goods.

Globalisation does not only include import and export of goods across borders but has also led to the sharing of ideas, knowledge information and people. As ideas and information flow across borders through universities, jobs and offshoring, they promote research and innovation which leads to greater development of countries. “Standing on the Shoulders of Giants” as it is popularly known as, has helped lower developed countries to use the technology and innovations of the higher developed countries to improve their economic conditions.

Thus, reverse globalisation could cause inflation, reduce consumer choice, slow the pace of innovation, and lead other countries and economies to retaliate with their own import restrictions. Blocking ideas will curb creativity and blocking people would plunder the society of new talent and much-needed workers. It would further add to the misery of those who have to flee their country as a result of political, economic, or religious persecution. However, looking at the popular stance around the world, many countries are focussing on building regional supply chains and destroying the fragments placed in different countries to build self-resilience. Indian Prime Minister Narendra Modi’s ‘Aatmanirbhar Bharat’ (Self-Reliant India) speech clearly indicated the intentions of the government to reduce its dependency on foreign nations. Japan’s stimulus includes subsidies and rebates for companies that repatriate factories. The United States is urging Intel to build its plants at home, and the EU is creating fun to buy stakes in firms to create ‘strategic autonomy’.

However, to put it in context, the world today is so interdependent that it is inevitable for us to completely irradiate globalisation. It is imperative for governments to understand that multilateral policies would also help the world to fight conditions such as the pandemic or the financial crisis in a much more efficient manner. Bringing all industries back home not only creates a problem in terms of efficiency and higher costs but also counters the primary reason for which revet-globalisation was proposed — Protection. A closed economy would be more prone and vulnerable to internal shocks such as floods, droughts and earthquakes. Further, instead of increasing employment, it would lead to further disruptions in the labour market by discouraging economic growth and hence lowering wages for workers — reducing the average standard of living. It is thus important to understand that the way to make supply chains more resilient is not to domesticate them, which concentrates the risk and defeats the idea of economies of scale but to diversify them.

The pandemic would definitely politicise travel and migration, even post the containment measures. It would be biased towards a more self-reliant economy; however, this inward-looking stagger would only enfeeble the recovery, leave it more vulnerable and spread geopolitical instability. However, we cannot disagree that the current state of globalisation has its flaws and certain measures do need to be taken to reduce its impact on all economies around the world. However, these measures need to be taken with caution. We need globalisation that is based on fairness, equality and humanity. Multilateral trade policies are the need of the hour to ensure that we together come out of this crisis. Ensuring proper health equipment, medicines, and vaccine development initiatives are flowing across borders freely is necessary. Using the benefits of this interconnected world to our strength is the only way towards future growth.

References/Citations

  • Altman, S. (2020, June 19). Will Covid-19 Have a Lasting Impact on Globalization? Retrieved June 30, 2020, from https://hbr.org/2020/05/will-covid-19-have-a-lasting-impact-on-globalization

 

The views expressed in this paper are the views of the authors and do not necessarily reflect the views or policies of PCI, its Board of Directors, or the governments they represent.

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