LONDON (Reuters Breakingviews) - Past cycles of globalisation have shown themselves vulnerable to sudden shocks. The First World War brought the Victorian free-trade era to a shuddering halt. Trade picked up after the conflict, but the 1929 crash was followed by beggar-thy-neighbour tariffs and another violent contraction in world trade. The fallout from the Lehman Brothers crisis damaged faith in globalisation. The Covid-19 pandemic could well be a harder blow. A world that turns increasingly inward will look very different to the one we know.
Protectionist pressures tend to increase at times when economic growth weakens. After the 2008 financial crisis, several countries, including China, sought to bolster their own economies with subsidies for exporters. By the middle of the last decade, trade restrictions affected a greater share of world trade than in the 1930s, according to Global Trade Alert. In 2015, world trade volumes started to decline. Most trade restrictions at the time were below the radar. But since the arrival of Donald Trump to the White House, protectionism has become more overt. Since early 2017, thousands of new trade distortions have been introduced.
The U.S.-China tariff war accounts for less than a quarter of recent anti-trade measures, estimates Simon Evenett, professor of International Trade and Economic Development at Switzerland’s University of St. Gallen. Still, the American president’s preference for conducting policy on Twitter had taken a toll. Last October, the International Monetary Fund warned that tariffs and uncertainty about trade policy were discouraging new investment and dampening the prospects for the global economy. At this critical juncture for globalisation, Covid-19 emerged in Wuhan.
The coronavirus pandemic threatens globalisation in several ways. First, it has exposed the fragility of cross-border supply chains. In recent years, producers have taken advantage of cheap dollar funding for trade credit to lengthen their supply chains, often incorporating several countries. These tend to be more efficient in terms of cost but are also more vulnerable. When Beijing tried to halt the spread of the epidemic in January, many Chinese factories were shuttered. Apple had problems sourcing parts for its iPhones. It soon became clear that many Western firms lacked an adequate understanding of their supply chains. Global trade links suddenly appeared to be as complex, interconnected and vulnerable to unexpected shocks as the financial world showed itself to be when the subprime crisis emerged.
The pandemic’s threat to world trade took a more insidious turn last month. Back in January, Beijing stopped the export of certain medical supplies, such as face masks, including those produced by foreign manufacturers. As the coronavirus spread across Europe, export restrictions proliferated almost as fast as the virus itself. Since the start of the year more than 50 governments have imposed export curbs on medical supplies, according to Global Trade Alert’s count. Germany stopped the export of 240,000 masks to Switzerland. France prevented Valmy from fulfilling its contract with Britain’s health service to supply millions of masks. India, a major producer of generic medicines, imposed a range of export restrictions on medical supplies and drugs, including fever-reducer paracetamol. The European Union, which produces half the world’s ventilators, restricted their export. Of the world’s major economies only the United States and Australia have maintained free trade in medical supplies.
Beggar-thy-neighbour trade policies have become sicken-thy-neighbour, says St. Gallen’s Evenett. Panicked reactions to the pandemic bring short-term relief at lasting cost. Companies may be reluctant to invest for export markets if those markets are shut off at whim. More importantly, export bans foster bitterness between trading partners. Deprived of medical supplies from Germany, Italy and Serbia turned to China for relief. Medical export restrictions succour nationalists who argue in favour of self-sufficiency in manufacturing. White House trade consigliere Peter Navarro states that American dependence on China for key medical supplies and drugs is a “wake-up call”.
What might the world look like when the pandemic passes? For a start, supply chains are likely to become shorter and more robust. Cross-border manufacturing will take on a geopolitical aspect, as managers question whether production is located in trusted countries. Moves to repatriate manufacturing, especially in key areas such as healthcare, will receive a fresh impetus. The age of multinational oligopolies is coming to an end. Takeover authorities will pay less attention to consumer prices when considering mergers and more attention to other matters, such as competition and security. If China becomes the scapegoat for the pandemic, as is likely, it can no longer serve as the workshop of the world. British politicians are already calling for a reassessment of their government’s decision to allow Huawei Technologies to provide telecoms equipment in the UK.
Some of the macroeconomic consequences that follow a turn in the globalisation cycle are foreseeable. The disinflationary forces unleashed by the era of free trade will come to an end. When trading links frayed at the close of the 19th century, the great Victorian bond bull market came to an end. The current bond bull market, nearly four decades old, will be replaced by a multiyear bear market. As interest rates rise, a higher discount rate will be applied stocks and houses, both of which will trade in the future at lower valuations. No longer able to outsource manufacturing to the cheapest geographies, manufacturing costs will rise. Profits will decline and labour’s share of national income will rise.
The geopolitical consequences of an end to globalisation are more fraught. As the history of the 1930s shows, the struggle for raw materials in a multipolar world can become a casus belli. For years, Beijing has been pursuing a 1930s-style autarky, tying up supplies of commodities from various countries, such as Venezuela, with loans from the China Development Bank. More recently, Beijing’s Belt and Road Initiative has increased its number of client states. At the same time, the People’s Republic has reduced the share of foreign components in domestic manufacturing. China may unwittingly have provided the catalyst for this crisis, but if globalisation fails it will enjoy its head start.
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