Coronavirus and deglobalisation

The coronavirus that has seeped out of China, insinuating itself into at least 81 countries while killing more than 3,200 people, has effectively accelerated and intensified the pushback to global connection.An intrinsic outcome of the growing integration and complexity of the global economy is that it too suffers from “a butterfly defect”.The super-spreaders of the goods of globalisation, such as major airport hubs, are also super-spreaders of the bads. The 2008 global financial crisis provided a dramatic example of how financial contagion could spread from the US to global markets overnight. So too has the rapid spread of cyber viruses.This is encouraging the pace of deGlobalisation and protectionism.

Deglobalization or deglobalisation is the process of diminishing interdependence and integration between certain units around the world, typically nation-states. It is widely used to describe the periods of history when economic trade and investment between countries declineDeglobalisation has happened before, notably between 1914 and 1945. It is happening now as a result of geopolitics, economic torpor, rising inequality, the failure to develop new political structures to manage globalisation, and the response to new threats such as Coronavirus.

  • The virus already has dealt another blow to slowing economies, and emboldened populists to revive calls, tinged with racism and xenophobia, for tougher controls over migrants, tourists and even multinational corporations.
  • Over the past 30 years China has become the world’s factory. For the past few weeks, the production line has been shut down by plant closures deemed necessary to halt the spread of coronavirus. Beijing fears there will be both short- and long-term damage from the outbreak. The country is on course for its first quarter of negative growth in decades, while earlier this week China’s ambassador to the World Trade Organization (WTO) called on other countries not to use coronavirus as an excuse to put up trade barriers
  • China suspects there will be backdoor protectionism because for years countries around the world have needed little encouragement to resort to protectionism. What’s more, the restrictions are not just on the movement of goods. Earlier this month, the US treasury announced curbs on foreign investment to protect critical technology, data and infrastructure from foreign sabotage. An era of open markets and open borders – where trade and transnational capital flows rose rapidly as a share of global output – has run its course. The instruments of deglobalisation are being weaponised.
  • The panic of Coronavirus and the rate at which it spreads is encouraging more and more countries to stop air-borne travel.Thus, the very backbone of globalisation i.e. interconnectedness is being hit.The deglobalisation is being encouraged.
  • Companies are realising that lengthy global supply chains designed to take advantage of low wages in the developing world have costs as well as benefits. The trend of de-globalisation is being encouraged.
  • The epicentre of Covid-19, Wuhan, is typical of many midsize Chinese cities. In 30 years, it has grown from 2 to over 11m people, and average incomes shot up. As in other mushrooming cities, poor hygiene and lax enforcement of regulations coexist with people and animals living in proximity, near airports from which a virus can spread anywhere in 36 hours.
  • The most obvious impact is on trade. The epidemic has prompted a re-examination of the world’s central reliance on China as ground zero for manufacturing, a trend that was already underway via the trade war.the Trump administration imposed tariffs on hundreds of billions of dollars’ worth of goods from China, promising that this would force companies — from clothing brands to gadget makers — to bring production back to the United States
  • Part of the world’s vulnerability to supply chain disruption stems from the excessive embrace of the so-called just-in-time mode of manufacturing: Rather than keep warehouses stocked with needed parts, ensuring that they are on hand come what may, the modern factory uses the web to order parts as the need arises, while relying on global air and shipping networks to deliver them on a timeline synchronized with production

Are we prepared for deglobalisation?

  • The “Splinternet–In recent years corporate leadership has rightly prioritized cyber risks, the threat of technological obsolescence, and the rise of the jobless underclass stemming from increased automation. However, there are now mounting concerns about the emerging “splinternet” — an increasingly fragmented internet with competing China-led and U.S.-led platforms.Such a technological fragmentation would disrupt global supply chains — which enable global corporations to gain a competitive edge by selecting the most cost-effective solution at each stage of the production process. And the move away from such centralized procurement raises the costs of and reduces the efficiency gains from shared global services.Era of de-globalisation
  • Global corporations are not structured in a way that is fit for purpose to compete in a deglobalizing world. It is increasingly understood that this ever-more siloed world directly impacts three key pillars of global corporations: technology, global recruiting, and the finance function.
  • Greater immigration controls are another offshoot of the move toward a more siloed world. The recent shift in the political mood in the U.S. and Europe toward more stringent immigration intensifies the war for global talent. The risk of further restrictions on immigration has climbed in importance on the leadership agenda as it threatens the corporation’s ability to hire across borders.
  • A more fragmented world also makes managing corporate finances globally more complicated and adds considerable costs to corporate treasuries. Global companies derive enormous benefits from a centralized finance function. Today many companies raise capital relatively cheaply in financial hubs, such as New York or London, and distribute the proceeds as investment across their global operations.
  • As power continues to move away from multilateral organizations such as the EU, WTO, and NATO and devolves to local governments, global corporations will likely find it harder to maintain effective government relations across a myriad of different countries.Thus, deglobalisation will make this difficult.

Is Globalisation no more?

Globalisation and surging trade and travel within countries and across national borders has lifted billions out of poverty, but it also spreads infectious diseases.Globalization, catchall for our interconnectedness, was already under assault from populists, terrorists, trade warriors and climate activists, having become an easy target for much that ails us.Now comes the coronavirus. Its spread, analysts and experts say, may be a decisive moment in the fervid debates over how much the world integrates or separates.

Globalization is far from over. The commercial links that produce the goods of the modern age, from computers to automobiles, involve so many people coordinating so many processes that a purely localized form of industry now seems unimaginable on a mass scale

But as surgical masks become desperately desired items, as schools from Japan to Ireland sit closed, as airlines scrap flights, trade shows are canceled and stock markets plunge, annihilating trillions of dollars in wealth, the panic seems likely to alter the contours of globalization and encourage protectionism

But the moral of this story, say economists, is not that globalization is inherently dangerous: It is that market forces left unsupervised pose perils.

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