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Effects of Covid-19 on economic globalisation

The era of globalisation, open borders and global value chains is under severe pressure. Populism, protectionism and climate change have all challenged economic globalisation. International trade increased rapidly after 1990, fuelled by the growth of a complex network of global value chains (GVCs). These chains represent the process of ever-finer specialisation and geographic fragmentation of production. International trade and the integration of developing countries into the world economy caused poverty to fall sharply. In recent years, this model of economic growth based on economic globalisation has been challenged. Even long before COVID-19, environmental groups, labour unions and populists all criticised free trade and globalisation for different reasons. The COVID-19 pandemic presents the latest challenge. This raises the question whether the outbreak of COVID-19 has sounded the death knell for economic globalisation.

Background of economic system in globalisation

In 2016, tens of thousands of European citizens took the streets to protest a free trade deal being negotiated between the EU and the US. Subsequently, the negotiations on the so-called Transatlantic Trade and Investment Partnership (TTIP) stalled and have since not been resumed. Pressure on globalisation furthermore rose as protectionist measures increased worldwide. The World Trade Organisation (WTO) estimated that the stockpile of import restrictive measures has increased since 2009 and that it affects 7,5% of world imports today. Between October 2018 and 2019, the WTO recorded 102 new trade-restrictive measures, covering USD 746,9 billion of trade flows. The trade war between the US and China has shaken the foundations of global trade. The superpower rivalry led to a process of economic ‘decoupling’, forcing many American and Chinese companies to shift supply chains elsewhere. As we all know that free trade and globalisation are increasingly under pressure,  COVID-19 is bringing economic globalisation to the brink of collapse and could fundamentally change the way international supply chains are managed. As one expert viewed the pandemic as a “game-changer” for globalisation, as this outbreak reveals an “irresponsible and unreasonable” reliance on Chinese suppliers and exposes the vulnerability of complex international supply chains.

Relation between Covid-19 and economic globalisation

In the short-term, it is highly likely that the COVID-19 pandemic will lead to a period of economic recession.  A short period of economic recession seems unavoidable, but the question is whether COVID-19 will structurally transform globalisation on the long term. To analyse the long-term effect of COVID-19 on economic globalisation, we must decompose the various elements of globalisation. Economic globalisation includes a variety of elements such as cross-border trade flows, capital flows, data flows, exchanges of people and so forth.  We can distinguish between local value chain participation, regional value chain (RVC) participation and global value chain (GVC) participation. Generally speaking, the higher the participation in intra-regional RVCs, the higher the degree of regional economic integration. Likewise, the higher the degree of participation in inter-regional GVCs, the higher the degree of economic integration into the global economy. Assessing the level of economic globalisation by GVC participation does not fully resemble the complex reality, as various other drivers of globalisation such as people-to-people exchanges are excluded. Nevertheless, the concept of participation in GVCs helps better grasp the potential impact of COVID-19.

As the pandemic lays emphasis on localisation it will  lead to the collapse of global value chains because national governments adopt protectionist policies and force companies to relocate production facilities closer to home to avoid a reliance on foreign suppliers. The participation of companies in both inter-regional as well as intra-regional value chains will decrease. The coronavirus outbreak could have a similar negative impact as the 2008 financial crisis. The 2008 financial crisis has already demonstrated that a severe crisis can have a structural negative effect on globalisation. The coronavirus outbreak could have a similar negative impact. Before the financial crisis, globalisation thrived and GVC value-added production activities grew at a much higher rate than domestic value-added production activities – indicating a strong process of globalisation. However, after the financial crisis the growth of participation in GVCs slowed and did not return to pre-crisis levels.

 Furthermore, the nominal average annual growth rates of complex GVC production activities declined steeply. Participation in inter-regional value chains could decrease as the coronavirus outbreak speeds up the process of US-China decoupling. Several research institutes also warned that COVID-19 will accelerate the process of decoupling more than the trade war as countries and businesses think about their supply chain in the long run. Participation in intra-regional value chains could also be negatively affected, as might already be the case in the EU. Time Magazine pointed out that “the pillars that were meant to hold up the EU — the free movement of goods and people — crumpled, as borders went back up and panicked governments stockpiled medical supplies with little regard for their neighbours”.

Other impacts of Covid-19 on economic globalisation

In addition, the pandemic will have a higher impact on complex inter-regional value chains and a lower impact on intra-regional value chains. The coronavirus outbreak will not lead to the end of economic globalisation, rather, it will lead to a strong process of regionalisation. The process of regionalisation has arguably already started before the pandemic as the last two decades have seen a spike in new regional trade agreements. Last year, the US, Mexico and Canada for example adopted a trade deal – the so-called USMCA Agreement. The pandemic could catalyse this process of regionalisation of trade.  In Europe, the coronavirus outbreak may reinforce the EU’s quest for strategic autonomy and economic sovereignty. These concepts have recently found traction in Brussels as the EU tries to reduce its dependency on third countries – particularly in sectors vital to public health, security and public order. The pandemic could further reinforce the EU’s ambition for economic sovereignty. On 25 March, European Commission President von der Leyen commented that “as in any crisis, when our industrial and corporate assets can be under stress, we need to protect our security and economic sovereignty.” Thus, Covid-19 would permanently change economic globalisation as supply chains shorten and regionalise in response to the pandemic.

In the third scenario, economic globalisation will recover once the economic recession has ended and financial markets have recovered from the shock of the coronavirus. Participation in inter-regional GVCs and intra-regional GVCs will recover and economic globalisation will return to pre-corona levels. Empirical historical data shows that, in the past, the world economy often reacted according to a ‘V-shaped’ model to an epidemic, meaning a quick down and a quick back up. After previous epidemics such as SARS in 2003 and the “Hong Kong” flu in 1968, economic growth fully recovered and more or less absorbed the economic shock. Thus, COVID-19 could also trigger a process of diversification of supply chains. Accordingly, global supply chains would be reshuffled, however, not reduced. This means the pandemic would cause individual companies to remodel their supply chains, but accumulatively, RVC and GVC participation could very well return to pre-crisis levels.

Writer is Dr. Rajkumar Singh Professor and Head University Department of Political Science B.N.Mandal University, Madhepura Madhepura-852113. Bihar, India.

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