Will the Coronavirus Bring the End of Globalization?

WSJ
The Covid-19 pandemic is closing borders and disrupting supply chains

A Chinese container ship in the port of Hamburg, Germany, March 3. PHOTO: KRISZTIAN BOCSI/BLOOMBERG NEWS

A Chinese container ship in the port of Hamburg, Germany, March 3. PHOTO: KRISZTIAN BOCSI/BLOOMBERG NEWS

Over the past week, the coronavirus has gone from an Asian contagion with ripple effects on international supply chains to a global pandemic that will plunge the whole world into recession. Travel has been halted across the globe. Borders are shut. Hundreds of millions of people are in effective lockdown in the European Union, and the U.S. is heading in that direction. The crisis has erased trillions of dollars from global stock markets and imperiled the future of millions of small businesses around the world, along with the livelihoods of vast numbers of wage earners.

In the months ahead, we are likely to see one of the sharpest economic contractions on record, and the downturn will undoubtedly serve as yet more evidence for those who have argued in recent years that globalization is coming to an end, or at least being rolled back. Nicolas Tenzer, chair of the Cerap think tank in Paris, argues that the rising barriers in response to the virus will strengthen “the populist and nationalist forces that have long called for reinforcing borders. It is a true gift for them.” The veteran U.S. market commentator Gary Shilling recently wrote, “The coronavirus’s depressing effects on the global economy and disruptions of supply chains is…driving the last nail into the coffin of the globalists.” Ian Bremmer, founder of the risk-consultancy Eurasia Group, sees a starker era ahead, including more palpable tension between the U.S. and China. “Globalization has been the biggest driver of economic growth,” he says. “Its trajectory is now shifting, largely for geopolitical reasons, and that will be accelerated by the coronavirus crisis.”

In the midst of our current spiral, it is hard to resist such dire forecasts. But we should. There is every reason to think that our post-coronavirus future will see not an end to the globalizing trend of recent decades but a new chapter in that story. The sudden halt in commerce and travel precipitated by the outbreak will not snap back overnight, and the next few years will see a re-nationalization of some industries for countries that can. But when this crisis passes, we are likely to find fresh confirmation of what we already know about globalization: that it’s easy to hate, convenient to target and impossible to stop.

Even before the virus, there were indications of both a pause and a modest pullback in globalization. Last year, global trade contracted a smidgen, by less than 1%, but at $19 trillion, it was still higher than any year before the record-setting 2018. As for China and the U.S., the dual effect of the Trump administration’s tariffs and the assertive nationalism of Xi Jinping put a brake on further integration. Data from the U.S. Census Bureau show that the total value of trade in goods between the two countries declined from $630 billion in 2017 to $560 billion in 2019. Even so, this pullback just puts the U.S. and China back at the trade level of 2013. And that amount, it should be noted, is almost five times what it was in 2001. In short, even after two years of trade war and diplomatic acrimony, the key axis of globalization was dented, but only barely.

As the U.S. was erecting tariffs, the Chinese government, for its part, was ramping up spending abroad. Since 2014, China’s Belt and Road Initiative has invested almost $1 trillion in Latin America, Africa, the Middle East, Southeast Asia and elsewhere. According to the consulting firm Gavekal Dragonomics, the rate of new Chinese investment slowed to just over $100 billion last year, but the initiative remains an incontrovertible example of China-driven globalization.

China appears committed to more engagement with the outside world, not less.

Nor is the coronavirus likely to reverse that trend. A recent report from the Carnegie Endowment notes that, as China emerges more swiftly from the crisis than other parts of the world, its leaders are hinting that they plan to increase investments abroad in a world that will be hungry for capital. In recent weeks, Beijing has delivered medical supplies, equipment and doctors to Italy and other EU countries. As the crisis expands, China appears committed to more engagement with the outside world, not less.

The same has been true for the private sector in the U.S. Even before the eruption of the coronavirus, there was considerable discussion of the need for economic decoupling from China. But displeasure with the bilateral relationship hasn’t meant any real retrenchment away from globalization for American firms; they have instead tried to diversify and establish connections to other parts of the world.

Apple, for instance, had bet heavily on China as a manufacturing and distribution hub as well as a burgeoning market, which made the company vulnerable when tensions and tariffs flared. As The Journal recently reported, Apple is now looking to move some of its China-based operations elsewhere, in reaction to both the trade war and the supply chain havoc caused by the coronavirus. But the company’s likeliest move will be to other locations in East Asia, not to American shores.

The recently rejiggered North American free-trade agreement is another instance of continued U.S. commitment to globalization, even on the part of the skeptical Trump administration. The agreement is designed to facilitate more trade, and the scale of continental trade is indeed increasing. Mexico is now the largest U.S. trading partner, outstripping both Canada and China.

Data compiled by the Organization for International Investment show that foreign direct investment in the U.S., although down in 2019 after reaching a peak in 2015 and 2016 of $500 billion, was still above the level of every other prior year. On the other side of the equation, U.S. investment abroad decreased to just under $6 trillion at the end of 2018 (the last year for which data is available) due to repatriation of earnings held by companies abroad. But to put that number in perspective: It was barely $1 trillion in 2001.

The same pattern pertains everywhere. In Europe, Brexit notwithstanding, economic integration continues apace. In fact, Brexit spurred a substantial increase in cross-border investments within the remaining eurozone countries. The shock of one of its key members leaving seems to have redoubled the efforts of the remaining 27 nations to draw closer, with a 43% increase in 2019 alone, according to data firm FDI Markets. A study from the London School of Economics shows that Brexit even spurred more British investment in Europe, with an increase of 12% between the 2016 referendum and the end of 2018.

With the coronavirus now hitting the whole continent with growing force, Europe’s north-south divisions will subside.

The post-coronavirus recovery is certain to bring increased spending from individual European governments and the EU itself. Europe’s recovery from the financial crisis of 2007-08 was hampered by north-south divisions. With the coronavirus now hitting the whole continent with growing force, those divisions will subside. The European Central Bank has already announced a €750 billion ($810 billion) bond-buying program; in the worst phase of the last financial crisis, it took months of acrimonious debate for the ECB to do much at all.

Post-virus investment is likely to pick up as well throughout Latin America, Africa and especially East Asia, where the Trans-Pacific Partnership (absent the U.S.) has streamlined economic relations. Such connections will expand in the wake of the present crisis, for reasons not of altruism but of self-interest.

The coronavirus pandemic is, obviously, a negative byproduct of our hyper-connected world, and it has brought about a nearly complete halt of global travel and tourism. When countries were truly more like islands, diseases had less opportunity to skip from population to population. The scale of travel today for tourism, trade and business has made it far harder to contain a pandemic. In 1950, according to the U.N. World Tourism Organization, there were 25 million tourist arrivals; last year, there were 14 billion.

And tourism has become a booming business across the world. Between 2006 and 2019, it grew from $5 trillion in direct and indirect value to more than $9 trillion. The continuing collapse of demand for travel will be acutely felt and ripple around the world, from Cambodian resorts to Mexican beaches and New York musicals.

Yet tourism and travel, along with the related phenomenon of millions of students from dozens of countries studying abroad, are among the more potent symbols of how deeply interconnected the world has become. The alarming spread of the coronavirus in recent weeks has indeed provoked a drawbridge reaction in many countries, but the response also suggests that the only reliable inoculation against future pandemics will be transnational cooperation.

The only reliable inoculation against future pandemics will be transnational cooperation.

By all accounts, such coordination is already in play in the medical and scientific community, as they race to understand the virus and create cures and treatments. More international partnerships will be necessary as we assess the economic wreckage that the pandemic will leave. Enlightened self-interest in working together to prevent such a crisis from happening again could well trump the knee-jerk reaction to retreat to national fortresses that are anything but secure.

Though months without familiar modes of travel may forever change patterns of behavior, judging from how people have snapped back after previous crises, that seems unlikely. Once the worst has passed, we may find waves of pent-up demand for millions of people to venture once more into the world, this time with coordinated health screening across countries akin to what emerged in the post-9/11 world to prevent the flow of people, money and goods that might support terrorist organizations.

And then there is the flow of capital. Markets in the past few weeks have crashed globally, in sync and almost simultaneously. In the U.S., as much as $10 trillion has been erased from markets. Every major market in the world saw equities lose 20% to 30%, and bonds have swung wildly and destructively.

But it isn’t just goods and people that have circled the world in ever more energetic motion over the past two decades; money has too. In the past 15 years, according to the Federal Reserve, U.S. holdings of foreign securities rose from $6 trillion to more than $12 trillion, and similar explosive growth occurred for countries around the world. That has gone hand in hand with loosening rules on capital flows. China alone, among major economic players, has meaningful capital restrictions, and only its domestic markets move out of sync with the financial markets of the rest of the world.

The absence of any real capital controls and the vastly increased appetite to invest everywhere is why financial markets began crashing once the coronavirus leapt from China. It took weeks for the disease itself to move from South Korea to Europe to the U.S., but it only took days for the financial contagion to spread. That is the pain of the moment for investors, but it is also provides a glimmer of the possible pace and scale of the global recovery when it arrives. Money can evaporate in a heartbeat and flow in an instant.

It is easy to imagine the demise of our massively interdependent world at a moment when it comes to a rapid, vertiginous halt. But a sharp contraction caused by a pandemic is not the same as a permanent reversal of the deep and complicated global integration of supply chains, markets and daily life built up over the past two decades. Those relationships are durable and beneficial and will be difficult to sever. Some are ready to try, but most of the world isn’t eager to renationalize industry, make trillions of dollars of global investment worthless and suppress the appetite for easy travel and free movement of people, goods and capital. The coronavirus is unlikely to be the moment when we see the collapse of a broad historical trend that has endured through the Great Depression, World War II, the Cold War and innumerable other crises, from 9/11 to the financial upheaval of 2007-08.

The months ahead will feel like the presumptive end of an era of globalization. And it may be the end of globalization’s first phase, with its heady optimism and corresponding ideological and economic backlash. But there will be a next phase, one less rosy-eyed and less sour as well.

As citizens emerge from various forms of sheltering in place, they will confront the days of spring with the relief and bewilderment of our predecessors in World War II emerging from a bomb shelter the morning after. They will find a changed world of travel limitations and viral testing but also a massive global system that remains structurally intact, if on the defensive philosophically. But the sheer scale of what has been created over the past several decades, to say nothing of the enormous benefits that have flowed from it for billions of people, will preclude a lasting reversal. We will discover that we are indeed all in this together.

Is it possible that we are truly at the end? Yes, but not likely. Globalization is dead. Long live globalization.

WSJ

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