Globalization: where to now?

Globalization — the increasingly barrier-free flow of goods, services and people across national boundaries is enduring its greatest challenge since the Great Recession of 2008. But global economic integration may be able to withstand more than many believe.

The last four years have been marked with a political attack on global supply chains, started in the U.S., that left multinational companies beaten and bruised. But it ́s the outbreak of this virus, the COVID-19, that seems to be the most serious threat to globalization. All the anxiety over Trump ́s tariffs in the last two years pale in comparison with the fear that this virus, in only a few months, would become an even larger disruptor of 21st century globalization than the most recent trade disputes. According to some economists, it is expected that this outbreak will cost the world $320 billion in lost exports of goods and services more each quarter than the total annual cost of the U.S.-China trade war.

It ́s no exaggeration to say that the integration that has characterized trade in the past four decades is under its biggest stress test since the2008 financial crisis or the September 11 terrorist attacks. In the coming semester there will certainly be a downturn in the global trade of goods and services which is sparking fears of renewed recessions in the world ́s largest economies and concerns about whether decision-makers have the appropriate tools or even the necessary statesmanship to face it.


This stands as a “I told you so” moment for all the American and European critics of globalization, who are raising new concerns about an over-dependence on China for everything from antibiotics and facemasks to paint pigments. And to the rejoice of the Americans in this group, American tariffs have undoubtedly accelerated an existing trend of shifting production toward local or regional production and away from China. But it’s been well-documented that the beneficiaries have been places like Vietnam, Mexico or Eastern Europe rather than the U.S.

And surprisingly enough, according to a World Bank research published last year, trade associated with global supply chains has already been falling as a share of global commerce since the 2008financial crisis. But a warning is due – It would be wrong to read that as a sign of de-globalization.

Since the 2011 earthquake and tsunami disaster in Japan, which was followed that year by floods in Thailand that also put supply chains under enormous pressure, many multinational companies have learned how to deal better with disasters and other threats to production by diversifying production sites.

As a matter of fact, in the earthquake ́s aftermath, one visible consequence was the decision by Japanese automakers and other companies to move some production offshore as a hedge against future disasters.

A consolidation of production in a single country due to diversification of supply chains away from China is unlikely. In some ways, unexpected drawbacks like the tariffs and coronavirus have created an impetus to broaden global supply chains to many more countries to make them shock-proof rather than re-nationalize them.

And so, there is an argument to be made that this new coronavirus may end up making the case for more — not less — globalization.

Article published in our March Newsletter

João Pontes, BSc in Finance

Published by lisboninvestmentsociety


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