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Past cycles of globalisation have been vulnerable to sudden shocks. World War I brought the Victorian free-trade era to a shuddering halt. The 1929 crash led to beggar-thy-neighbour tariffs. The financial crisis in 2008 damaged faith in globalisation. The Covid-19 pandemic could well prove a harder blow.
Protectionist pressures tend to increase when growth weakens. In 2015 restrictions affected a greater share of world trade than in the 1930s, according to Global Trade Alert, and world trade volumes started to decline. Since the advent of President Donald Trump in 2017, thousands of new trade distortions have been introduced.
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The US-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, Trump’s preference for conducting policy on Twitter took a toll. Last October, the International Monetary Fund warned that jitters over trade policy were dampening global growth prospects. It was at this critical juncture that Covid-19 emerged.
The pandemic has exposed the fragility of cross-border supply chains. Producers have used cheap dollar funding for trade credit to lengthen their supply chains, often incorporating several countries. These chains are cost-efficient but vulnerable. When Beijing tried to halt the spread of the epidemic in January, many Chinese factories were shut.
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 as complex, interconnected and vulnerable to shocks as the financial world when the subprime crisis emerged.
Covid-19’s threat to world trade took a more insidious turn last month. In January, Beijing stopped the export of certain medical supplies, such as face masks, including those produced by foreign manufacturers. As the virus spread across Europe, export restrictions proliferated. Since 1 January more than 50 governments have imposed exports curbs on medical supplies. 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. 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. Export bans also 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 adviser Peter Navarro says US 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 healthcare, will receive fresh impetus. The age of multinational oligopolies is ending. Takeover authorities will pay less attention to consumer prices when considering mergers and more to issues 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.
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 to stocks and houses, both of which will trade in future at lower valuations. Manufacturers will no longer be able to outsource manufacturing to the cheapest geographies, so 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 a head start.
A version of this article was first published on Breakingviews. Edward Chancellor is a financial historian, journalist and investment strategist.
Edward specialises in business and finance and he regularly contributes to the MoneyWeek regarding the global economy during the pre, during and post-pandemic, plus he reports on the global stock market on occasion.
Edward has written for many reputable publications such as The New York Times, Financial Times, The Wall Street Journal, Yahoo, The Spectator and he is currently a columnist for Reuters Breakingviews. He is also a financial historian and investment strategist with a first-class honours degree from Trinity College, Cambridge.
Edward received a George Polk Award in 2008 for financial reporting for his article “Ponzi Nation” in Institutional Investor magazine. He is also a book writer, his latest book being The Price of Time, which was longlisted for the FT 2022 Business Book of the Year.
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