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  • Emily Dow

COVID-19: make or break globalisation?

I know you've read the words "made in China" on something you own. You can thank globalisation for that. But have you heard of slowbalisation? Or maybe deglobalisation? Many believe COVID-19 has prompted such, however the pandemic has probably only expedited this likely inevitable outcome. Globalisation is the cooperation between international governments, businesses, and people through interactions that support one another. For example, firms source different stages of their supply chain from many different countries in order to be cost efficient, and with this has come specialisation - allowing countries to concentrate on producing what they are good at/can most productively and relying on other countries for things they cannot. Improvements in technology, infrastructure, and communications have made this possible and has shaped the economies of developed and emerging countries, as well as benefitting global economic growth (through overall lower prices and increased economic efficiency by increased utilisation of one’s resources). In particular, globalisation has increased standards of living in China, which is no surprise given the large role they play within supply chains by providing cheap labour thus attracting foreign investment. Their GDP figures oscillated around a large 10% between 1978 and 2012, but have had a declining trend since (yet remain high - above 6% - compared to the UK with 1.5% in 2019).

Globalisation began post World War 2, and by the 1990s the world was in a state of hyper globalisation. This helped demand flourish, standards of living rise, and more choice for consumers globally as countries were learning and adapting by using each other's resources efficiently, introducing the economic theory of potential absolute and comparative advantages countries may hold. Concisely, absolute advantage is when a country can produce more using the same or less resources than another country whereas comparative advantage is when a country produces a good or service at a lower opportunity cost than another. However, the 2008 recession, US-China trade war, and finally the pandemic have been the main contributors to slowbalisation and in fact trade tensions have never disappeared since the GFC (Global Financial Crisis). This has caused businesses to (or want to) shorten their supply chains rather than having goods tour the world for each stage of production before completion.

The US-China trade war, prompting large rounds of protectionism (restriction of imports) from the world's two largest economies forced firms within the US and China to move production internally within their own borders to avoid tariffs (tax on imports) or quotas (limit on imports) impacting their competitiveness. Both the US and China imposed tariffs of $34bn in July 2018, formalising the beginning of the trade war. The Economist visualise the recent rise in tariffs from the two countries below:

The general impact of these tariffs have been increased prices and a general decrease in bilateral trade between the two countries. Tariffs prompt inflation and/or decrease investment from firms, as this increase in cost needs to either be absorbed by firms, reducing corporate profits, or passed onto consumers in the form of higher prices. On top of this, the flow of data from China has been significantly reduced since the reign of Xi Jinping who believes the communist society in China should be reflected in the population's internet accessibility too. The legislation and surveillance of online activity (known as The Great Firewall of China) has been in existence since at least 2000, starting with the first surveillance programme called The Golden Shield Project. China are relentless when it comes to censoring content, having banned Google, Facebook and even Winnie the Pooh. The country is also known to employ around 50 000 people to enforce their censorship legislation and monitor the internet annually, as well as individuals who post over 500 million pro government comments on social media a year. The tightening of their legislation over recent years will have contributed to slowbalisation, particularly since globalisation depends upon the cooperation and openness of nations.

COVID-19 too has sped up slowbalisation, by highlighting the advantages to countries and businesses of keeping supply chains short and production domestic as mass disruption to supply chains, borders and transport links have been experienced. Developing economies who were thriving off of globalisation have suffered (for example, Bangladesh had a loss of $3.2bn from cancelled clothing exports between January and June 2020) and it is unlikely they will ever return to pre pandemic (or realistically pre 2008) levels. Firms are continually attracted to shorter, more local supply chains as they cannot risk the volume of disruption COVID-19 has brought ever again. The clothing brand Zara have always had relatively short supply chains, restricting production sources from neighbouring countries only. Disregarding their obvious easier response to the pandemic, Zara has the overriding general advantages of no stock pile inventory and quicker responses to consumer demands. These advantages, combined with realised fears of a pandemic-like disruption reoccurring mean firms are likely to reevaluate their production decisions and opt for less risky production options, at anticipated increased costs, however. This will be particularly true for firms in the UK as there is continual confusion over the agreed trade deal with the EU; sections such as "the rules of origin" have introduced complicated dimensions to a firm's production process.

Impacts of slowbalisation are speculative. Climate activists support the prospect of reduced pollution, and many have called attention to the depletion of natural resources and destruction of ecosystems which globalisation is responsible for. However, the risk of negating the positive impacts of globalisation remains a fear. This is unlikely, however, as an element of globalisation will remain, and the transition will not be a quick one. Countries will have learned and adapted from each other, and therefore will be a lot more capable of completing more stages of production independently without having to rely on other countries for vast cost efficiencies. Developing and some emerging nations who depend on globalisation to continually increase standards of living may be left behind, and this could unfortunately increase global inequalities with little hope of resolution. A large initial attraction to these countries were their cheap labour costs, however as increased automation in factories is favourable and more productive due to innovation, this relieves firms of the restriction to one country - machines can be duplicated and located anywhere unlike labour. This supports slowbalisation, but does not mean a less productive and efficient global economy.

Sources used:

The steam has gone out of globalisation

A quick guide to the US-China trade war

Will Covid kill globalisation?

Trade war costs to consumers, companies and nations

The great firewall of China: Xi Jinping's internet shutdown

The Great Firewall of China

Globalization: Definition, Benefits, Effects, Examples - What is Globalisation?

'Slowbalisation': Will the slowing global economy be a boon or bane?

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