Globalization is either dying, dead or about to be drastically reimagined—depending on whom you ask.
As international borders, then workplaces and local haunts, and even beyond the front door became increasingly out of reach with the infectious COVID-19 virus making itself at home everywhere, self-sufficiency arose as the prime savior. And with that came the notion that relying on global trade could no longer work, and that supply chains would have to be reined in and reshored.
According to experts on either side of the aisle, we’re either facing a deglobalized future, or one where global cooperation is the very thing that staves off debilitating crisis.
“I’m very concerned about the trend of deglobalization,” David Miliband, president and CEO of the International Rescue Committee, said during the Financial Times Global Boardroom digital conference Thursday. “I can see supply chains being shortened in the name of resilience, I can see the idea of nationalistic politics, even xenophobic politics, growing, despite the fact that there will be no return to anything like normality unless we can quash this disease globally.”
This idea of deglobalization, or decoupling, looks at investing in local supply chains to lessen global dependency so as not to be capsized by something that happens beyond your borders. But it won’t be so cut and dry that countries can wash their hands of others and expect to sail solo.
“We absolutely are not going to have complete deglobalization,” said Anne-Marie Slaughter, CEO of New America, an organization dedicated to renewing America’s promise (not to be confused with making America great again). “I think there’s less of a risk of decoupling than a course correction on the supply chain side.”
That supply chains are in more than dire need of that correction may never have been more evident than now. But that doesn’t make the pandemic the final straw that broke globalization’s back.
“The waves of globalization, since the 19th century, have surged way up the beach and then pulled back,” Slaughter said. It’s something the world saw during the first World War and again in recent years as trade tensions ran high and populist leaders pushed protectionist notions.
The backlash “against a real high tide of globalization” she added, was already coming. What’s more, COVID-19 wasn’t the first thing that stopped supply chains in their tracks. The 2016 Fukushima eruption in Japan created its own—albeit much smaller—disruption. But that serves as further evidence, according to Slaughter, that “there’s a value in building resilience by bringing a number of supply chains back to the United States.” Mega corporations “cannot possibly reshore everything,” she added, “but they can reshore some things.”
To do so, she said, would build up U.S. resilience and capacity to manufacture for domestic needs quickly, rather than leave it “too dependent on very global and often not resilient enough supply chains.”
Relieving that overreliance—more than mulling globalization’s fate—should be supply chains’ new focus.
“The news of the death of globalization has been greatly exaggerated,” Sabine Weyand, director general for trade at the European Commission, said.
While the pandemic has cast certain policy failures into unfavorable light and exposed governments around the world for their lack of preparedness, the supply chain’s failures ran deeper than that. “We realized we did not build the strategic stocks we need. We also don’t have the capacity to shift production at short notice, and I think these are the issues we need to look at.”
While the world knew China had long been its factory, despite the country’s shrinking share of the manufacturing market over the years, many—in the fashion industry in particular—didn’t realize the depth of their dependence on China for key inputs or raw materials until their “diversified” factory bases could do little in the midst of a pandemic to keep things going without the necessary ingredients.
The European Union, for example, relies on China for up to 80 percent of certain active pharmaceutical ingredients, and solely on India for paracetamol.
“That’s not sustainable,” Weyand said. “But it’s not a crisis of globalization. It’s a crisis of planning and risk management and you have to permanently adjust that…if globalization hasn’t caused the crisis, deglobalization will not solve it.”
What the world is seeing now, she said, is an increased need for greater global cooperation, as that may be the only way to collectively quell the coronavirus and get economies back up and running to sustain the millions of livelihoods at stake over the stoppage. The new economic order, Weyand said, should be one centered around “open strategic autonomy,” the EU’s current aim.
“We want to be able to chart our own course in world affairs based on our values and interests. We do not want to be dependent on one or the other player,” she said. “But we want to shape the global order around us in a cooperative manner.”
That cooperative manner, she added, will include working with countries through the multilateral system and developing beneficial trade relations with the rest of the world, including the U.S. There may be little appetite, however, for settling the Boeing/Airbus trade battle that has framed (and stalled) negotiations between the U.S. and EU ahead of the November presidential election.
“We think that transatlantic cooperation will have to be a major engine,” Weyand said.
For now though, global trade will be challenged.
According to early indicators from the World Trade Organization (WTO), global trade is estimated to drop between 13 percent and 32 percent this year. And though he couldn’t commit to projections as to whether the world would come out on the more or less favorable end of that forecast, Robert Koopman, WTO chief economist and director of the Economic Research and Statistics division, said the demand crisis may spell the greatest doom.
“The biggest driver, really, right now is not supply chain shocks but demand shocks. Economies are shut down, people aren’t buying,” he said. “What we have here is more psychological concerns around consumers’ willingness to spend and firms’ willingness to invest and produce.”
Where bulk commodities are doing “relatively OK,” he said, auto manufacturing is “hammered.” And though he didn’t directly address apparel, the industry may likely not be far behind its vehicular counterpart.
“What I see right now is a weak recovery,” Koopman said. “All the physical capital remains, most of the workers are healthy and can go back to work, so you would think production could pick up pretty quickly. But that’s going to depend on whether people are willing to go out and spend.”
The rebuilding of supply chains may play out in the midst of rebuilding demand, as each should ideally be ready when the other is. And while globalization may no longer be the first, or main aim, it will still be part of the conversation.
“This crisis will not kill globalization, but it will change it,” said Beata Javorcik, chief economist for the European Bank for Reconstruction and Development (EBRD).
“In particular, we are going to see reorganization of global value chains,” she added. “The dial will shift away from cost minimization and towards resilience—so away from just-in-time and towards just-in-case.”
Supply chain diversification will now need to be grounded in building redundancy rather than chasing the lowest cost. And as businesses craft their new sourcing setups, Javorcik said regions like Eastern Europe or the Western Balkans may attract new production facilities for their proximity to the rest of the European market as well as existing trade agreements afforded with their EU membership or separate agreements made with the EU for those outside of the bloc. The U.S. may look to bring more manufacturing stateside or work to forge deeper partnerships with some of its nearest neighbors. And, yes, this could all send sourcing costs up.
“If there’s a really significant move to focus on domestic production…costs will rise, there’s no doubt about it,” Koopman said.
But, as Javorcik noted, new manufacturing models and technologies could help render higher labor costs a nominal issue.
“Even though eastern Europe does not have the lowest labor cost, automation is going to help,” she said. And, with COVID-19 forcing new forms of work with many people now doing their jobs remotely, even location of that labor may become less relevant.
Once companies have, as Javorcik noted, “crossed the psychological barrier of remote work…why not replace more expensive workers in the U.K. or Germany with cheaper workers in Poland or Moldova? Of course, that’s not going to be possible in all sectors. Of course, you need to worry about data privacy, you need to worry about time zones, but I think, ironically, the crisis may speed up another form of globalization.”
While there’s no definitive answer to whether it will be wildly or minimally reimagined, globalization has not been ousted by the pandemic.
“This pandemic is the showcase for the absolute need for global cooperation,” the European Commission’s Weyand said. “If we do not beat this virus everywhere, we will not beat it anywhere.”