Can Covid strike at economic globalisation?

Abhirup Bhunia | Updated on April 16, 2020 Published on April 16, 2020

The pandemic threatens to usher in a phase of economic insularity, through efforts at localisation of supply chains and stricter immigration controls. But to counter the economic crisis, it is important to ensure that the world does not return to inward-looking prescriptions

The dual supply and demand shocks from the Covid-19 pandemic are expected to cause a global recession. In the last several weeks, global supply chains have been disrupted as workers are locked down, factories shut, and closed borders and terminals block supplies and cargo. Aggregate demand has collapsed.

Covid’s impact on lives and livelihoods worldwide threatens to usher in a phase of economic insularity and de-globalisation. But, the need for coordinated action to stimulate global shared prosperity will never be stronger. The World Trade Organisation (WTO) estimates international trade to steeply decline by up to 32 per cent, much greater than the impact felt during the 2008 financial crisis.

Policy shift

There are two distinct and interrelated ways that Covid may shape policy directions on global economic cooperation.

One, significant restructuring of supply chains may ensue, with possible efforts at localisation of supply chains. Countries may try to partially insulate themselves from shocks by curtailing external dependence. A case in point is Japan, which has earmarked $2.2 billion of its stimulus package to help manufacturers move production units out of China, in a bid to reduce dependence on Chinese supplies and inputs. The policy moves towards pushing production facilities with local sources of supply and inputs will likely surge everywhere.

Economics will eventually dictate, but there is going to be a probable move towards government-supported reorientation of supply chains. Many global manufacturing firms in Europe, the US and in Asia, particularly in complex industries like automobile and electronics, are reliant on parts and supplies from China and South Korea. Some experts in the US have already suggested “moving supply chains back” post Covid. A general protectionist view towards cross-border trade may be imminent, as countries most integrated into globally economies and supply chains (typically measured through trade share of GDP, Global Value Chain participation index, share of global trade, etc) are badly hit.

Second, movement of goods, services and labour may continue to be restricted. The fear of stricter immigration controls looms as unemployment mounts in the Western world — more than 16 million jobless claims in the US, one million jobs lost in March in Canada, and millions more unemployed in Europe. Many job losses will be at the lower end of the skills hierarchy, and it may not be long before immigrant workers take the fall.

The state of labour in the developing world is despondent with unemployment threatening to push millions back into poverty. Revival of consumer demand in the developed world will be one of the keys to restoring employment in labour-intensive export-oriented industries in the global South. In Bangladesh, an estimated one million workers in the readymade garment manufacturing (RMG) industry — a quarter of all workers in the sector — have been laid off/suspended, as orders are cancelled.

MSMEs need support

The International Labour Organisation (ILO) estimates that the economic disruption from the Covid pandemic will potentially wipe out the equivalent of 195 million jobs worldwide in the second quarter of the year. In India, MSMEs — which account for more than 45 per cent of total exports and employ more than 110 million people — face cancelled orders and a freeze in new orders from buyers in the US and Europe.

Under the circumstances, MSMEs in emerging economies will enormously depend on government to provide export incentives and subsidies — usually fodder for disputes in international trade, due to their market distortion potential. The OECD Secretary General has already advised that trade policymakers should look beyond the immediate and ensure government support to firms do not become “sources of the unfair competition once the crisis is over.” A coordinated effort to restore trade and economic growth looks difficult, but the only way out. Future trade negotiations will be hard fought.

Africa outlook

Meanwhile, estimates suggest that Africa will stand to lose billions of dollars in export revenue in commodities and oil. Not only have oil prices plunged, but African dependence on capital-intensive industries, including in commodities and extractives, mean that economic slowdown looms large on the continent. China — the epicentre of Covid-19 — is a key trading partner for Africa. One estimate has African GDP growth falling from 3.2 per cent to 2 per cent, and the effects on job creation is obvious.

Global tourism — which accounts for 8 per cent of services trade worldwide — has come to a grinding halt, with millions of jobs threatened in Asia Pacific and Africa, two of the fastest growing tourism hubs in the world. The sector contributed 24.3 million African jobs in 2018. Restrictions on travel may continue, until Covid has fully run its course.

The economic impact of Covid will continue to unfold in the coming weeks and months, spreading much like the super-virus itself, affecting every part of an interconnected global economy. Twenty-first century production of goods and services rely on a complex web of firms across several countries, in turn providing employment to people in all participating economies.

Several firms straddling countries are involved in the production of finished goods. To counter the economic crisis, it is important to ensure that the world does not return to country-first rhetoric and inward-looking prescriptions. Trade represents almost 60 per cent of global GDP, and countries will not thrive in isolation — even after they have faced a pandemic.

The author is an international development consultant.

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Published on April 16, 2020
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