The focus over the past week has been on the continued rise in infections in Europe, and the economic consequences of new restrictions that have been imposed in several countries, including the UK. (For more, see here.)
However, it is also useful to take a step back from the day-to-day ebb and flow of the virus and consider the longer-term effects on the global economy and financial markets. This is exactly what we’re doing in a new series of research under the banner “Economies after COVID”.
One way in which the virus is likely to leave its mark on the world economy is by accelerating the rollback of globalisation. This was the theme of a webinar we hosted last week, a recording of which is here.
In the early stages of the pandemic most attention centred on the role of supply chains. As borders were closed and factories locked down, there was understandable concern that supply chain dependencies would amplify and prolong the disruption to global activity. As it happens, these concerns were misplaced. Supply chains have continued to function well this year. In fact, in fact, without them, countries would have struggled much more to meet the surge in demand for things like medical, PPE and home-working equipment.
Likewise, there has so far been little sign of the pushback against migration that some had feared early in the pandemic. This could change if labour markets in developed economies remain weak. But so far, the pandemic has arguably produced greater appreciation of the critical role played by migrant workers in many key sectors, such as healthcare and transportation.
Nonetheless, history is likely to judge this as the point at which the wave of globalisation that has reshaped the world economy over the past three decades began to retreat.
Globalisation was already faltering before the pandemic struck. The twin props of technology and policy that had underpinned global integration following the end of the Cold War were starting to crumble.
The pandemic may accelerate some technological shifts – for example, by encouraging greater adoption of robots in manufacturing, thus making labour costs a less important consideration in decisions about where to locate production. More importantly, however, it is likely to intensify the political headwinds that were already starting to push back against globalisation.
There are two elements to this. The first relates to the immediate political fallout from the pandemic. Mainstream views towards China have become more hawkish, in part due to its early failure to contain the virus but also because of its behaviour since. Beijing’s increasingly assertive foreign policy combined with greater repression at home are fuelling resistance to China within Western capitals.
One way this is manifesting itself is in technology and security policy. Several countries have announced bans on Huawei in 5G networks. Meanwhile, China’s long-standing restrictions on foreign internet services is starting to be mirrored by other countries. TikTok and WeChat are facing high-profile threats to their operations in the US, but India has also banned several Chinese apps.
The second way in which the pandemic is likely to accelerate the political pushback against globalisation relates to the economic and policy response. As we’ve noted before, China is leading the global rebound. But the nature of its recovery risks increasing strains with the rest of the world. For a start, it has failed to give a boost to other economies. But the focus of Chinese stimulus on investment in next generation technologies such as AI, data centres and 5G, also risks triggering a backlash among the US and its allies.
All of this creates a combustible mix. And while the tone of the debate may cool under a Biden administration, the fundamental forces that are driving a wedge between the US and China will remain. The economic legacy of the pandemic is still uncertain. But there is a good chance it will come to be seen as the point at which US-China decoupling became irreversible – and the wave of globalisation that turbo-charged world growth in the early 21st century began to retreat.
To register for upcoming webinars in our ‘Economies After COVID’ series, click here.