Will COVID-19 Sink Globalization?

Will COVID-19 Sink Globalization?

Watching the news, it is easy to think that the COVID-19 pandemic will sink globalization. The number of cargo ships setting off for the United States declined by 10% in March compared to the previous year, the seventh consecutive month of declines. The cost of shipping goods by air has almost doubled, further restricting trade. The flow of people has plummeted, too, with many countries restricting foreign visitors due to the virus. News that President Donald Trump is suspending immigration into the U.S. might seem like the final blow to an entire era of globalization.

Of course, the backlash against globalization didn’t begin with COVID. In some ways, the virus simply accelerated trends that were already underway. China started deglobalizing long ago by selectively adopting international exchanges that suited the interests of the Chinese Communist Party. Flows of capital were allowed in to build factories and fund Chinese firms. But they are not allowed out, helping to keep onshore interest rates artificially low and allowing Beijing to control the value of its currency.

China partially deglobalized its trade flows, too. Beijing was happy to export to the world, building up a dominant position in electronics assembly. Yet, it was far less interested in importing from other countries. In part, this was a side effect of its investment-driven growth model, which left a relatively small share of the country’s income for consumption. But China also limited imports as a deliberate policy to develop self-sufficiency. The country’s Made-in-China 2025 plan is one such mechanism to deglobalize by reducing China’s purchases of other countries’ products. This policy makes other countries poorer, but makes Beijing comfortable that it is less reliant on other countries.

The second step in deglobalization was sparked by the election of Donald Trump, who has capitalized on dissatisfaction with China’s trade and currency practices. His trade war, which involved putting tariffs of up to 25% on many imports from China, did not sink globalization, but it has certainly slowed it—causing global trade to decline last year. Similarly, the Trump administration’s limits on U.S. exports to Chinese tech firms like ZTE and Huawei discourage foreign firms from doing business with China—and incentivize China to reduce its reliance on American supplies.

This was the context when COVID slammed into the global economy earlier this year.

Now, countries worldwide are scrambling to limit the movement of people, order factories at home to produce ventilators, ban exports of face masks, and bring home pharmaceutical supply chains. The world’s COVID response could be read as the vindication of Trump’s argument that borders matter, control over supply chains matter, and China can’t be trusted.  

But that is probably not the right interpretation. One reason is that COVID is a temporary shock, but globalization has persisted, in different forms, for decades. Within two years, we will likely either have a vaccine, or COVID will have infected much of the world. Either way, the current restrictions won’t be needed. China, where the new coronavirus first emerged, is already thinking about lifting some travel restrictions that it imposed.

Medical supply chains will change less than politicians currently promise.

The push to produce medical goods at home is also probably temporary. After COVID infections peak, most countries will have already purchased many additional ventilators, masks, and other types of medical equipment. Will it really make sense for countries to spend additional funds setting up ventilator factories at home when they have already finished buying many more to bolster their supply? Most countries will probably decide that it is cheaper to expand their emergency stockpile rather than permanently fund medical device factories.

But even after the COVID shock dissipates, will the experience not shape businesses’ investment decisions for decades to come? Surely, many argue, it has illustrated the risks of supply chains spread between many countries. Some businesses see greater risk in China-centric supply chains, in particular. Japan’s government has announced subsidies for Japanese firms that want to move supply chains out of China, whether to lower-cost Southeast Asian countries or back to Japan. COVID could be the final straw in decisions about whether to relocate.

Such trends are real, and COVID will likely accelerate them. But are they sinking globalization, or merely changing it? Pundits like to refer to “globalization” as if it were a single thing. But many things can cross borders—people, goods, services, money, data—and they are all regulated differently.

Fewer goods were traded in 2019 compared to 2018, when “only” $18.8 trillion worth of goods crossed borders. COVID will make it harder to ship merchandise, but other things will get easier. A substantial portion of America’s workforce is getting a crash course in videoconferencing, for example. On Zoom, it is as easy to do business with Singapore as with Scranton.

Economic globalization evokes images of massive container ships moving manufactured goods from Rotterdam to Shanghai. But even as fewer ships plod the oceans with goods, the quantity and value of data whizzing between countries is increasing. It will grow yet again this year, as if COVID never happened. Is this globalization or deglobalization? It depends where you look. If manufactured goods were the engine of the last era of globalization, then data is the driver of the next age. Rather than dooming globalization, the coronavirus could spur it onward, with high-value data processing replacing supply chains as the key facet of global economic exchange. COVID has made it harder to ship merchandise around the world. But no one has quarantined bits crossing borders.

The views expressed in this article are those of the author alone and do not necessarily reflect the position of the Foreign Policy Research Institute, a non-partisan organization that seeks to publish well-argued, policy-oriented articles on American foreign policy and national security priorities.