Globalisation will stall in the wake of COVID-19 - Capital Economics
Global Economics

Globalisation will stall in the wake of COVID-19

Global Economics Focus
Written by Mark Williams
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Global supply chains have functioned well this year despite the disruption of social distancing and lockdowns, and people in many places appear more appreciative of migrants. But the pandemic is widening the rift between China and the rest of the world. It will come to be seen as the moment when decoupling became irreversible and the recent wave of globalisation began to retreat.

  • Global supply chains have functioned well this year despite the disruption of social distancing and lockdowns, and people in many places appear more appreciative of migrants. But the pandemic is widening the rift between China and the rest of the world. It will come to be seen as the moment when decoupling became irreversible and the recent wave of globalisation began to retreat.
  • The pandemic has been shaped by globalisation, as close integration has accelerated both the spread of the coronavirus and the adoption of effective medical and policy responses. In turn, it has interrupted the global movement of people and goods. Borders have been closed, export sectors have been locked down, and the processing of cargo at ports has slowed.
  • Travel for business and tourism will remain depressed for a long time. But there is no sign that governments plan to make restrictions on immigration permanent. This may change if labour markets remain weak, but the more notable shift in many places recently has been increased recognition of the essential but often low-paid role that immigrants play in healthcare, picking crops, cleaning, and as carers. The embrace of remote working may also make collaborating at a distance easier.
  • When manufacturing lockdowns began, there were reasonable concerns that supply chain dependencies would amplify and extend the disruption around the world, as has happened when natural disasters have forced factories to close in the past. But supply chains have generally functioned well this year. Governments are more likely to create stockpiles to improve access to critical supplies (such as PPE) in future than insist on reshoring of production. Indeed, reshoring would this year have made things worse.
  • Nonetheless, we believe that the COVID-19 pandemic will forever mark the high-water line for the current wave of globalisation because of the wedge it is driving between China and the rest of the world.
  • Globalisation was already faltering and on some measures going backwards before COVID-19 emerged because its twin supports of technology and politics were changing. The pandemic may accelerate some technological shifts – for example, by encouraging greater adoption of robots in manufacturing, making labour costs less important. Most important though is the impact it is having on the political landscape.
  • Antipathy to China has risen around the world, for its early failure to contain the disease and for its behaviour since: the National Security Law in Hong Kong, bloodshed in the Himalayas, military activities in the South China Sea, and tone-deaf public diplomacy.
  • As a result, mainstream views towards China have become more hawkish in all major economies. Several more have announced Huawei bans in 5G networks, including those like the UK that had previously been sitting on the fence. A new development is the mirroring of China’s long-standing restrictions on foreign internet services. Both TikTok and WeChat face threats to their operation in the US. India has already banned them along with many other Chinese apps.
  • The contrast in the speed of recovery from the pandemic, and the high profile focus in China’s stimulus on investment in next generation technologies (AI, electric cars, data centres, 5G) will only exacerbate concerns in the US and among its allies that it is at risk of being overtaken by its chief geopolitical rival.
  • All of this will lead to the rift between China and the major developed nations widening, with new limits on market access, on flows of technology (and, possibly, finance), and new opportunities for countries that are able to position themselves as alternative manufacturing bases to China. This decoupling will ultimately have a much bigger impact on the distribution of global supply chains than the pandemic.

Globalisation will stall in the wake of COVID-19

This Focus is part of a series exploring how the pandemic will change the global economy. You can find other publications in this series here.

The globalisation of disease

Economists think of globalisation in terms of trade, financial flows, migration and ideas. But it is now clear that they should have been thinking about pathogens too. Pandemics are the globalisation of disease and, as we are learning, their economic impact can be huge. 

Pandemics are intimately connected to all aspects of globalisation. They are spread by the global movement of people and they usually follow patterns of trade. The Black Death spread east and west along trade routes linking East Asia and Europe. The influenza strains that led to pandemics in 1957 and 1968 were first identified in the trading hubs of Singapore and Hong Kong. In the current pandemic, the early outbreaks in many countries were centred on or near cities (Milan, London, New York) with close links to global commerce. 

And since the speed at which diseases spread is linked to the rate at which the infected meet the uninfected, the spread of pandemics has tended to accelerate as the world has become more integrated. The Black Death may have taken nearly a decade to cross from central Asia to Europe. Another year passed after its arrival in Constantinople and Italy before it reached London. The 1957 pandemic was transmitted mainly along land and sea routes. After five months, infections were reported in 20 countries. The 1968 pandemic was the first to be accelerated by air travel, but still took months to circle the world.

By contrast, the new coronavirus spread to much of the world outside China within weeks. Indeed, there is some evidence that it had already reached North America and Europe before the cluster of atypical pneumonia cases in Wuhan set alarm bells ringing at the end of December.

Close global integration has affected the path of the pandemic in other ways too. This is the first truly global recession. Four fifths of economies are likely to contract this year, compared with fewer than half in 2009. The immediate cause is not the virus itself but the widespread adoption of lockdowns to contain it. The rapid global spread of this and other novel policy responses has mirrored that of the virus as governments have learned from each other, and as precedents set in one place have widened the set of possible responses elsewhere. Similarly, global ties have allowed doctors around the world to learn rapidly from each other about effective treatment. The genome was shared globally before infections were confirmed widely outside China. And global integration may facilitate the distribution of a vaccine. In other words, globalisation has shaped the path taken by the pandemic by accelerating its spread and also the medical and policy response.

In this Focus, we ask whether the pandemic will in turn have an impact on the path taken by globalisation over the years ahead.

The Black Death is the most extreme example of a pandemic leaving lasting scars. It contributed to the collapse of the Mongol khanates and the Pax Mongolica that they facilitated and brought an era of globalisation to an end. The Mongols had removed overlapping tariffs, established a trans-Asian postal system, and increased security for merchants. As these benefits were lost, the costs of overland shipping surged. Records of business contracts in Italy show that previously-abundant raw Chinese silk vanished in the late 1300s. It appears that flows of long distance trade dried up.

But it is possible to imagine a world in which the COVID-19 pandemic triggered the opposite response of strengthening global ties and cooperation. One way to think about globalisation is as a process in which countries opt to surrender some autonomy in pursuit of collective gains. There are few better examples than infectious disease control of areas in which all nations would benefit from an effective global response. 

The pandemics of the twentieth century point to a third possibility: that COVID-19 has no lasting impact on globalisation. We argue below this will be the case in some respects. Nonetheless, the conclusion we reach is that the COVID-19 pandemic will forever mark the high-water line for the current wave of globalisation.

A less mobile world?

Globalisation is a process in which the world’s markets for goods and services, financial markets and labour markets become more closely integrated. Any lasting impact of the pandemic will show up in a shift of course in one or more of these. 

The last of them, in particular cross-border migration, is where the potential for a backlash in the wake of a pandemic is clearest. But a backlash has not appeared so far. 

Of course, cross border movements have slowed to a trickle. At one point nearly 40% of the world’s population lived in countries that had closed their borders to all non-residents. International tourism and business travel collapsed during the first quarter of the year (see Chart 1.) and are likely to be among the last sectors of the global economy to recover.

Chart 1: Flight Ticket Revenues (% of 2019)

Sources: Skytra, Capital Economics

But there is no sign that governments intend to maintain restrictions on immigration if the pandemic passes. Quarantine requirements may remain in place for travellers across some borders if an effective vaccine is not widely available. But these will deter short-term visitors rather than immigrants. Tourism may continue to suffer but long-term immigration may not.

In fact, there is some evidence that the pandemic has made people more appreciative of foreign workers. In many places, frontline workers in healthcare are disproportionately immigrants. The same is true for jobs like cleaning and crop harvesting that had to continue during lockdowns. In May, Italy’s government approved a plan to regularise undocumented migrants working in agriculture or as carers. Portugal’s government has taken similar steps while Japan’s government has relaxed visa restrictions for migrant workers. The UK government’s decision to extend residency rights to up to three million people from Hong Kong was not a response to the pandemic. But the lack of any domestic pushback underlines that anti-immigrant sentiment hasn’t increased this year.

Indeed, YouGov polls in the UK show that the share of people believing that immigration is bad for the country has remained stable since infection numbers picked up in the UK and there has been a small increase in those believing that immigration of people working in the National Health Service should increase. Similarly, a Gallup poll conducted in the US at the start of June found that the number of US residents who would prefer immigration to increase was higher than the number who wanted it to fall for the first time since 1965.  

Meanwhile, the shift to more widespread remote working may make cross-border collaboration easier. It may also encourage long-term migration. Estonia introduced a new “Digital Nomad Visa” last month and countries from Barbados to Thailand have taken similar steps to attract remote workers (conversely, it will also be easier to work for foreign firms in future without having to move abroad).

In sum, fears that the pandemic would do lasting damage to the ease with which people can migrate for work have not so far been borne out.

But a backlash could still emerge. If labour markets remain weak for years, as seems likely in most places, this could foster an increase in anti-immigrant sentiment.

Chart 2: Reason for Long-term Immigration to the UK (1000 people)

Sources: ONS, Capital Economics

And there remains another possibility: that the pandemic has a lasting impact on would-be migrants’ willingness to move. The risk of being thrown out of work with no way to return home or simply of being locked down far from family was not a concern before. Studying abroad may become less common too, because of a greater appreciation of being close to home or because universities move to online learning. Study was a bigger driver of immigration to the UK last year than people seeking work. (See Chart 2.) The same was true in Australia. 

And finally, some less tangible economic benefits of global travel may be lost – it is plausible for example that foreign investment and the diffusion of knowledge that it can bring will slow if all international business meetings move to Zoom. Similarly, it may prove harder to manage global supply chains in future.

The pandemic and financial globalisation

The pandemic’s lasting impact on globalised financial flows is likely to be smaller than that on flows of products or people. But there are a few ways they could be affected.

We discuss below how the pandemic has heightened tensions between the US and China. Firms face pressure to delist; cross-border investment may be impaired indefinitely; decoupling may ultimately lead to restrictions on portfolio flows too. Meanwhile, Hong Kong appears to be transforming from a global financial centre to an offshore hub for China.

Elsewhere, one legacy of the pandemic may an increased reliance on financial repression, and with it capital controls, by indebted governments needing to keep debt financing costs under control.

Trade flows after the pandemic

Many of the early concerns about the global economic impact of COVID-19 centred on disruption to supply chains. The low inventories associated with modern supply chains, it was feared, would amplify industrial disruption around the world. This turned out to be a rare example of excess pessimism around the pandemic.

The pandemic had an immediate impact on global merchandise trade through a number of channels. Lockdowns, distancing requirements and measures such as temperature checks have reduced the throughput capacity of ports and border crossings. Lockdowns led to maritime traffic jams of container ships waiting to be processed, first at anchorages off the coast of China, and a few weeks later off ports elsewhere in the world. (See Chart 3.)

Chart 3: Number of Container Ships at Anchor

Sources: Refinitiv, Capital Economics

The grounding of the world’s fleet of passenger aircraft also interrupted freight movements. According to the IATA, passenger flights carry around half of air cargo in normal times. Last year more than a quarter of EU goods trade with the rest of the world was carried by air. (See Chart 4.)

Chart 4: Mode of Transport of EU Trade with Non-EU Countries (2019, goods exports + imports)

Sources: Eurostat, Capital Economics

However, these supply side disruptions were small in the context of the collapse in global demand and were resolved more rapidly than many had feared. Governments in richer countries exempted those involved in trade from entry restrictions and quarantine requirements. Even at the height of lockdown, the backlogs at container ports were within the usual historical range – similar to what was seen when fog closed some Chinese ports in 2018 and when capacity shortage caused congestion in Rotterdam the same year. (See Chart 3 again.) The market solved the shock to air cargo capacity: air cargo freight rates spiked enough for some passenger airlines to resume flights purely for cargo. Most of the initial contraction in air-freight relative to other types of trade soon reversed. (See Chart 5.)

Chart 5: Air Freight Share of EU Goods Trade (%)

Sources: Refinitiv, CEIC, Capital Economics. Note: For consistency, the UK is included in the EU aggregate after Jan. 2020.

Where widespread shortages did emerge – for example with some medical and PPE equipment and toilet paper – this was due to an unanticipated surge in demand, not disruption to supply.  And these shortages were generally resolved quickly: indeed, the speed at which production of masks and other PPE was ramped up and these products distributed globally was testament to the strengths of global supply chains.

That has undercut the argument that was heard frequently during the early stages of the pandemic that it would push firms to reshore production or to add redundancy to supply chains in order to reduce risk. The initial flurry of interest in “reshoring” appears to be dying away. (See Chart 6.)

Chart 6: Google Searches for “Reshoring”
(Normalised Index, Maximum = 100)

Sources: Google, Capital Economics

Indeed, in retrospect, for most global firms, the most effective strategy to minimise disruption this year would have been to relocate as much of their production as possible to where the pandemic began, in China. (See Chart 7.) 

In any case, increasing the resilience of supply chains to unanticipated shocks is far from straightforward.

Several events have highlighted supply chain vulnerabilities in recent years. The 2011 Tōhoku earthquake and tsunami in Japan caused huge disruption particularly to the auto sector around the world. For example, the world’s only producer of a certain paint pigment was located near to the Fukushima nuclear plant and had to close. The factory supplied Volkswagen, BMW, Ford, Chrysler, GM, Hyundai and Toyota. For months after, new cars in shades of red and black were in global short supply. Wider parts shortages forced GM to close a plant temporarily in the US and Peugeot to close one in Europe.

Chart 7: Industrial Production (% y/y, year-to-date)

Sources: Refinitiv, CEIC, Capital Economics

Carmakers responded by trying to increase the resilience of their supply chains. Toyota, for example, conducted an overhaul of its global manufacturing operations, adding suppliers and re-organising production so that factories in each region could continue to operate in the event of disruption elsewhere in the world.

But the most striking aspect of the supply chain response to the Tōhoku disaster and similar events, like the Thai floods later in 2011, is how small it was overall.

According to a recent report from McKinsey, inventory turnover in the auto sector – a measure of how much inventory companies hold – was the same just before the pandemic as it was before the tsunami. Similarly, at the time of the Thai floods, the country produced around a quarter of the world’s hard drives and the resulting factory shutdowns had knock-on impacts on electronics production worldwide. Yet last year, Thailand still produced a quarter of the world’s hard drives. 

In sum, the lesson from previous supply chain shocks is that they don’t lead to significant reshoring or reorganisation. Supply chain managers have to weigh the risk of occasional disruption against the other benefits that supply chains bring. They are a powerful tool for raising efficiency. And supply chains have proved resilient this year.

Preparing for future pandemics

This is not to say that supply chains won’t shift over coming years, just that concerns about their fragility in the face of a pandemic won’t push in that direction. But other factors could.

The growth of global supply chains has been propelled by the twin drivers of technology (container shipping, the internet) and politics (support for increased economic integration). Neither of these is static.

Indeed, we argued last year that trends in both technology and politics were now leading to an era of de-globalisation.

On the side of technology, the adoption of more capital-intensive manufacturing processes, including the widespread use of industrial robots in previously labour-intensive sectors like textiles, is one: it undercuts a key driver of globalisation, which is the effort to reduce labour costs. The pandemic may have given some firms an extra nudge in this direction. Automated production is easier to maintain in an era of social distancing. But we doubt that the pandemic will make a major difference unless firms believe that social distancing of workers will have to continue indefinitely. 

The pandemic is likely to have more lasting consequences for the political underpinnings of global supply chains and economic integration.

One element of this is that governments may wish to re-examine the trade-off between efficiency and security of supply in outsourcing of production. That trade-off has been highlighted this year by shortages of facemasks, PPE, and ventilators. Lockdowns and sickness have also heightened awareness of bottlenecks in access to widely-used medicines.

For example, in 2018, China accounted for 51% of the world’s exports of paracetamol (acetaminophen); India shipped a further 25%. According to the US-China Economic and Security Review Commission, around 40% of the generic drugs sold in the US have a single global manufacturer, most of them in turn dependent on active pharmaceutical ingredients sourced from China.

But even in these sectors, the answer to these vulnerabilities will almost certainly not be to aim for domestic self-sufficiency in production. For a start, it would be impractical to maintain production capacity in each country sufficient to meet demand during a pandemic. According to the OECD, China produced half of the world’s facemasks before the pandemic but even this wasn’t sufficient for China’s domestic needs when COVID-19 infections soared. Most countries experienced severe shortages of masks and PPE for the same reason: global demand far exceeded global supply.

For masks, as well as PPE and medicines, production is capital intensive and inelastic in the short-run. That makes maintaining excess domestic production capacity sufficient to cope with a once in a generation event extremely expensive. Those factors point instead to a solution of stockpiling of medical goods to provide security of supply, similar to the “Strategic National Stockpile” of medical equipment, including masks and ventilators, that exists in the US, but on a larger scale.

Governments would have to pay to maintain these stockpiles, or mandate that the private sector holds large inventories of key goods. Different governments may draw the line in different places as to what constitutes a key good but it would be expensive if it extended much beyond medical and pharmaceutical products. These accounted for 6% of global goods trade last year. And net trade in pharmaceuticals is significant only for a few major economies. (See Chart 8.)

Chart 8: Net Pharmaceuticals Exports (2019, % GDP)

Sources: UN Comtrade, Capital Economics

The consequence of heightened tensions

The biggest challenge that the pandemic poses to the current distribution of global production is the role it is playing in accelerating the decoupling of China from the West.

This was already underway and in our view is set to continue whoever is in the White House after this year’s election. China’s emergence as a geopolitical competitor to the US is not compatible with the two sides’ continued integration as long as China remains autocratic with a state-led economic model.

But COVID-19 has heightened animosity between the two sides. Perhaps the least consequential aspect of this is that lockdowns have pushed the targets set in the Phase One trade deal for China’s purchases from the US even further out of reach. China’s imports from the US remain lower in both dollar terms and as a share of overall imports than prior to the trade war. (See Chart 9.) Meanwhile, thanks to surging exports of facemasks and IT equipment to assist working from home, China’s exports to the US last month were up 15% y/y. The bilateral trade imbalance was only just short of an all-time high.

Chart 9: China’s Goods Imports by Origin
($, seas. adj.)

Sources: CEIC, Capital Economics

The Phase One deal was the foundation on which a truce in the US-China trade war was built. But it was fragile anyway. Even in better circumstances, the targets were unrealistic. And tensions around technology and security were too great for a truce to last long.

But the pandemic has precipitated a broader deterioration in relations. On the US side, Donald Trump has gone from praising Xi Jinping for his handling of the outbreak in January and February to blaming China for the deaths and economic damage in the US. His administration has followed up on several fronts. Measures against Tiktok and Wechat, efforts to force the delisting of Chinese firms, visa cancellations, sanctions against officials in Hong Kong and the closing of China’s Houston consulate are all hostile steps that did not appear to be under consideration when the trade deal was signed.

But the deterioration owes at least as much to decisions taken by China’s leadership as those made in the US. Global awareness of the repression in Xinjiang has increased. More recently, there has been a crackdown on dissent in Inner Mongolia. In the last few months, China’s troops in the Himalayas have been involved in the worst clashes with the Indian army in more than 40 years. China has deployed bombers to a disputed outpost in the South China Sea for the first time and conducted military exercises unusually close to Taiwan. China chose this moment to impose a National Security Law on Hong Kong, effectively ending its political autonomy.

China’s diplomats have become strikingly undiplomatic too. In March, a foreign office spokesperson suggested that the US may have been the source of the coronavirus and had deliberately spread it in China. In a single week in April seven Chinese ambassadors in Europe, Africa and Central Asia were summoned by their host governments to explain comments they had made.

The links between the Chinese actions and the pandemic aren’t individually obvious, but the timing suggests there is a connection. China may be choosing a moment to assert its territorial claims when governments elsewhere are preoccupied. The goal may also be to demonstrate the leadership’s strength to a domestic audience at a time when it has been criticised by other countries for its initial failures in containing the virus.

As popular as this approach may be domestically (the diplomats are hailed as “wolf warriors”), the result is that China’s relations have deteriorated with many countries at once, rather than only with the US, as often appeared to be the case during the trade war.

The UK, for example, had been attempting to keep both sides happy with its decision to allow limited deployment of Huawei technology in its 5G network. But it has now come off the fence with an outright ban. India appears about to do the same, having been similarly equivocal until recently. India’s government has also blocked the use of more than 200 Chinese apps. China’s global propaganda efforts have backfired too: polls show a significant deterioration of perceptions of China in many countries. And according to Reuters, an internal government assessment in China has concluded that “anti-China sentiment” globally is the highest it has been since 1989.

Accelerated decoupling

Decoupling of the US and Chinese economies was already underway. The US ban on Huawei and its efforts to stop technology sales to China predate the coronavirus. China has long been concerned that its dependence on foreign technology is a strategic weakness and has been channelling resources to developing alternatives.

But the pandemic has accelerated this process and pushed many countries other than the US into picking a side.

The economic trajectory of China relative to the rest of the world is likely only to add to strains over the next couple of years. China’s success in containing the virus domestically and in rapidly returning its economy to work will stand in stark contrast with the performance of much of the developed world for the foreseeable future. China’s outperformance will both strengthen the conviction of the leadership in Beijing that their approach to economic management is more effective, and that pushback from the West is motivated by fear of China’s success. Rather than being a “Chernobyl Moment”, the pandemic appears to have strengthened the Party’s perceived legitimacy in China.

In the US and elsewhere, one of the animating concerns of China hawks has been that China is on course to overtake the West economically. The next couple of years are unlikely to provide much reassurance that this isn’t going to happen.

The shape of stimulus programmes will further feed these concerns. Stimulus in the G7 has been directed at supporting employment and household incomes. China’s is overwhelmingly directed at infrastructure, including high profile investments in sectors like 5G, electric cars, data centres, semiconductors and AI. We don’t believe this state directed investment will be allocated effectively. As with China’s investment in solar power during the past decade, technical advances will be achieved only alongside a legacy of overcapacity and non-performing loans. But for non-Chinese firms in these sectors, the competitive threat will be real. And for leaders of rich countries so will the perception be that China is with the help of subsidies and other market distortions leap-frogging technologically.

The resulting geopolitical strains will cause shifts in supply chains. As discussed above, supply chains are less mobile than often assumed. But they do move in the face of permanent changes to the business environment. A recent survey by UBS of export-focused manufacturing firms in China underlines this difference. There has been no significant increase in the share of firms saying they are planning to move some operations out of China since the pandemic began. However, the share doubled last year (to 60%), with the trade war cited as a major driver. Similarly, in a recent survey of its members by the US China Business Council, firms cutting back on investment were more likely to say that the key driver was US-China tensions than uncertainty due to the pandemic. 

There will not be a sudden, wholesale movement of manufacturing. But firms will try to anticipate shifts in the business landscape, which could be significant over the next few years. These could include tariffs, limits on access to crucial components or technology, requirements that some products are not manufactured in China, and so on. Chinese companies may find that the inroads they have been making building brands in the West are blocked. And the split in the global market for internet services may be replicated in hardware.

Economic implications

Decoupling could turn out to be one of the more lasting legacies of the pandemic. Admittedly, there was already a strong case that globalisation had stalled and in some respects was going into reverse. The globalised world that centred on the twin poles of China and the US was breaking apart. But that shift became all-but-irreversible this year. In future, the pandemic is likely to be seen as the moment the current wave of globalisation ended.

There is a huge amount of uncertainty about how this will play out, which hinges on geopolitics more than economics. We had a stab a outlining some plausible scenarios a year ago.

Almost certainly, decoupling will have severe consequences for many large firms. Huawei and Tiktok have already had their wings clipped. Companies like TSMC are under pressure to pick a side. And for many firms based outside China, China is a major market: limits on their ability to sell or manufacture in China would be very damaging.

But for the rich economies these firms are based in, the immediate impact of decoupling on output would be small, as long as the transition was smooth and gradual. Apart from producers of commodities and some capital goods, demand from China has been met in large part from production inside China. Exports of manufactured goods to China are economically significant for only a few economies.

Chart 10: Per Capita GDP (% y/y)

Sources: World Bank, Capital Economics

Indeed, the benefits for the rich economies of the recent decades of globalisation are hard to discern at all in the GDP data. Per capita growth in the advanced economies has been slower during the wave of globalisation that started around 1990 than in the decades before. (See Chart 10.) For most rich economies, restricting ties with China would not have a noticeable impact on potential growth. Integration with China had a disinflationary impact on goods prices and wages around the world, but that pressure had already eased.

China would feel the economic impact of decoupling more acutely. Expansion into foreign export markets and competition with foreign firms at home has propelled productivity gains in Chinese manufacturing. The loss of that competitive pressure may not matter now to the extent it would have in the past, given the size of China’s internal market. But the leadership’s likely response, of using more widespread state intervention in an effort to catch-up, is still likely to exacerbate the ongoing slowdown in trend growth.

The most interesting questions surround the implications for other emerging economies. As Chart 10 indicates, emerging markets have been the chief beneficiaries of the recent period of globalisation. EMs outside China could benefit still if supply chains migrate elsewhere. For example, Vietnam was arguably the “winner” of the US-China trade war: its exports surged as firms sought suppliers outside China. Mexico, India, and parts of Sub-Saharan Africa could all in principal benefit from a reordering of the global manufacturing architecture.

But there are significant obstacles too. On the part of the EMs themselves, poor infrastructure and policies hold back the development of large-scale manufacturing. And, as noted above, the technological drivers of continued integration of global manufacturing are weaker now than in recent decades, with the development of automated production lines undermining one of the key reasons firms have had to locate factories in low-wage economies.

In sum, the direct impact of the pandemic on the long-term future of global supply chains and migration may be smaller than had seemed likely earlier in the year. But by accelerating the decoupling of China and other major economies it is still likely to leave a lasting legacy.

The main shocks will be felt at the level of individual firms. Most developed economies should in aggregate adapt easily, as long as the shift is gradual. Even for China, decoupling will be a headwind rather than a rupture in growth. And for other EMs, decoupling will be an additional challenge in an era in which other underpinnings of continued globalisation are also weakening.

Mark Williams, Chief Asia Economist,