Coronavirus on its own won’t suddenly precipitate a big decoupling between China and the West, but the virus adds to a list of other reasons why a process of de-globalisation lies ahead.
- Coronavirus on its own won’t suddenly precipitate a big decoupling between China and the West, but the virus adds to a list of other reasons why a process of de-globalisation lies ahead.
- The big threat to globalisation in the past couple of years has come from tensions between the US and China. This is not just a President Trump thing, but rather reflects China’s emergence as a superpower with a different approach to economic management and an entirely different set of values to the major developed economies. (See China Economics Focus, “Decoupling, and its impact on growth,” 17th October 2019.)
- It is possible that the political consequences of the coronavirus alleviate these tensions. Given that the outbreak has undermined the idea that concentrating power in the Communist Party is the best way forward for China, some think that this might prompt the Party to liberalise and relinquish control. This could eventually bring China and the West closer together. However, we think it more likely that the Party and President Xi will make the case that the outbreak was only contained thanks to a strong centre. That could entrench China’s existing economic model and make further clashes with the US more likely in the future.
- A more immediate way in which the crisis could accelerate a process of de-globalisation is by highlighting the vulnerability of long and complex global supply chains. Many firms are now warning about an impending shortage of component parts caused by factory closures in China, with some already suspending production. The biggest effects have been felt in emerging Asia (see here), but the recent developed market PMIs showed a lengthening in suppliers’ delivery times (see here and Chart 1).
- On its own, the coronavirus is unlikely to prompt firms to redesign their entire supply chains. Indeed, previous shocks that affected the supply of intermediate goods (for example, Japan’s 2011 tsunami) did not stop the further fragmentation of supply chains. Moreover, to the extent that firms do act, they might just reduce their reliance on any individual country or supplier of parts. While this could reduce links between China and the rest of the world, it need not reduce the amount of global trade.
- That said, the virus adds to other reasons why firms are already rethinking their logistics. These include environmental concerns about transporting goods long distances and the development of new technologies making it profitable to reshore some production. Surveys suggest that, well before the virus struck, many firms were trying to shorten supply chains – both in terms of geographical distance and the number of links in the chain – to reduce risks, increase quality control and respond to consumer demand more quickly.
- Chart 2 illustrates how globalisation – as measured by the flows of trade and foreign direct investment – has flattened off as a share of GDP. We expect this process to turn into a period of outright de-globalisation. To read more about the implications of this, see our Key Themes page on ‘The end of globalisation’.
Chart 1: Suppliers’ Delivery Times (Index)
Chart 2: World Trade & FDI Inflows (% of GDP)
Vicky Redwood, Senior Economic Adviser, +44 20 7808 4989, email@example.com