Curmi & Partners

The end of globalisation as we know it?

By Nicole Busuttil

Globalisation has a very long story, one that has changed in content and intensity over the past decades. Technology-driven globalisation picked up in early 1990s, delivering a great deal to the global economies. Supply chains spread like wildfire, reaching even the most distant countries, raising worldwide economic levels to new heights. As explained by the philosopher Adam Smith, “the Wealth of Nations” comes from an interconnected world. However, with the immense amount of good brought about by this interconnectivity, there is a sliver of backlash as it is easier for pathogens and crises to cross borders, resulting in a global disruption as seen throughout history.

So, the big question is: “Is globalisation on its deathbed as a result of the pandemic?”.

Some economists believe that even before the pandemic hit, globalisation was in trouble, peaking around a decade ago. One reason for this is that technological drivers are fading, with complex supply webs having reached their limit. New and advanced manufacturing techniques are now resulting in the onshoring of production rather than outsourcing to low cost of labour countries as previously seen, dampening trade between countries. Furthermore, globalisation was damaged way before the pandemic-induced economic blow from sealed borders and disrupted commerce – this being narrowed down to the Global Financial Crisis and the China-US trade war.

The pandemic has shaken the ground under our feet, further exposing the fragility of the global economies and intensifying some of the pushback against globalisation. The lockdowns brought about fears that supply chain dependencies would cause worldwide disruptions. However, the supply chain web has continued to function over the past year, coping well with a shift in spending from services to goods production in many advanced economies. Moreover, governments did not attempt to aid domestic industries through the implementation of policies restricting international trade, thus easing concerns of widespread protectionism and the dismantling of global supply chains.

Before the outbreak hit, China and America signed an agreement whereby China agreed to increase purchases of services and goods from the US by $200 billion over 2 years, with the US promising to roll back some of the tariffs on Chinese goods. Concerns regarding this deal were visible before the first cases of the virus appeared, with the pandemic possibly diminishing China’s ability further to meet their side of the bargain as domestic demand for US products weakened. If China does not meet these targets, the prior trade war will most likely resurface. Further, President Biden is motivated to restore America’s role as leader of the free world, putting his approach on a direct collision course with China. This can provide an insight into the future of globalisation, with a potential decoupling of the two trade leaders and the world breaking into US- and China-led trade blocs. The implications of this can be severe, as there will likely be a reduction mainly in technology transfer and inward investments amongst countries.

On a positive note, the pandemic is accelerating digitalisation, connecting everyone through the digital world with online communication, e-commerce products, online shopping and much more. Countries faring the best during the pandemic are in fact those supported by digitalisation. There may be a different kind of interconnectivity going forward, where supply chains are shortened as countries will rely on natural resources for example, rather than the importation of oil, but in general, interconnection will increase given that in a digital age, globalisation is pervasive.

History shows that countries have been focused on the bad that comes about from interconnectivity rather than from all the good and wealth that it brings. As economies re-open, activity will recover, but there are doubts as to whether globalisation will return quickly and be as carefree as before. Globalisation may stall over the next decade, however deglobalisation seems to be the more likely outcome. If this is driven by new technological advances, it will be good news for the global economy. However, another scenario, which is just as probable, is that of an aggravated trade world due to social and political tensions, and economic changes spurred on by the coronavirus.

The information presented in this commentary is solely provided for informational purposes and is not to be interpreted as investment advice, or to be used or considered as an offer or a solicitation to sell/buy or subscribe for any financial instruments, nor to constitute any advice or recommendation with respect to such financial instruments. Curmi & Partners Ltd. is a member of the Malta Stock Exchange, and is licensed by the MFSA to conduct investment services business.