COVID-19: Is this the end of globalization?

The lockdowns and border closures that many governments have imposed to manage the ongoing COVID-19 pandemic have caused the greatest economic shock since the Great Depression. The scale and pace of the collapse in supply and demand throughout the global economy in the first half of 2020 is truly startling. At the time of this writing, in November 2020, the precise extent of the economic carnage remains unclear, but all the signs are ominous. Though doomsday predictions from earlier in the year have not been met, world merchandise trade is still expected to fall by nearly 10 percent in 2020. ¹ Some services sectors, such as aviation, tourism, and international education have been almost entirely wiped out, though online services have seen expanded usage. Globally, foreign direct investment plunged by 49 percent in the first half of 2020, compared to 2019, much worse than the trough reached during the global financial crisis of 2008. The outlook for the full year remains dismal, at 30–40 percent below the previous year’s level. ² To shore up collapsing economies, governments have rolled out huge rescue packages, which in late April 2020 were already estimated to total US$6.3tn for the Group of Twenty (G20) countries alone, or 9.3 percent of their 2019 gross domestic product. ³ Despite these extraordinary efforts, however, the World Bank predicts that the global economy will still shrink by over 5 percent in 2020. The share of countries entering recessions in 2020 will be higher than at any point since the Great Depression, while per capita income will decline in more countries than at any point since 1870. ⁴ Even the People’s Republic of China (PRC) and India, the main engines of global economic growth in the past few decades, have experienced their first episodes of negative growth since the 1970s. ⁵ The International Labour Organization estimates that COVID-19 has caused employment to decline by 320 million full-time jobs in the G20 countries, amounting to nearly 15 percent of all paid working hours. This is, on average, six times worse than the impact of the 2008 crisis over a similar time frame. ⁶

While the economic devastation is clear enough, less obvious are its implications for the global political economy, and specifically globalization—the main economic trend of the past forty years. Is the COVID-19 crisis going to end globalization? And if so, what sort of economic order will emerge in its place?

It would be foolish to attempt to predict the future in the middle of an unpredictable pandemic. For example, the pace at which economic activity recovers, and hence the extent of the global economy’s transformation, would partly depend on whether and when effective treatments or vaccines are found and delivered widely. What is clear enough, though, is that the COVID-19 pandemic, rather than a turning point, is acting as a catalyst for pre-existing trends in the global political economy, pulling in a direction opposite to the “hyperglobalization” of recent decades. To examine how COVID-19 interacts with key dynamics in the global political economy, I focus specifically on production, which under globalization was linked closely with international trade and foreign direct investment patterns, and on global finance.

As I will show, the disruptions to global supply chains wrought by COVID-19 have combined with rising United States–PRC rivalry, growing disaffection with the distributional impacts of global value chains (GVCs), and rising automation, to foster efforts to shift away from globalized production. However, given the extent to which production, trade, investment, and taxation have arranged around GVCs over the past few decades, full reversal is unlikely. More likely is an increasing fusing of multinational corporations’ efforts to maximize profits with a variety of national security and geo-economic agendas. Meanwhile, amid the COVID-19 economic doom and gloom, financial markets have been booming for most of 2020, high on central banks’ injections of liquidity to which they have been addicted since the 2008 crisis. Policy-makers are in a trap, since turning off the tap would collapse global financial markets, potentially leading to catastrophic economic outcomes. As in the decade since the 2008 crisis, however, booming markets will likely deepen inequality and resentment, fuelling economic nationalism and eroding support for globalization even more.

I begin by examining trends in production, then in finance. I conclude by briefly considering what these dynamics mean for Canada and Australia, both relatively small and open economies. Their governments will need to relearn how to direct their economies more purposefully or find themselves in a fragile position in the emerging, post-COVID global political economy.

COVID-19 and global production

The reorganization of trade and production around border-spanning GVCs, dominated by large multinational corporations, has arguably been the most distinctive feature of economic globalization in recent decades, as compared, for example, with the “first globalization” of the nineteenth century. ⁷ “Global value chain” refers to the trade, investment, and production activities associated with the production of a good or service, whereby different stages are located in different countries. ⁸ In 2019, the Organisation for Economic Co-operation and Development (OECD) estimated that trade within GVCs accounted for around 70 percent of the world’s total. ⁹ Trade and financial liberalization, as well as the rapid development of affordable transportation and communication technologies, have from the late 1970s enabled firms to reshape international trade and investment around their own strategic needs. Through GVCs, multinational corporations aim to maximize profits, by leveraging differences between locations, for example in labour costs, currency exchange rates, taxation, human capital, quality of infrastructure, regulation, and more. ¹⁰ For example, the iconic iPhone is assembled mainly in the PRC, due to labour costs in particular, but many of the higher value-added components are brought in from several other countries. Apple Inc. retains the lion’s share of the profits, due to its control over lucrative intellectual property rights, even though it employs less than 10 percent of the people involved in making the iPhone. Thus, although it is “made in China,” the value retained in the PRC from the iPhone X’s production process is about US$104 of the pre-retail price of US$409.25 per unit, relating to the cost of labour and China-made components. Although only a quarter of the total, this is in fact a sharp increase from earlier iPhone models, in which only about US$6.5 of the value was retained in the PRC, reflecting the increasing sophistication of the PRC’s technology sector. ¹¹

Challenges to the apparently unstoppable march of GVCs began appearing before COVID-19. Ironically, these have emerged largely from the country in which corporations have reaped the greatest benefit from “hyperglobalization”—the United States. Although American corporations remain without peer at the top of the global value-added pyramid, this position has increasingly come at a great political cost at home. As production, and even services, shifted offshore, ¹² inequality within the United States began to soar, worsened by limited welfare and redistributive measures and multinational corporations’ sophisticated tax minimization strategies. In the years after the 2008 crisis, income inequality in the United States, as measured by the Gini coefficient, was higher than in any other OECD member state, and the share of income going to the top one percent reached levels not seen since the 1930s. ¹³ Combined with popular resentment of the bailout of banks and financial firms by the United States government and the Federal Reserve Bank after the 2008 crisis (discussed later) and manifesting on the left in Occupy Wall Street and on the right in the Tea Party, trust in mainstream politics and government institutions crumbled. This partly explains the surprise election of Donald Trump to the presidency in 2016. ¹⁴ Trump’s electoral appeal—especially in the “rustbelt” states, worst hit by deindustrialization—hinged on his promise to bring “good” manufacturing jobs back to the United States—a promise that Trump’s presidency ultimately failed to deliver. ¹⁵ To be sure, some observers claim that job losses result mainly from automation, not globalization, and that there is no going back to the post-war industrial economy, irrespective of changes to trade and investment patterns. ¹⁶ For my purposes, settling whether “globalization” or “automation” is at fault for job losses is less important than the political salience of the nationalist and anti-globalist sentiment.

Therefore, long before COVID-19 struck, the globalized status quo was on shaky political ground in the country where the government had done more than any to facilitate globalization. ¹⁷ Trump’s trade policy while in office demonstrated a neo-mercantilist approach, focusing on reducing the United States trade deficit and undermining trade multilateralism. Ironically, as I have explained, the United States' trade deficit and the growing domestic inequality associated with deindustrialization are directly related to the activities of United States-based corporations and the GVCs from which they benefit more than anyone else.

In the PRC, too, challenges to GVCs were growing before COVID-19. Although the emergence and uptake of GVCs in the late 1970s had underpinned the PRC’s remarkable economic success story, by the mid-2000s exports-driven growth had slowed down. After the 2008 crisis it completely stopped, suggesting limits to this growth model. ¹⁸ Furthermore, as mentioned earlier, Chinese companies’ share in the overall value generated through GVCs often remained low, even as the PRC became “the world’s factory.” In this context, Chinese leaders have sought to avoid the “middle income trap,” by pushing Chinese technological firms up the value chain and supporting industrial upgrading. In various ways, including under the banner “Made in China 2025” (which was later abandoned), the PRC’s party-state supported Chinese state-owned and private companies buying up or even stealing intellectual property from other countries, insisted on technology and knowledge transfers as preconditions for access to the Chinese market, limited competition from foreign firms in the domestic market, and provided ample financial assistance and cheap credit for home-grown research and development. ¹⁹ These practices are broadly similar to those other East Asian “late-developers,” such as Japan, South Korea, and Taiwan, have used. However, whereas these countries developed under the United States’ umbrella, initially within the context of the Cold War, the PRC is perceived as a challenger to United States hegemony, generating growing great power friction.

Related to this friction, GVCs were further undermined before COVID-19 by what Farrell and Newman call the “weaponization” of interdependence. ²⁰ The term refers to the capacity of governments and regulators of states that operate as key nodes within global economic networks to use their central position to coerce other state and non-state actors into actions that they would not have taken otherwise. Although not new, this practice has become more prevalent under Trump and increasingly used to attain geo-economic objectives, in particular, to contain the PRC’s rise. Perhaps the most significant recent example is the banning of American companies from working with the Chinese telecom giant Huawei, but the Trump administration has also threatened and imposed import restrictions on close allies, including Canada. Combined with the tit-for-tat trade war between the United States and Chinese governments in recent years, many observers have been wondering whether the world’s biggest two economies were “decoupling.” ²¹ All indications so far are that the incoming Biden administration will persist with similar policies towards the PRC, though perhaps United States allies will be spared.

The COVID-19 pandemic will likely further undermine GVCs and reduce international trade more generally. The aforementioned sharp reduction in foreign direct investments is perhaps the clearest indicator so far. The intense competition that emerged in the early months of the pandemic for critical medical supplies, including basic personal protective equipment, combined with export restrictions imposed by many governments, is already generating calls all over the world to bring production back home. Actions, such as the United States federal government’s alleged “pirating” of surgical masks, made by United States firm 3M, while on the way to Germany, ²² will likely have a lasting effect on firms’ and governments’ confidence in long transnational supply chains. However, although some production may be “reshored,” the old manufacturing jobs may not return along with it, as increasing automation and technologies such as 3D printing will replace workers. ²³ Indeed, reshoring was already beginning to occur before COVID-19, enabled by automation, though the complete automation of entire supply chains remains unlikely at this stage. ²⁴

None of this is to say that GVCs will disappear. It is hard to imagine that the world could easily shift from having 70 percent of all trade within GVCs to something completely different. Early evidence suggests that COVID-19 has not even reduced the PRC’s share of global exports, indicating that large-scale divestment in the PRC is yet to occur. ²⁵ In September 2020, for example, the PRC’s exports were actually up 9.9 percent from 2019, since its capacity to control COVID-19 and restore production rapidly made it even more essential to global supply than before. ²⁶ Nonetheless, the pressure on GVCs is likely to remain, and they will increasingly be shaped by geo-economic, neo-mercantilist imperatives, not just firms’ profit-maximization imperatives.

Finance propped up by central banks

Another important aspect of economic globalization in recent decades has been the massive growth of financial markets, which now dwarf the “real” economy of goods and services. For example, in 2018, trading on global equity markets alone totalled US$97.3tn. ²⁷ By contrast, the value of global trade in goods and services came to approximately US$26tn in the same year. ²⁸ Trading volumes on secondary and foreign exchange markets are even bigger by orders of magnitude. Finance and the “real” economy cannot be easily separated, since the credit created in the financial system has enabled much activity in the “real” economy. ²⁹ However, financial markets have been on state life-support since the 2008 crisis. COVID-19 has only reinforced this trend.

State intervention in markets is routine under capitalism, neoliberal ideology notwithstanding, but since the 2008 crisis, finance has become highly dependent upon the injection of liquidity, especially United States dollar-denominated, into markets. In the aftermath of the 2008 crisis, with interest rates already close to zero, the United States Federal Reserve’s assets swelled from under US$1tn to around US$4.5tn, as it used dollars it simply created to purchase securities from the United States government and banks. Other central banks, in the United Kingdom, Japan, and the European Union, also pursued “quantitative easing,” ³⁰ as this practice has come to be known, though on a smaller scale. The Federal Reserve extended its purchasing of securities to European banks, giving them preciously needed dollars during the 2008 crisis. In this sense, it became the global “lender of last resort,” underpinning the entire global financial system. ³¹ The 2008 crisis and its aftermath also showed that, notwithstanding other changes in the global economy and the United States’ ballooning government debt, there is no competition in sight to the United States dollar as the global reserve currency and the world’s most liquid asset, to which most market players flock at the first sign of trouble.

Quantitative easing in the 2010s facilitated a massive inflation in asset prices, allowing many financial firms to reap huge profits, while fiscal austerity to curtail growing government debt spread misery to the wider population, helping fuel the resentment that supported the rise of right-wing populists globally. But finance became addicted to it, as more and more capital sloshed around world markets looking for profitable returns. Given the potentially calamitous implications of another major financial crisis, central banks continue to prop it up. Attempts to taper quantitative easing after 2013 led to sharp contractions in financial markets and capital flights from emerging markets in particular.

When COVID-19 struck, financial markets initially fell off a cliff, as could perhaps be expected given the scale of the economic crisis. Shortly thereafter, however, central banks began to pump huge amounts of liquidity into markets, completely reversing earlier trends. While all eyes were on Donald Trump’s abdication of America’s global leadership, including the United States neutering of the International Monetary Fund (IMF), the Federal Reserve again stepped up, as it did in 2008, injecting over US$2.3tn into markets in a few short weeks by: purchasing securities; stabilizing money market mutual funds and repurchase markets; lending to financial firms and non-financial employers in the United States, including small and medium enterprises; and supporting local and state government borrowing, as well as household loans. ³² The Federal Reserve also opened swap lines in mid-March 2020 with nine additional central banks ensuring that they did not run out of dollars ³³ on top of the five central banks it already had similar arrangements with since the 2008 crisis. ³⁴ As the COVID-19 crisis deepened, more central banks began implementing quantitative easing programs for the first time. This group includes the historically conservative Reserve Bank of Australia and the Bank of Canada, neither of which implemented quantitative easing after the 2008 crisis.

While the Federal Reserve’s current actions go beyond financial markets, the financial sector continues to be its core focus. We have thus been treated to the bizarre spectacle of booming financial markets in the middle of the worst economic crisis in generations. ³⁵ On 8 June 2020, for example, the NASDAQ closed at an all-time high, while the Dow Jones was only seven percent off the record. ³⁶ This bull run may not continue indefinitely. However, based on what we have learnt from the decade after the 2008 crisis, that added liquidity may never translate into lending and investment that stimulates the real economy and leads to broad-based and more equitable growth. It will likely further inflate the market bubble.

It remains to be seen whether the current crisis will lead to, first, a wider realization that, contrary to common belief, money does in fact grow on trees (in the Federal Reserve’s and other central banks’ gardens), and then to political demands to use this capacity to create new money for wider public benefit. Supporting the financial sector in the longer term is incompatible with a fairer distribution of resources, which, in the context of an economic depression, could be necessary to stave off societal breakdown. Ultimately, restoring capital controls of some kind would be essential for reducing the risk of additional financial crises. But this would necessitate debt cancellation on a large scale to reduce the size of the debt mountain created over the past decades of financialization. Such a move would be politically difficult, given the enormous power of financial sector interests. The risk is a disorderly collapse of the financial system.

The COVID-19 crisis has also reaffirmed that no substitute exists today for the United States dollar as the global reserve currency. At the first sign of trouble, market actors and governments rushed to increase their United States dollar holdings, thus appreciating the dollar’s value relative to other currencies and undoing Trump’s efforts to promote United States exports. Whether United States domestic politics will eventually prevent the Federal Reserve from performing its critical global role remains to be seen. President Trump’s assault on global governance institutions has already weakened the IMF, thus leaving emerging markets (with the exception of the PRC) to suffer a calamitous withdrawal of funds. This was partly reversed as central bank spigots reopened, but, given the size of emerging markets’ debt and the scale of their economic woes, it is hard to see them borrowing their way back to growth.

At the moment, the Federal Reserve’s independence allows it to act as an institution with a truly global scope. Even Trump’s “America first” politics and repeated public attacks failed to affect its operations. It is, however, possible that, over the coming years, monetary policy will become increasingly politically contested, such that the Federal Reserve may come under pressure to “de-globalize.” This could involve changes to current policies, such as not swapping dollars with other central banks, only swapping with friendly states, or not buying securities from non-American entities. Excluding non-American entities could leave them dollar-starved and could create a global banking crisis. Alternatives to the United States dollar could emerge in the coming years, but the adjustment period would be difficult and dangerous.

Conclusion

At the start of this article, I questioned whether the economic crisis wrought by the COVID-19 pandemic heralded the end of globalization. Though it is too early for definitive answers, the COVID-19 crisis has so far intensified pre-existing dynamics, rather than establish new ones. Specifically, COVID-19 appears to be putting pressure on GVCs, adding to earlier trends away from the globalization of production, trade, and investment. I also examined financial markets, which are currently enjoying a curious bull run, a result of central banks’ massive injections of liquidity to stave off collapse. Both dynamics underscore the deep instability now afflicting the global political economy. The globalization of production and state-supported financial market booms have increased inequality, especially in developed economies, fuelling the rise of right-wing populists, such as Donald Trump. It is far from clear that reshoring would benefit workers in developed economies, though it would undoubtedly negatively impact workers in developing countries. Moreover, doubling down on the same economic response to the 2008 crisis will likely only intensify the same, troubling, political dynamics. Although GVCs are unlikely to disappear, they will likely be increasingly shaped by the geo-economic agendas of the states from which they herald.

As I was finalizing this article, Joe Biden and Kamala Harris defeated Donald Trump and Mike Pence in the United States presidential elections of November 2020. A Biden presidency will undoubtedly soften the rhetoric emanating from Washington and could improve international cooperation over vaccine development, for example. It may not have a significant impact on the substance of the issues discussed here, however. Many of the trends I discussed earlier regarding GVCs and finance have developed over a longer time frame, and dissatisfaction with the PRC’s behaviour is now a bipartisan issue in Washington. Significant reversals on trade relations between the United States and the PRC or access to sensitive technologies are therefore not likely.

For countries such as Canada and Australia, with relatively small and open economies, the shifting global political economy heralds potentially serious challenges. Both have already been on the receiving end of blatant forms of economic coercion from the United States and the PRC in recent years. In Australia’s case, for example, Chinese anger at Canberra’s public call for an inquiry into the origins of COVID-19 led, in May 2020, to a series of escalating trade restrictions from the PRC, directed at Australia’s exports—including coal, barley, beef, and wine. Australia’s agricultural exports were already negatively impacted by the United States–PRC trade deal, which was designed to reduce the United States’ trade deficit with the PRC. If the PRC were to extend these restrictions, they would have a serious impact on Australia’s recovery from the COVID-19 recession, given that finding alternative markets of equal scale or purchasing power would be difficult. Canada and Australia have also become reliant in the “hyperglobalization” years on long supply chains for some essential goods, including personal protective equipment and medical supplies. As mentioned, the limits of these became painfully clear in the early months of the pandemic. In order to avoid the worst outcomes, the Canadian and Australian governments need to direct their economies to secure essential capacities. Reliance on “global markets” to deliver national prosperity and security will no longer do.