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Monday, 28 December 2020

Deglobalization after covid-19

Could covid reverse the tide of globalization? The past year pulled the brakes on global trade flows, forcing businesses and consumers alike to think and spend more locally, and accelerating a deglobalization of the world economy. With global lockdowns limiting travel of both people and goods in a way previously unimaginable, could 2020 bring a permanent shift to the cross-border flow of commodities, people and ideas?

Covid-19 has brought to light the faults with a China-reliant supply chain, prompting a rethinking of the traditional wisdom driving a globalized economy of seeking out the lowest production costs wherever they may be. As Chairman of the European Union Chamber of Commerce in China Jörg Wuttke told Bloomberg: “The globalization of putting everything where production is the most efficient—that is over.” But aside from covid-19, US-China tariff wars as well as sanctions on the use of US technology by Huawei have meant that companies have had to look for local alternatives. As deglobalization accelerates, we’re likely to see a repeat of the Huawei example all over the world, and a resurgence of developmental economic theories such as the “big push” that encourage developing economies to orient themselves away from exports and towards local markets.

On the other hand, covid could end up inspiring a different sort of globalization. According to DHL’s 2020 Global Connectedness Index, while capital flows decreased globally and the movement of people retreated to a level last seen in 1990, cross-border internet traffic saw a 48% increase from mid-2019 to mid-2020, which will likely fuel a boost in e-commerce activities. The report also found that trade activity has rebounded more quickly than expected since the spring, reaching only 3-4% lower than its pre-covid levels. While this could be a temporary phenomenon due to restocking, HSBC expects global trade to rebound in 2021, with some adjustments to supply chains as companies look to hedge against future risks by expanding to multiple bases and sourcing more of their materials locally.

For emerging markets like Egypt, a deglobalized economy could impose serious limitations on growth, particularly for industries that are heavily reliant on imported materials. The global export to GDP ratio had already been declining, falling 5% from the global financial crisis in 2008 to 2020, and indicating a regression in trade-linked growth. This could inflict a heavy blow on developing economies playing catch up with their Western counterparts by relying on export-led growth. On the other hand, AUC’s Sherif Kamel writes that deglobalization could present an opening for Egypt’s manufacturing industries as regional businesses look for suppliers that are closer to end markets, allowing Egypt to act as a gateway to Africa and to entrench itself more firmly in regional supply chains.

Enterprise is a daily publication of Enterprise Ventures LLC, an Egyptian limited liability company (commercial register 83594), and a subsidiary of Inktank Communications. Summaries are intended for guidance only and are provided on an as-is basis; kindly refer to the source article in its original language prior to undertaking any action. Neither Enterprise Ventures nor its staff assume any responsibility or liability for the accuracy of the information contained in this publication, whether in the form of summaries or analysis. © 2022 Enterprise Ventures LLC.

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