China Faces An Economic Reckoning As Covid19 Turns The World Against Globalism

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One of the more apparent consequences of the coronavirus is that it looks likely to become a catalyst for deglobalization. At the centre of this will be the decoupling of the Chinese economy with developed economies and the US in particular. The world’s three largest free economies – the European Union, the United States and Japan – are all drawing up separate plans to lure their companies out of China.

European Union trade commissioner Phil Hogan has called on companies to consider moving away from China; US President Donald Trump’s top economic adviser Larry Kudlow has said the government should pay the costs of American firms moving manufacturing back from China onto US soil; and Tokyo has unveiled a US$2.2 billion fund to tempt Japanese manufacturers back to Japan or even to Southeast Asia.

Meanwhile, bills are piling up in the US Congress aimed at reducing America’s reliance on Chinese supply chains and pushing for a decoupling of the world’s two largest economies.

While these are recent moves, the truth is the debate on globalization – and de-globalization – began more than a decade ago in the wake of the global financial crisis of 2008.

After decades of globalization in trade, capital flows and even people-to-people exchanges, the trend has reversed over the past decade as trade and financial integration stalled.

Protectionist tendencies are on the rise. Since 2008, G20 countries have added more than 1,200 restrictions on exports and imports. Britain’s decision to leave the EU, the election of Trump on a protectionist agenda, and the rising popularity of right-wing political parties in France, Italy and elsewhere are all examples of rising public discontent with the status quo.

De-globalization gained steam when Trump launched tariff wars against many of American’s trade partners, China in particular. Since the advent of the US-China trade war in the past two years there has been growing evidence of a sharp decrease in merchandise, capital and people-to-people flows.

Conventional wisdom suggests globalization makes the world a better place to live as a whole, as free trade generally promotes global economic growth. Economic liberalization creates jobs, makes companies more competitive, and lowers prices for consumers. Advances in technology and communications have made it easier than ever for people and businesses to stay connected.

But globalization is a complicated issue and its benefits and disadvantages are not equally shared. Globalization is good for multinational corporations and Wall Street as it opens up opportunities to sell goods and services to much larger markets with greater profits. They also benefit from moving assembly lines to developing countries where production costs are lower.

The biggest problem for developed countries is that jobs are lost in the process. Supporters of globalization point out that it has brought about cheaper imported goods. But this benefit does not offset the decline of jobs and therefore wages.

Another problem for developed countries is that they lose domestic fiscal revenue when countries move production elsewhere. In the US, the process has cost not only many jobs but also steadily increased the trade deficit and debt.

China has been the biggest beneficiary as its economic rise has come hand in hand with globalization. Since it joined the World Trade Organization in 2001, China has leapfrogged France (in 2005), Britain (in 2006), Germany (in 2007) and Japan (in 2010) to become the world’s second-largest economy. This rise was thanks largely to open access to international markets and billions of dollars of foreign direct investment (FDI). China has for some years been the world’s top destination for FDI and this has played a critical role in making the country a global economic powerhouse, turning an agricultural backwater into the world’s manufacturing hub and largest merchandised goods exporter in just a few decades.

The flip side is that de-globalization poses a very real risk for China, as its economic prospects have become so deeply intertwined with world markets.

Exports of goods and services accounted for 19.51 per cent of China’s GDP last year, according to the World Bank. While that figure is declining, it is still sizable. Based on this, a 10-percentage-point decline in China’s exports might mean a decline of about 2 percentage points in GDP growth on average.

Exports employ 180 million workers, so any hit to the sector would also have a knock-on effect on investment, incomes, consumption and employment.

The outbreak of Covid-19 has further convinced the skeptics of globalization by highlighting a flaw in supply chains. Developed economies have been made painfully aware that decades of deindustrialisation have resulted in greater risks in the areas of public health, national security and geopolitics.

Politicians, policymakers and business executives in developed economies have come to realize the hazard involved in over-reliance on China for critical supplies, particularly for medical equipment, pharmaceuticals and medicines.

What has upset many in the West is the realization that they were wrong to assume globalization and democracy would go hand in hand. China’s meteoric economic rise, its pivot to more authoritarian rule and a more assertive stance on the international stage in recent years have proved such assumptions completely wrong.

For China hawks in the West, the globalization of the past few decades has seen the free West help create a communist monster, one that now poses the most severe challenge to established universal values and the global order.

That is why the Trump administration’s December 2017 National Security Strategy classified China as a strategic rival that aimed to “undermine the American economy, values and interests”. The EU has made a similar policy statement, identifying China as a “systemic rival”.

The global economy as a whole will suffer from de-globalization and the decoupling of the world’s largest economies if the flow of capital, investment and trade becomes less dynamic. But the escalating trade war and rising strategic competition between the US and China were fostering the de-globalization trend even before the outbreak of the coronavirus pandemic. Covid-19 is only likely to accelerate the decoupling and therefore may well prove to be a historic turning point.

It seems unavoidable that the coronavirus will usher in a new era of economic development, both for China and the rest of the world. ■ ■