• Bruegel experts present opposing views on what the coronavirus means for the future of globalisation, in particular international supply chains and dependence on Chinese manufacturing.
• On the optimistic side the macro hit will be relatively contained to the first half of the year and the global economy will recover quite quickly. Moreover, while diversification can help to reduce future supply disruption, pandemics can happen anywhere and the virus is no longer contained in China.
• China’s 35% share in global intermediate goods trade reflects economics. The country’s vast size matters as does the industry clusters that have developed. A temporary supply disruption cannot offset these factors.
• More generally support for globalisation remains despite some populist sentiment (CETA ratification), also epidemics are linked to people not economic or financial integration. Economic engagement with China will continue, albeit will some caution over political / security issues.
• More pessimistic take is that the economics no longer makes sense and COVID (and the trade war before it) will accelerate a production shift that has already been underway for a while. Chinese wages now higher, on average, than in Malaysia given 10% growth p.a over the last decade. Samsung already left for Vietnam a while ago and South East Asia now receives more FDI than China.
Why does this matter? De-globalisation is already under way with global trade volumes contracting last year. A continuation of this trend due to COVID-19 will mean less efficient production, higher costs and ultimately slower global growth. There are no winners in such a scenario as even where production is shifted closer to home companies could face higher wage costs, reduced supply-chain infrastructure and a shortfall in workers with required skills.
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