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Will COVID-19 stop globalisation in its tracks?

04 December 2020

Angus Wilson, Wealth Manager

What is globalisation?

Globalisation is broadly defined as the "process of increased interconnectedness among countries … [which] usually results in a better standard of living"[1].  This heightened standard of living is often attributed to cheaper communications, access to varied cultures and lower costs of products. At a given time, we could feasibly be in our living room in the UK, on FaceTime to friends in America, while eating Thai Food, using utensils made in China.

The phenomenon of globalisation can be traced back more than two thousand years, to the first Silk Road in 1st century BC where, for the first time, Chinese luxury products started to arrive in Rome. This developed further with the spice routes in the 7th century and, more significantly, in the 15th and 16th centuries, with Columbus' discovery of America and Magellan's circumnavigation. These explorations facilitated global trade on a scale that would begin to benefit society at large.

The establishment of the British Empire, combined with the industrial advances of the 18th century, marked what the World Economic Forum (WEF) describes as the "first wave of globalisation". International trade began to grow exponentially, only stopped in its tracks by World War I. The conflict resulted in an almost total unwinding of the good work that had been done - "trade as a percentage of world GDP had fallen to 5% - a level not seen in more than a hundred years" (WEF).

How does politics impact globalisation?

World War I would prove to forbear the future waves of globalisation. These waves would often be catalysed by changing political incentives: “Some aspects of globalization are continuously advancing – notably transport and communication technology. Other aspects – notably politics – are more like a pendulum swinging back and forth"[2]. Protectionist policies have periodically damaged the momentum of global trade, as we have seen through Trump's tenure in office, with flaring tensions between the White House and China resulting in significant tariff imposition. This sort of policy may be good for winning votes (although it hasn't done quite enough for President Trump), but it is unequivocally damaging for the welfare of the end consumer. As Jonathan Marriott, our CIO, commented earlier in the year, "Donald Trump, it seems, may not have learnt the lesson of the 1930s that protectionism, in the end, damages both sides."

The inclination towards national self-preservation has become increasingly prevalent over the last decade, exemplified by the Brexit vote, a push for Scottish independence and the rise of political populism. Seemingly, the populations of developed nations are becoming disenfranchised by the centralist democratic regime - they want to pave a new way for their respective countries to flourish, without the need for global support. The benefits of free trade and the free movement of people have been partially disregarded in favour of national sovereignty. Some would argue that their sense of national identity has been eroded as the concept of global citizenship has emerged and perhaps there is a case to be made for meeting somewhere in the middle.

Will COVID-19 create deglobalisation?

The new health crisis is also set to have an impact on globalisation. A strong indicator of the status of globalisation is the Worldwide Foreign Direct Investment (FDI)/Gross Domestic Product (GDP) ratio. This measure increased from 9.6% in 1990 to 30.9% in 2007, following a sustained period of extraordinary technological advancement. After a temporary setback during the global financial crisis, this recovered to 33.6% in 2015[3]. UN's trade and development arm (UNCTAD) recently revised its forecasts about the effects of COVID-19 on global FDI flows to a 15% drop resulting in a c.40% contraction - more dramatic than at any time in modern history.

With many businesses becoming unviable at the hands of the virus, it is likely to be a long time until we reach pre-pandemic global trade volumes. The socioeconomic shifts that will impact the lives of millions are likely to linger for many years and it is very difficult to say if deglobalisation will be a necessary side effect. What we certainly have seen, with so much of the country homeworking, is a microcosm of deglobalisation – perhaps better described as localisation.  Instead of commuting to our offices some distance from home and buying lunch or coffee from well-established chain sandwich shops, we are instead supporting local businesses closer to home.  It will be interesting to see to what degree this microcosm might shift to the global stage. 

In times of crisis, human nature would normally dictate that populations unify and this particular crisis extends across the entire globe. In labs around the world, scientists are united in their search for a viable vaccine to COVID-19. Perhaps, even acknowledging the backdrop of protectionism, 'America First' and Brexit, we may surface as a more aligned human race, open to trading for the benefit of all parties.

[1] Levy, Brandon, The Role of Globalization in Economic Development

[2] Peng & Meyer, 2011: 21

[3]  UNTAD 2016, Annex Table 7

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