COVID-19 Brings Winds of Change in Globalization

According to the International Monetary Fund (IMF), the global economy is about to shrink by more than 3 percent in 2020, the sharpest slowdown since the Great Depression in the 1930s. ^[1] With vaccines at least 12-18 months away and natural immunity at least 2 years away, this outbreak is proving to be a stress test for globalization as nations limit international travels and critical supply chains falter, forcing many countries to reevaluate the global interconnected economy. ^[2] 

International solidarity is essential, now more than ever, in the fight against a virus that does not care much about geographical boundaries. However, many attribute globalization as the causal factor leading to spread of the contagious disease rendering global supply chains ineffective.^[3] Public health response to the crisis has caused the largest and fastest decline of international flows in modern history. Exposing both merits and demerits of global relations, the pandemic might change globalization as we know it. 

Globalization over the Years Gradually Getting Slower 

The current globalization process dates back to the 1970s and can be distributed in different phases of growth, contraction, and mutation. Many of these shifts correlate with changes in the global geopolitical and economic order, rise of powers in Asia, and shift of the centre of global activity from the Atlantic to the Pacific.^[4] These changes have been accelerated and consolidated by the recessions at the end of the 2000s and the beginning of the 2010s. Various analysts predicted that globalization would slow down or end. Some of these analyses even predicted a period of secular stagnation during the financial crisis of 2008 and the following Great Recession. ^[5] 

Elcano Royal Institute, a Spain-based think tank, divides globalization since 1990 into three phases e.g. i) initial phase of deglobalization between 1990 and 1995, where aggregate global presence fell by 0.7 percent; ii) sustained globalization between 1995 and 2011, with a cumulative increase of 43%; and iii) the current phase, with moderate increases and annual averages close to 1%. ^[4] 

The indices over the years suggest that the trend of globalization may have slowed down since the start of last decade and had two falls in 2014 (-0.7%) and 2015 (-1.4%). Before the current crisis hit, the process had been in a recovery phase.

Different variables (Economic, Military, and Soft) have contributed at different rates to the speed of globalization in recent years. The economic dimension shows the intensification and stretching of economic interrelations around the globe; the military dimension is often a subdomain of political globalization and is defined as the use of military power across the world; and the soft dimension shows the expansion of intangible factors such as ideas, values, culture, and perceived legitimacy. The economic dimension has been the main component of globalization over the years 1990-2005 whereas, the military dimension contributed to deglobalization with negative rates in most of the years. The soft dimension has been an important vector of globalization since 2000 and some soft variables are being strengthened during the current coronavirus crisis. For example, improvement in information infrastructure, scientific research, and social sciences. 

Global Exchanges Affected by the Outbreak of COVID-19  

Experts agree that the coronavirus crisis will have major impacts on all dimensions of international exchange. ^[6] The timing and nature of different national responses to the crisis will affect the rhythm of globalization in different ways. ^[7] 

Countries Seeking Efficiency Rendered Helpless due to Interdependence 

Globalization created a booming international and flexible marketplace where manufacturers can substitute one component of the chain with another as needed. The process thus created a stage for specialization, which, in turn, ensured efficiency. Comparative advantage of a country is the driving force of this specialization. However, this also created a complex system of interdependence for many countries.  

The outbreak of COVID-19 has exposed the fragility of this global system. For example, car manufacturers in western Europe are worried about shortages as a single manufacturer, MTA Advanced Automotive Solutions, has suspended productions in one of its plants in Italy.^[8] As a result of supply chain problems, productions of laptops fell by about 50% in February globally. ^[3] Other international organizations are likely to meet the same fate as most of them rely on just-in-time inventory to minimize inventory costs.

Suffering Healthcare Sector due to Codependency 

Production bottlenecks are hampering sectors that are crucial in fighting against the coronavirus. Critical medical supplies such as reagents are running low and out of stock in many countries. Both the companies dominating production of necessary reagents, Dutch company Qiagen and Swiss company Roche laboratories, have been unable to keep up with the surge in global demand. ^[9] This has delayed the production of test kits in countries, including the US, forcing them to wait in a long queue to buy chemicals they need. ^[3] Americans shuttered at home are looking for other alternatives other than relying on the country’s USD 4 trillion health care industry as the official total death toll exceeds 100,000. Similar picture prevails in other countries relying on supply from foreign countries for medical well-being. 

Countries Reacting on their Instincts against Global Solidarity

Before the spread of COVID-19, Chinese companies manufactured about 50 percent of the world’s medical masks. ^[3] Under current circumstances, the manufacturers in China have increased production. The Chinese government, however, has effectively bought the country’s supply of masks while importing masks and respirators from abroad. ^[10] In Europe, Turkey, Germany, and Russia prohibited the export of medical masks and respirators and France seized all available masks whereas, the European Union (EU) is supposed to have a common marketplace with unrestricted free trade among member states. 

As the crisis deepens, the global supply chain of urgent medical supplies will be torn down if no actions are taken. Countries like the US that depend on foreign exchange will suffer the most from this. The country has a national stock of masks that has not been replenished since 2009. ^[3] Under these circumstances, many companies are considering pulling back from global integration with other countries and investing to be self-sufficient instead.

Change in Global Exchanges Results in a Shift of Global Influence to the East 

While North America, Europe, and South America are considering building walls, markets in Asia, led by China and India, are talking about building bridges. The shift of influence towards the East is being driven by several factors. The region is drawing capabilities as significant capital investment flow into Belt and Road Initiative projects by China’s state-owned enterprises, banks, and investors. ^[12] Although the US has been pulling back on global integration, China has been demonstrating its willingness to lead throughout the crisis. Beijing has learned how to fight the new virus and has stocks of equipment that do that. These are valuable assets that they have been deploying with skill. In March, Italy sought help from EU countries to provide emergency medical equipment. None of the countries responded but China did. ^[3] They offered to sell ventilators, masks, protective suits, and swabs. Jack Ma, the billionaire co-founder of Alibaba, has offered to donate test kits, masks, and protective suits to the USA, Europe and Africa. ^[13] 

Bangladeshi Industries Suffering due to Tumbling Global Economies

Globalization has brought benefits for industries in Bangladesh, especially the apparel industry, as international companies continue production in cost-effective centres of Bangladesh and devise a supply chain that spans multiple countries. The outbreak of the coronavirus exposed vulnerabilities in these international value chains. Under current situation, the economic fate of the country is tied to the recovery of countries that enable the Ready-made Garments (RMG) and Remittance sectors. ^[14] This is expected as slowdowns in economies like the US and EU have ripple effects in the economy of Bangladesh.

Struggling RMG and Remittance Sector amidst Global Lockdowns

Performance of the RMG sector is critical for Bangladesh as the sector contributes to 84% of the country’s export and creates employment for 3.5 million people.^[16] Due to the recent crisis, RMG companies that buy from Bangladesh are closing doors in cities throughout America and Europe. H&M, Nike, GAP, Zara, Marks & Spencer, Primark are all major buyers that have closed their stores in major cities. ^[14] Bangladeshi suppliers fell in troubled waters as American retail giant JCPenney filed for bankruptcy protection on 17th May. ^[15] According to BGMEA, USD 1.5 billion worth of orders have already been cancelled or postponed by international buyers.^[16] Besides, problems loom on the supply side too. Bangladesh Garment Buying House Association (BGHA) has reported that spinners are charging 15% higher prices than last month as a result of the yarn import disruption from India. ^[16] Chinese lockdowns are affecting the supply chain for Bangladesh as imports from China account for 46% of the total USD 34 billion import as of FY 2018-19. ^[16] 

Bangladesh has around 10 million workers overseas with a majority in the Middle East, UK, and Malaysia.^[14] Travel restrictions with economic downturns in host countries are causing migrant workers to lose out on wages. Moreover, falling oil prices is expected to aggravate the demand for migrant workers in host countries. As demonstrated, oil prices serve as a leading indicator of remittance inflows.

Stepping into the New Globalization

• Going forward, policymakers around the world will have to confront the changes in how the global economy works. They might have to consider the expensive option of continuing production within the country as the coronavirus crisis has shown that regions that specialize in one particular product can cause unexpected disruptions and break down the global supply chain. 
• With citizens’ health at stake, countries will think more about being self-sufficient even if this means severing ties with allies and neighbors. In Bangladesh, authorities need to start focusing on removing the vulnerabilities during crises like the payment uncertainties that the owners of the garments are going through now. ^[18]
• As per KPMG, winds of globalization will continue to blow from the East as the region achieves greater sophistication, innovation, and transparency. ^[12]
• Bangladesh needs to get rid of its lengthy and cumbersome logistics and costumes procedures in order to increase global trade. Combining technologies like the IoT has potential to improve transit time of traded goods by 16-28% by 2030. ^[17] With rising trade projections in China, Bangladesh is one of the countries which can gain the most from this. Besides, the country can capitalize on other opportunities as international companies in electronics, textiles, and energy sectors are the most likely to relocate parts of their operations to the South-east Asia trade bloc. ^[19] 
• China is expected to continue development in more knowledge-intensive sectors while developing economies like Bangladesh, India, and Vietnam will continue achieving solid growth in near-future through labor-intensive manufacturing exports. ^[17] These countries will need to map out strategies for diversification as growing automation in the East may limit job-creation in labor-intensive manufacturing.

Current fluctuations in international trade will continue to present business opportunities. Companies need to carefully monitor the drivers of globalizations’s future to navigate through and even profit from globalization’s turbulence.  

Saim Ahmed Shifat, Trainee Consultant at LightCastle Partners, has prepared the write-up. For further clarifications, contact here: [email protected]