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Five reasons COVID-19 won’t kill globalization

Manufacturing, supply chains and the future of globalization

 Will the coronavirus pandemic mark the death knell of globalization? Many historians, economists and journalists have reached this conclusion. Here, John Young, APAC country manager at automation parts supplier EU Automation, offers five key reasons that this verdict might be premature.

Globalization was the buzzword of the 1990s. Although previous historical eras had witnessed significant levels of internationalization in trading activity, globalization was seen as capturing something that was qualitatively different. Broadly defined as global interconnectedness, it incorporated the notion of time-space compression: time and geographical distance were no longer factors that restricted the flow of people, information and economic activity, which could now cross borders more freely.

One statistic that captures the importance of this transformation is export as a share of global trade. That figure stood at approximately ten per cent in the 1970s but has risen to around 25 per cent today. This was the triumph of a liberal, globalized market economy.

COVID-19 and the ensuing lockdowns have caused an unprecedented shock to global supply chains, major downturns in economic activity and, contra the logic of globalization, reinforced the power of national borders as governments around the world urgently introduced major restrictions on travel.

In December 2020, UNCTAD predicted that the value of global trade in merchandise would decline by 5.6 per cent in 2020 and trade in services by a staggering 15.4 per cent compared to 2019. Economists and business leaders have begun to talk more openly about the prospects of reshoring, suggesting many companies will look to relocate their supply chains within national borders.

Do manufacturers and supply chain managers need to prepare for the end of globalization? The times are changing, but here are five reasons COVID-19 won’t kill globalization.

The trend in trade was already set

As pointed out above, the key stat for understanding globalization in trade terms is trading as a percentage of GDP. That has been stagnant since the financial crisis of 2008, so it cannot be attributed to the pandemic. The fate of globalization will be determined more by long-term trends and the US-China geopolitical relationship than by the impact of COVID-19, however dramatic the latter might have been in its short-term impact.

The take-home point for manufacturers, investors and supply chain managers is that they should pay more attention to medium-term trends and policy decisions made in Washington, rather than making knee jerk decisions in response to the exceptional circumstances of 2020 to the present day.

Globalization is more than trade

Globalization is a process, not an event. That process takes place in many spheres of human activity, aside from trade. Cross-border flows of people, ideas and information are just as much a central feature of a globalized world as are flows of capital and trade. And while severe travel restrictions have meant a 70 per cent reduction in flows of people, cross border flows of information, ideas and other forms of communication have continued.

In fact, 2020 has seen a surge in digital information flows, as the key technological enablers of globalization have allowed people and businesses to navigate their way around the pandemic’s restrictions. From wedding guests viewing ceremonies online, to businesses engaging with employees and customers through Zoom meetings, 2020 has demonstrated what digital communications can do in a globalized world.

Data beats anecdote

Although global trade in merchandise fell 5.6 per cent from its 2019 levels, that reduction pales in comparison to the fall experienced in 2009, which was over 20 Per cent. And while the trade in services has taken a bigger hit, much of the data emerging on global connections is showing that these are more resilient than previously assumed.

For example, the seventh edition of the DHL global connectedness index, which provides some of the most comprehensive statistics on globalization during the pandemic currently available, shows that globalization is far from dead. Flows of trade, capital and people held up better than expected and while the level of connectedness declined in 2020, it did not plummet to the levels witnessed in 2008.

Similarly, while there are plenty of interesting anecdotes about manufacturers choosing to relocate production domestically, or informed speculation from economists about the logic of reshoring, the most recent academic survey of the reshoring phenomena found little data to support the view that this was happening on a large scale.

Regionalization is part of globalization

If some companies or governments choose to reduce their dependence on China, that does not mean a reduction in global connectedness. Instead, many companies will choose the path of near-shoring, searching out new suppliers or relocating productive capacity in their regional neighbourhood.

Patterns of regionalization are not evidence of de-globalization. In fact, regional flows of trade, people and information have always been at the heart of globalization. It is no surprise that factors of geography mean these relationships predominate.

Reliable global suppliers will already have a geographically diverse spread of hubs, warehouses and suppliers in any case. For example, EU Automation has hubs in Singapore, the UK, the US and Germany, in addition to trusted suppliers and warehouses all over the world. This has helped us to continue to supply our customer’s needs for new and obsolete parts quickly, despite the impact of global lockdowns and travel restrictions.

We still need global value chains

Following the supply chain shock caused by the Wuhan lockdowns in February and March, many manufacturers have sought alternative sources of supply. Yet while shortening your supply chain or diversifying your sources of supply is sensible, this is not always practicable and takes time to implement. Just ask the pharmaceutical companies producing the vaccines.

According to the International Federation of Pharmaceutical Manufacturers, a typical vaccine manufacturing plant will use about 9,000 different materials sourced from 300 suppliers across approximately 30 different countries. Furthermore, as acknowledged by AstraZeneca in its most recent annual report, many of the raw material inputs are difficult or impossible to substitute.

The death of globalization has been announced many times before. It might be tempting to think that this time, given the impact of COVID-19, the doomsayers are finally right. However, the fate of globalization will be shaped less by the short-term impact of lockdowns and more by long-term structural factors. While globalization may not be the unstoppable force it was in its heyday, many manufacturers will continue to rely on global supply chains. Above all, digital technologies will continue to allow people and businesses to overcome the restrictions of geographical distance and time in ways their parents’ generation would have found unimaginable.

EU Automation has provided parts to customers in 157 different countries. To find out more, visit euautomation.com  

 

About EU Automation: EU Automation stocks and sells new, used, refurbished and obsolete industrial automation spares. Its global network of preferred partner warehouses, and wholly-owned distribution centres, enables it to offer a unique service within the automation industry, spanning the entire globe.  It provides worldwide express delivery on all products meaning it can supply any part, to any destination, at very short notice.

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