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Covid-19 and the ideological damage to globalisation

Hyper-globalisation and just-in-time capitalism had already failed to fulfill their promise of shared peace and prosperity, but Covid-19 has revealed their potentially deadly consequences, argues Edward Knudsen.

In the wake of the economic disruption wrought by Covid-19, global economic flows have ground to a halt. The International Monetary Fund (IMF) predicts a dramatic three percent drop in global growth. The World Trade Organisation (WTO) anticipates that trade will drop between 13 and 32 percent in 2020. The decline in international movements of good and capital – combined with fracturing supply chains and plummeting global demand – has led some to ask whether globalisation as we know it may come to an end.

Although the Coronavirus has revealed the systemic risks inherent in globalisation, it is too early to pronounce international economic integration dead. Far more likely is a hollow globalisation, limping without its enthusiastic cheerleaders and only sustained by the raw material reality of decentralised production systems. Covid-19 may not kill globalisation, but it will strip of it some of the few remnants of its ideological backbone.

Globalisation, diminished

Before the Coronavirus, there were already strains to the political and economic justifications for globalisation. Although global trade has lifted many out of poverty, the harsh economic realities of the 21st century economy have discredited the pollyannaish arguments about globalisation that prevailed in the 1990s and early 2000s. Instead, global economic integration has increased inequality, prompted nationalist backlashes and facilitated ‘weaponised interdependence’ between states, leaving its intellectual backers on the defensive.

Aside from the ideological considerations, there have been concrete challenges to international economic integration. Global trade growth slow been slow for several years. Global trade politics have also been rocky—the WTO’s Appellate Body remains blocked and trade barriers have been rising.

Covid-19 has taken the pre-existing inequities and contradictions and thrown them into sharp relief. As a result of the crisis, the most basic justification for global trade—the Ricardian argument that the international division of labour facilitates the most efficient patterns of production—has been challenged. Even if an essential good is produced more efficiently abroad, for the supply of that good to dry up in times of crisis renders such an arrangement untenable.

The dangers of economic hyper-specialisation

This problem is particularly severe in countries where economic specialisation is so pronounced that they have given up manufacturing base almost entirely. This has been particularly evident in highly financialised economies such as the United States and the United Kingdom.

The UK has experienced severe shortages of critical equipment and experts doubt its ability to manufacture ventilators or an eventual vaccine in sufficient quantities. Much of this is the result of a diminished manufacturing base, as the UK economy has become increasingly specialised in services. The decline in British manufacturing has been supported by economists such as Patrick Minford, who celebrated that the UK may soon “mostly eliminate manufacturing” in favour of high-end professional services. In the face of a global pandemic, however, this development may soon prove catastrophic.

The United States, where manufacturing as a share of gross domestic product has also plummeted over recent decades, has struggled to meet the production needs of the Covid-19 crisis. Faced with almost no domestic textile production capacity, legacy clothing companies have stepped in to manufacture masks. Meeting the demand for other medical equipment has also been difficult. In the US, roughly half of ventilators are made abroad, and only a handful of American companies are capable of producing them. As the president of the Alliance for American Manufacturing, Scott Paul, has argued, “The absence of adequate domestic production capacity for things like face shields and respirators… has left us dangerously exposed during an international health emergency.”

Problems are also dire in the developing world. With the concept of import substitution long discarded in favour of ‘moving up the value chain’, many poorer countries do not even attempt to develop finished-product manufacturing capacity. WTO director-general Roberto Azevêdo identified this problem, warning of “serious problems in the poorer and more vulnerable countries that typically rely heavily on imports for medical equipment.” Azevêdo sees the solution as the maintenance of global free trade, but developing countries may conclude that the solution for their manufacturing shortfall is the exact opposite: building domestic capacity, rather than relying on the vagaries of the global market.

When ‘just in time’ is too late

As with the trend of global hyper-specialisation, the concept of ‘just-in-time’ production has been similarly challenged by the Coronavirus. Supply lines have been stretched to the breaking point, hindering the ability of hospitals to combat the virus. This problem is not new—the Wall Street Journal warned of potential medical shortages in the advent of a major flu outbreak in 2006. Hospitals failed to heed the advice, however, and patients are now paying the price.

The consequences have been dramatic around the world as well. In addition to the UK’s woes, many European countries have faced interruptions in needed shipments of critical products. Quality issues of imported medical goods have also been rampant in Europe, further hindering its ability to combat the virus. Around the world, Covid-19 has thrown other precisely timed production processes into disarray.

In the United States, which has applied the logic of ‘just in time’ to its entire health care system, the results are even more dire. With little excess capacity, many hospitals have been overwhelmed, an absurd outcome given the US’ exorbitant healthcare costs.  By contrast, Germany, which has been criticised for its ‘excess’ health capacity, has fared well in combating the effects of the Coronavirus.

System breakdown 

As a result of the global shortages, countries have resorted to drastic measures to protect their citizens and ensure they have sufficient resources to combat the crisis. In March, nearly 70 countries resorted to export bans on medical supplies, endangering the delicate supply lines of the nearly $600 billion medical trade.

India, where many pharmaceuticals are made, has restricted exports of many drugs, alarming Europe. China’s February ban of medical masks caused shortages worldwide. Its massive domestic consumption of other supplies—many of which are produced there—has limited the quantities available for other countries.

Despite its objections to other nations’ bans, Europe restricted exports of protective equipment on March 15th. The United States imposed its own export ban in early April. Canada, which relies heavily on US imports of finished products, was shocked by the US ban—but eventually was successful lobbying against it. Still, that such a hurried appeal was even necessary reveals the life-or-death stakes of modern globalisation.

More dramatic than the various export restrictions have been the acts of international confiscation around the world. In March, the Czech Republic allegedly seized hundreds of thousands of face masks from China which were bound for Italy. Turkey has been accused of confiscating ventilators bound for Spain.

Disputes between the US and Germany have been particularly intense. After attempting to buy out a German firm which is developing a vaccine, the US was accused of diverting a mask shipment intended for the Berlin police. The interior minister of Berlin called the US actions as ‘an act of modern piracy.’ The US has also been criticised for outbidding other countries to acquire supplies.

Ironically, Germany’s irritation at the US partially validates earlier American ‘national security’ justifications for protecting domestic industries with tariffs. At the time, German Chancellor Angela Merkel dismissed such arguments as ‘a shock.’ However, with car manufacturers such as General Motors stepping in to provide equipment, the Coronavirus crisis has fully illustrated the importance of having a domestic manufacturing base and industrial capacity.

The future of globalisation

It has long been apparent that economic interdependence would not bring the much-heralded promises of shared peace and prosperity. Now we see that, faced with a global crisis, it struggles to serve even its most basic function—efficiently providing sufficient quantities of goods and services.

Facing an increasing likelihood of disruptions and shortages as the climate crisis intensifies, it is clear that countries will need to build resilience into global supply chains. There will be pushback against deliberately moving production home, but drastic measures may be needed. Some countries, such as France and the United States, have already hinted that this is their goal.

As the world enters its greatest economic crisis in nearly a century, it is worth remembering what John Maynard Keynes advocated during the depths of the Great Depression. “Let goods be homespun whenever it is reasonably and conveniently possible,” argued the famous economist in 1933. It would be wise to heed his advice in the coming years.

Edward Knudsen is a Research Associate with the Dahrendorf Forum at the Hertie School in Berlin.

The opinions expressed in this blog contribution are entirely those of the author and do not represent the positions of the Dahrendorf Forum or its hosts Hertie School and London School of Economics or its funder Stiftung Mercator.