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Apfelthaler: Will COVID-19 end globalization?

By   /   Friday, May 22nd, 2020  /   No Comments

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By Gerhard Apfelthaler

It is the year 1000. Traders are crossing oceans to Arabia, East Africa, India and China. The Vikings are sailing to Canada, and the Maya are exploring lands as far as Colombia and today’s Mississippi River Valley. This is when globalization began, asserts author Valerie Hansen in a book published this year. Fast forward to 2020. Is this the year that globalization comes to an end?

Recent reports already read like eulogies — Oxford Economics thinks that total global trade in goods and services could fall by 10 percent to 15 percent in 2020. The International Chamber of Commerce and the Boston Consulting Group in a joint research report projected scenarios in which global trade could fall by anywhere between 11 percent and 30 percent this year. And the United Nations Conference on Trade and Development forecasts trade will fall by 27 percent in the second quarter of the year.

Globally, estimates show that about 20 percent to 30 percent of container-ship departures had been canceled through this month, according to Ocean Insight. And closer to home, recent data shows that overall exports of U.S. goods declined by roughly 6.7 percent in March, with the important automotive sector plummeting by 18 percent.

Populists and anti-globalists from the left and right have quickly embraced the narrative of globalization as a failed experiment, and declared that its end has come.

New York Times columnist Ross Douthat calls COVID-19 a “world crisis tailor-made for an anti-globalization … worldview.” Robin Niblett, director of a British foreign policy think tank, noted that the “coronavirus pandemic could be the straw that breaks the camel’s back of economic globalization.” And, according to frequent commentator Gary Shilling, it is “driving the last nail into the coffin of the globalists.”

Will COVID-19 really be the death blow to globalization? I don’t think so. Advances in technology and communication, increases in capacity, and decreases in the cost of shipping and global cost arbitrage have sliced manufacturing into discrete steps, resulting in highly complex and fragile supply chains. The last weeks have certainly been a stress test on these supply chains, but let’s not throw out the baby with the bathwater.

Decoupling the U.S. economy from the global networks of supply chains and engaging in massive onshoring or reshoring might create more problems than it will fix. In the short and medium term it would cause severe disruptions and shortages, and in the long term it would make U.S. products less competitive — at home and abroad. Anyone who believes that we could maintain our treasured standard of life should be reminded of the 2007 experiment at Drexel University, the “100-mile suit.” The aim of the experiment was to produce a suit with labor and parts from within a 100-mile radius around Philadelphia. After several months and 500 hours of work by 20 people, the finished product only very distantly resembled a suit – produced at exponentially higher cost.

What is needed is not a radical solution, but measured and meaningful change. The U.S. will certainly have to change the fact that it now imports almost all of certain common antibiotics, over-the-counter pain medications and other active pharmaceutical ingredients from one country — China. What is needed is smarter globalization and a diversification of supply chains. Companies will look to source from other countries, maybe multiple countries for a single product. And through the establishment of parallel regional supply chains, companies just might have to learn how to hedge against future crises.

Accept it, globalization has become a fact of life. It has lifted people throughout the world out of poverty, and it saves each consumer in the U.S. an estimated $10,000. Globalization may change its course, pace or form, but it is bound to stay. China is already emerging from the crisis, and its exports rose by a surprising 3.5 percent in April, crushing expectations for a decline of 15.7 percent. And when the U.S. economy finally emerges from its lockdown, there will be a market somewhere that will want our exports.

Gerhard Apfelthaler is dean of the School of Management at California Lutheran University.

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