Is the Future of Globalization at Stake?

When globalization threw open the gates of world economy, all countries reaped massive benefits. International trade increased driving the global GDP to new heights. The turn of the century witnessed the fastest growth phase of globalization until the 2008-09 economic slowdown stalled its meteoric rise. The past decade saw globalization take a hit as the sentiments of the world underwent a transformation.

In 2019, as globalization slowed significantly due to the US-China tensions and now with the outbreak of the century’s deadliest pandemic, the future of globalization seems to be at stake. According to WTO predictions, world trade is expected to drop by 13 – 32% in 2020. As the countries across the world experience lockdown with zero international travel and negligible cargo movement, this was bound to happen.

https://www.statista.com/chart/21821/global-trade-volume-as-a-percentage-of-gdp/

The above image demonstrates global trade volume, measured as a percentage of global GDP, has been rather stagnant in the past decade. It shows that globalization failed to return to its previous growth trajectory post the last economic slump.

Currently, as most countries fight the health crisis, localization, nationalism and protectionism are on the rise. Supply chain disruptions due to Covid-19 has also prompted many MNCs to adopt a more domestic approach to production and sourcing. The pandemic is bringing economic globalization to a tipping point and could bring major changes in international supply chain management.

Political Scientist and former Advisor at Business Europe, Frederic Van Til suggests three possible scenarios for the future of globalization depending on the impact of the pandemic.

Scenario 1: Globalization makes way for localization

If the current tilt towards protectionism intensifies and nations worldwide adopt policies prohibiting global trade and force companies to move their production facilities closer to home in order to minimize dependence on foreign suppliers, the current global value chains structure would completely collapse. Something similar had happened post 2008-09 economic slump as visible in a comparison of global and domestic value chain activities between 2012-16, where global value chain production activities fell by -1,65% while domestic value chain activities rose by 1,49% on an average (according to a report by WTO). In this scenario, inter-regional and intra-regional value chains would also plummet.

Scenario 2: Regionalization displaces globalization

In this scenario, the Covid-19 outbreak is expected to create a strong process of regionalization instead of ending economic globalization. Here the pandemic impact is expected to be higher on inter-regional value chains and lower on intra-regional value chains. Arguably, the regionalization process had already started two decades back when new regional trade agreements began increasing. For instance, in 2019, Canada, Mexico and US signed the trade deal called USMCA Agreement. In Europe, there is a conscious effort to reduce reliance on third countries which might intensify their quest for economic sovereignty and strategic autonomy.

Scenario 3: Globalization continues unharmed

The third scenario advocates no radical shift in the present structural functioning of global value chains. Here, inter and intra-regional value chains would recover post surpassing the pandemic led economic crisis. If the global economy absorbs the economic shock and indeed globalization is able to continue in its current avatar, global companies would diversify their supply chains and spread production to other nations of Asia. This will result in considerable shuffling of supply chains, but the global value chain would gradually return to pre-pandemic levels.

In conclusion one can only highlight that uncertainty is the only certainty in the present situation. Much depends on when a cure or vaccine is found and how the national leaders all around the world react to the current crisis. Business organizations must pay heed to all the possible scenarios and prepare a plan for each scenario to make sure their company is able to live the transformation successfully.

Source:

Statista – Click here to visit page

Frederic Van Til authored article – Click here to visit page