To what extent will coronavirus outbreak rewire global trade dynamics?

Unless mainland China somehow manages a swift recovery, historians of globalisation will view this moment as a watershed

Will future economic historians look back on the first months of the year 2020 as the period in which the advancing tide of globalisation was finally pushed back? The rhetoric of populist leaders across the world, as well as technological changes over the past decade, has certainly meant that globalisation is no longer the all-conquering force that it was a few years ago. Trade growth has decreased in recent years, but the rhetoric has been louder than reality. In spite of tariff increases by several jurisdictions, it is hard to point to any wholesale restructuring of global supply chains. Some companies have sought to move out of mainland China — but, by and large, the structure of global trade had not been affected.

The question is whether the Wuhan coronavirus will change all that. The final effect on humans is hard to predict. The virus may, like the swine flu in 2009, only kill some hundreds of thousands across the world. Or it may live up to what appears to be a higher mortality rate than most such viruses, and approach the death tolls of previous influenza pandemics, such as the Hong Kong Flu of half a century ago (misnamed, since that likely also originated in mainland China). However, after that initial toll, the likelihood according to epidemiologists is that it will become endemic — recur every now and then in a global population that largely has developed immunity to it.

The greatest long-term effect of the new coronavirus, therefore, is likely to be what it reveals about the global economy’s dependence upon Chinese activity. The effect of the coronavirus on the mainland’s economy is clear. Numbers emerging from Chinese official statisticians are always open to question, but even photographs taken by NASA and the European Space Agency show a sharp decrease in nitrogen oxide pollutants over the mainland’s industrial and commuter hubs over the past eight weeks as the virus rampaged through Wuhan and the rest of the mainland, killing over 2,500 at last count.

The eight- to 10-week mark is a crucial one. Most mainland companies and factories stopped production before the Chinese New Year festival, which began on January 25. The last of those shipments, if packaged and put out to sea, should be arriving at their destinations around the world around now. Arrivals at ports have already decreased 20-30 per cent. Companies have about two weeks or a month of inventory on hand usually, though stocks are often piled up in advance in January precisely because of the Chinese holiday. But, either way, unless shipments resume swiftly, companies across the world will begin to run out of inputs in the middle of March.

Illustration by: Ajay Mohanty
 

Of course, for some, especially car companies, that effect is already being felt. And remember, even companies that do not immediately think they are dependent on mainland China may be affected, because their suppliers may be dependent on an input from the mainland.

What happens to confidence in supply chains under such circumstances? In essence, companies all across the world may be forced to pause because of a medical crisis in one particular geography. Since the SARS outbreak in 2002, China has become the factory of the world — and most of us have no real sense of how much we are dependent upon its stability.

The fact here is that instability does not have to be related to such public health emergencies. Authoritarian regimes are always brittle; political turbulence is not very far under the surface, and the People’s Republic has reverted in recent years to old-style authoritarianism, which covers up subterranean fault-lines till they explode into the open. One only has to look at the turbulent political history of decades past to remember precisely why Beijing, prior to the current leadership, had embraced a more collective and less authoritarian model of government.

A reduction in the mainland’s economic activity and supply because of political instability is one thing; something similar because of political choice is also possible. In the case of significantly enhanced military tension, for example, it is impossible to imagine that the world can continue to depend upon Chinese factories to the extent that it does at the moment.

The diffuse supply chains that have been built up since 2000 have been remarkably effective at introducing efficiencies and reducing costs. But we have all known since 2008 that increased “efficiency” means that there are fewer redundancies built in, and less capacity for flexibility at moments of crisis. In this case, the world may well shortly realise, for the first time, the degree of its dependence on the mainland’s production and the fact that it in essence has few alternatives at a time of crisis.

This is why there is a good chance that, unless somehow the mainland manages a swift recovery, historians of globalisation will view this moment as a watershed. There may be no alternative, both from the point of view of rational profit-maximising companies and from the point of view of policymakers seeking to ensure local stability, to seeking out alternatives to supply chains that are dependent on mainland China. But then does that by itself alter the dynamics of globalisation, which is supposed to focus on cost minimisation and efficiency above all?

The truth is, however, that, the departure of some manufacturing from China has been delayed by inefficiencies and sunk costs — essentially, the extent of the infrastructure in the Pearl River Delta and elsewhere is such that clients have chosen to absorb significant cost increases rather than risk disruption to their supply chains. They now know that disruption is a fact of life — and in fact that such disruption is greater when it is paired with dependence. The question is to what degree this will change their decision-making, going forward. If Chinese factories do not re-open at full capacity soon, then it is very likely it will change it much more than we can anticipate.