Coronavirus is not the end of globalisation
Emanuel Örtengren // 24 March 2020
The outbreak of the new coronavirus COVID-19 has been described as a threat to globalisation. But spreading risk across the world is essential in order to make businesses and societies less fragile. This is not the end of globalisation, but the beginning of a new chapter.
The outbreak of the new coronavirus COVID-19 has put globalisation – the political, cultural and economic integration of societies – to the test. For instance, Peter S. Goodman of the New York Times argued that the ongoing pandemic has created a perfect anti-globalist storm, with companies struggling to manage their supply chains and nationalist parties putting the blame on foreigners and open borders.
That today’s viruses can spread quickly and disrupt the global economy is indeed a consequence of increased global movement in the post-war period. However, there is a risk that politicians will now draw the wrong conclusions about the vulnerabilities that come with globalisation.
Fundamentally, the fact that goods, services, capital and people can cross borders with ease brings enormous value to all of humanity. The benefits are not just material, but also in terms of experiences and intellectual exchange. From a business point of view, globalisation’s real Achilles heel has been that a large number of enterprises have been overly dependent on suppliers concentrated in the same region. This weakness has now been exposed by the coronavirus outbreak.
According to the analytics firm Dun & Bradstreet, 51,000 businesses from across the globe have at least one supplier in Wuhan and at least five million have at least one subcontractor there. It is hard to find replacements to these suppliers at short notice. This means that a lot of businesses will learn hard lessons about the importance of identifying alternative suppliers.
However, businesses have been forced to make similar adjustments before. One example was following the Fukushima accident in 2011, which made clear how much of the global supply chain for microchips passed through Japan. As a consequence, large companies like IBM realised the risks associated with concentrating their supply chains and shifted some of their sourcing to Taiwan. Thus, these companies did not move production to their country of origin, but rather increased the diversification of their supply chains.
As it happens, microchips illustrate how comparative advantages and local specialisation create benefits for all parties involved, as noted by Robert Armstrong in The Financial Times. The best chip manufacturing equipment is made in the Netherlands, the best chip design in the United States, and the best foundries are located in Taiwan. In essence, this is what early economists like Adam Smith and David Ricardo showed in theory over 200 years ago. Today, people all over the world benefit from comparative advantages and local specialisation in practice.
The coronavirus outbreak will have consequences for how global companies manage their supply chains. More companies will have to find alternative suppliers to become less vulnerable in the future. Moreover, inventories – which have previously been viewed as unnecessarily costly – will become a worthwhile investment. During an event like a pandemic, when all of a firm’s suppliers and subcontractors could be affected simultaneously, it is unsustainable to have small buffers like Apple, which carried only nine days of inventory.
In this way, the coronavirus crisis does not spell the end of globalisation, but rather the beginning of a new chapter. Where the next pandemic breaks out, bubble bursts or natural disaster strikes is uncertain, but businesses seeking to mitigate risk will want to disperse that uncertainty across the world. What would one call such a global diversification other than globalisation?
It is also questionable whether our increased propensity to travel should be blamed for disease outbreaks. Although the spread of viruses like COVID-19 is much faster today than in the past, travel has decreased the likelihood of pandemics as lethal as the Spanish flu a hundred years ago.
According to a study published in 2018, travel provides people with partial cross-immunity by being exposed to different kinds of virulent strains. Robin Thompson of Oxford University, one of the researchers behind the study, has described air travel as a ‘natural vaccination’.
In the aftermath of this crisis, countries all over the world will no doubt face a debate about their societies’ readiness for the next pandemic. But in that discussion we must not forget that it is a strength, not a weakness, that people can easily cross borders and that production is spread across the world. No country is strong on its own, especially in the face of global threats like a pandemic.
This article appeared first on Timbro’s Smedjan blog.
EPICENTER publications and contributions from our member think tanks are designed to promote the discussion of economic issues and the role of markets in solving economic and social problems. As with all EPICENTER publications, the views expressed here are those of the author and not EPICENTER or its member think tanks (which have no corporate view).