What’s Next? Globalization in a Post-COVID-19 World
By Lulwa Taqi
It’s hard to think of any activity or chain of events that doesn’t involve globalization. It’s hard to imagine life without it, but, slowly over the years, the degree to which economies and countries are intertwined and interdependent seems to be diminishing. Globalization was in trouble way before the COVID-19 pandemic. After the 2008 global financial crisis, the pitfalls of globalization were made apparent. Deep global trade and financial linkages mean that the effects of a recession or a bubble spill over from one country to another, triggering a downward spiral in economic activities everywhere. Today, the pandemic has done more damage to the fundamental premise of globalization than the 2008 financial crisis ever did. The viability of globalization is being questioned much more harshly, justifiably so, under the context of the pandemic. As more nations pursue self-sufficiency, the future of international trade hangs in the balance.
The pandemic has paralyzed large parts of the global economy, which are just recently starting to reopen. Lockdown measures created a perfect storm by restricting economic activities, increasing uncertainties, and unleashing the largest global downturn since the Great Depression. According to the United Nations’ Department of Economic and Social Affairs, global gross domestic product (GDP) is forecast to contract by 3.2% in 2020, and the world economy is expected to lose nearly $8.5 trillion in output in 2020 and 2021—almost erasing the cumulative output gains of the last four years.
COVID also managed to do the impossible: It destroyed the demand for fuel, as billions of people stayed home, and travel was curtailed. Crude oil prices in the United States (US) went below zero for the first time in history on April 20, 2020—something unseen even in financial crises and wars. Oil companies all over the world found themselves having to halt production, and some even considered burning their oil just to take it off the market. However, a small country in South America has been weathering the storm and maybe even rising above it. Guyana is an outlier. Despite the falling demand and the price war between Russia and Saudi Arabia, it has been able to join the likes of the world’s top crude oil producers. On August 29 2020, Guyana received $46 million for its third shipment of 1 million barrels of oil, reflecting an increase of more than $10 million per barrel than it received on its previous shipment. Considering the effects of COVID on the global oil market, this is an outstanding accomplishment.
Developing countries are facing extreme fiscal constraints coupled with ever-growing levels of debt. In part, this is due to Chinese lending for unprofitable infrastructure projects via its Belt and Road Initiative. Over the past two decades, in its effort to become the developing world’s most prominent banker, China has gone on a generous lending spree—lavishing countries with billions of dollars, in an effort to expand its influence and become a global superpower. Since the Belt and Road Initiative began in 2013, China has lent up to $350 billion to countries that most multilateral development banks consider “high-risk” (including Djibouti, Montenegro, and Pakistan). Now, governments worldwide are urging Beijing to restructure, delay, or even forgive the billions of dollars of loans. Beijing knew the chance it was taking by lending to these countries, but it did so anyway, because it underestimated the negative feedback loop that would occur if severe credit problems hit all of these countries at the same time. China has maintained its stance that it will deal with its debtors individually, but leaders in those places are calling on the international community for help. Although the Belt and Road Initiative is only one of the reasons why developing countries face extreme fiscal issues, it raises a lot of questions about debt, sustainable development, and globalization.
Global cooperation is vital to both contain the pandemic, and manage the financial calamities experienced by countries hit hardest. In the short-run, international aid is imperative to counteract liquidity shortages. However, in the long-run, many developing countries will need to redesign their infrastructures to stimulate sustainable growth and expedite recovery. They can’t do this alone—international cooperation is necessary for avoiding a debt crisis in many of these places. The pandemic presents a rare opportunity to structurally reform and strengthen international debt and financial architecture. If nothing is done, then the result will be a protracted and global economic crisis, precipitated by widespread defaults.
Countries need to ensure their fiscal stimulus packages are targeted to facilitate and promote sustainable development, while also aiming to close the digital divide. Businesses worldwide will also have to consider new approaches, such as internationalization. In this day and age, trade has become increasingly frictionless—meaning firms are not limited to exporting final goods. Instead, they can concentrate on exporting intermediate goods that rely on their home-country’s comparative advantage. Alternatively, countries with a comparative disadvantage can design programs and provide subsidies to entice companies to create and innovate, in order to mitigate the impact of the disadvantage on their products or processes.
Firms that find that their products are being discriminated against, because of the perceived quality lost (or gained, in some cases) by consumers in a host country, can work around nationalism by employing internationalization. For instance, companies may change those negative perceptions by using components from countries that have an advantage. If firms are looking to employ a more rigorous and public-facing approach, they can leverage foreign partners to build credibility and cultivate a more reputable international image. For example, a study showed that US consumers were more willing to buy a “Made in China” teddy bear when it was sold by a US retailer.
Internationalization can be complex, and there are serious trade-offs to consider when evaluating the different avenues that firms can take. However, it is almost always better to take the leap, and expand globally with the right plan and guidance—rather than do nothing, and remain in a stagnant situation. Recently, more and more countries have been shying away from internationalization, because they find it overly intimidating, and are finding themselves lured into the dangers of protectionism.
There has been growing rhetoric around favoring protectionist policies over free trade. Major players in the global trade arena, such as India, Japan, and France, have all been keen to bring supply chains back home in the name of “resilience.” However, this solution is counterintuitive: overly domesticating supply chains concentrates risk and forfeits economies of scale. To make sure supply chains are resilient and profitable, we must diversify them.
Globalization’s fiercest critics have been using the pandemic to point out that global integration only benefits a select few countries and demographics, while endangering the interests of most others. This is true to a certain extent. Small and medium-sized enterprises in emerging markets don’t necessarily have the knowledge or opportunity to seize the benefits of globalization that those in developed markets do. What if they were finally given a chance to seek out these benefits for themselves? What if what the world needs now is not a curtailing of globalization, but a redesigning of it?
Lulwa Taqi is an intern at M74 from Kuwait. She is a recent graduate of Pace University in New York City, where she earned a bachelor’s degree in International Management and Economics. Her interests include the European Union’s integration policies, the Middle East’s geopolitical climate, and international trade.
The views expressed above are those of the author and do not reflect the official position of the M74 Group, which remains neutral on all matters. Publishers assume no liability for content.