WASHINGTON—The COVID-19 pandemic, which has taken a tremendous toll on the global economy, will fundamentally reshape international trade, exacerbate U.S.–China tensions, and accelerate the ongoing shift away from globalization, according to experts.
The world’s two largest economies, the United States and China, are moving toward a bigger geopolitical confrontation, according to Ian Bremmer, president and founder of Eurasia Group, a political risk consultancy.
“I suspect we wouldn’t even see that if Biden becomes president come January, but certainly the next few months are going to be particularly volatile and dangerous,” he said on June 22 at a virtual panel discussion hosted by Columbia University.
American businesses don’t support protectionist policies, but they would still “lobby for stronger and tougher U.S. policies towards China,” Bremmer said, adding that it’s “a significant change from what we would have seen even 24 months ago.”
“So many American CEOs I talked to are saying that they don’t think they have sustainable business plans for China in the next five years,” he said. “It’s the absence of rule of law, it’s the inability to have a functional judicial response, it’s the amount of IP that’s being ripped off, and it’s the cyber problem.”
With the pandemic, public opinion has shifted against China and globalization in recent months. Americans were disturbed to learn about their country’s excessive reliance on China for protective equipment and crucial drugs. And dependence on a single country during the pandemic has exposed the vulnerability of global supply chains.
The reason the pandemic has been so disruptive to supply chains is that the world wasn’t prepared for this kind of pandemic, and countries lacked the production capacity to produce essential drugs, ventilators, and masks, according to Martin Wolf, the chief economics commentator at Financial Times.
“By now, a lot of the supply shortages have been eliminated, and supply positioning looks much better. But of course, people remember this, and it will affect their future decisions,” he said at the panel discussion.
Globalization, the most powerful economic force that shaped the world over the past few decades, was already in trouble before the deadly pandemic.
The financial crisis of 2008, Wolf said, led to a sharp fall in world trade relative to output and upended “the great episode of globalization.”
“The world trade has been growing much more slowly since the financial crisis than before. And in that context, among other things, it’s pretty clear that supply chain unbundling across borders slowed considerably and in fact, has continued to do so,” he said.
Similar to the 1930s, the pandemic may give rise to protectionism around the world, which will be a mistake, he warned.
The Great Depression of the 1930s triggered protectionist trade policies around the world, including tariffs and import quotas to limit spending on foreign goods, leading to a sharp contraction in world trade.
He said the countries might also fall into the mistake of self-sufficiency, which will be “immensely costly.”
“I think it would be a catastrophe if the illusion we drew from this is that every country should go back to the sort of self-sufficiency so many countries tried in the 50s, particularly the developing world, and of course in the Soviet bloc, all of which ended very very badly,” he said.
U.S. companies dependent on global sourcing have faced an unprecedented disruption during the pandemic. And the ones that heavily or solely rely on factories in China will have two possible reactions, according to Wolf.
They will either diversify their sourcing across the world or bring supply chains home, he said.