Coronavirus will undo globalization, make supply chains regional: EIU
Employees work on the production line of a robot vacuum cleaner factory of Matsutek in Shenzhen, China August 9, 2019.
Jason Lee | Reuters
The coronavirus crisis will fundamentally reshape global trade as companies look to reduce their dependence on Chinese manufacturing, economists have predicted.
In a report published on Wednesday, the Economist Intelligence Unit (EIU) said the pandemic will reverse globalization by accelerating a move toward regional supply chains.
China’s dominance in international trade has grown ever since the country was accepted into the WTO in 2001. This event was credited by the EIU as sparking the latest wave of globalization, as multinationals took advantage of production and demand opportunities in the country.
“However, as a result of Covid-19, it is likely that this period of globalization will not only come to a halt, it will reverse,” the report’s authors said, noting that the Sino-U.S. trade war and rising wages in China had already incentivized some corporations to relocate supply chains to other parts of Asia.
“Covid-19 will push more companies in other sectors to relocate parts of their supply chains,” the report predicted. “The outcome of this will be an Asian supply chain network that is both less China-focused and more diverse.”
This shift away from China would be indicative of a wider trend, the report said, as global firms looked for ways to build up their resilience following the supply shock induced by the coronavirus.
“By building quasi-independent regional supply chains in the Americas and Europe, a global company will provide a hedge against future shocks to their network,” the EIU said. “For those companies that have this luxury already, they have been able to shift production of key components from one region to another as lockdowns and factory closures resulting from coronavirus have unfolded.”
Because of the difficulties surrounding the establishing or moving of supply chains – particularly in the automotive sector – it is likely that any major shifts would be permanent.
“As more firms make this decision, the shift to regionalized supply chains will be an enduring outcome of this crisis,” the report said.
Many sectors, such as pharmaceuticals, agriculture and energy, have come under pressure amid the global health crisis, as their reliance on economies like China and issues with international logistics have weighed on supply chains.
Mark Mobius, founder of Mobius Capital Partners, told CNBC in April that many companies were looking to move their supply chains closer to home after the shock of the pandemic.
“I think there’s going to be a diversification where these supply chains get moved into places like Vietnam, Bangladesh, Turkey, even Brazil,” he said.
Speaking to CNBC on Wednesday, Suren Thiru, head of economics at the British Chamber of Commerce, said some U.K. businesses were already shortening their supply chains after coronavirus-related disruptions had affected operations.
Meanwhile, independent analyst Fraser Howie said governments would look to reduce their dependency on China, although he noted that there was “no way China’s going to be ignored.”
Bruce Pang of China Renaissance Securities agreed that China had a key position in the global supply chain in the near term, as alternative markets did not have the same scale to support major relocations.
The coronavirus pandemic was not the only issue that would encourage companies to rethink their supply chains, the EIU noted on Wednesday.
“The trade war is likely to continue after the U.S. election in November 2020, regardless of the outcome, as issues of technological dominance drive tensions between the world’s two largest economies,” it said in the report.
The analysts also emphasized that climate change would grow in importance for corporates, forecasting that the global economy would shrink by 3% by 2050 as environmental issues like severe natural disasters weighed.
“For many reasons, therefore, managing risks with the aim of avoiding severe threats to operations will remain a central requirement for multinationals,” they said.
Market watchers have been predicting an unravelling of globalization since before the outbreak of Covid-19.
Eoin Murray, head of investment at Hermes Investment Management, told CNBC last year that international trade as we know it was unlikely to exist in the future, and would instead be replaced with a regional trading system.
Meanwhile, Hans Redeker, global head of FX strategy at Morgan Stanley, warned last June that geopolitical tensions were reversing globalization.