The COVID-19 crisis will fundamentally change world trade as companies seek to reduce their dependence on Chinese manufacturing. The pandemic will reverse globalization by speeding up regional supply chains, CNBC reported referring to the Economist Intelligence Unit.
China's dominance in international trade has increased since the country was admitted to the WTO in 2001. This event was recognized by the EIU as the last wave of globalization, as multinationals took advantage of the country's production and demand opportunities.
“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 departure from China will indicate a broader trend, as global companies are looking for ways to increase their resilience after a supply shock caused by a 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.”
Due to difficulties in creating or moving supply chains - especially in the automotive sector - any significant shifts will likely 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 fields, such as pharmaceuticals, agriculture, and energy, have come under pressure from the global health crisis, as their dependence on economies such as China and issues with international logistics have put pressure on supply chains. The EIU noted on Wednesday that the COVID-19 pandemic is not the only issue that will prompt companies to rethink their supply chains.
“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.
Analysts also noted that climate change will become increasingly important for corporations, predicting that the global economy will shrink by 3% by 2050 as environmental problems such as severe natural disasters increase.
“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 observers predict a breakdown of globalization before the outbreak of COVID-19.