The coronavirus swept across the world from Asia to Europe to the US along the same supply chains that deliver our electronics and clothing. But even as it serves as a reminder that we live in an interconnected world, it does not signify that we are all going to be in the same boat moving forward. On the contrary, the multi-speed global economy will continue to diverge as North America, Europe, and Asia focus more on regional self-sufficiency than far-flung global supply chains.
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The optics around coordinating a global economic recovery bear some resemblance to 2008, with central banks pumping trillions of dollars into the financial system, fiscal deficits widening, and other emergency measures that spared the world from a sustained global depression. Looking more closely, however, we can see clearly that American, European, Chinese, Japanese, and other stimulus packages are not crafted to support a revival of global demand. They are are clearly targeting domestic demand. Furthermore, both the US and Japan have strongly signaled greater funding to nearshore manufacturing–especially by pulling corporate investment out of China.
Regionalism was already overtaking globalism before COVID-19
It is important to note that these trends were underway before the pandemic. Owing to the US-China trade war, by 2019 America’s trade with each Canada and Mexico had risen to above US$300 billion per year, while US-China trade had fallen to $270 billion. Meanwhile, China’s trade with its Southeast Asian neighbors in ASEAN had nipped $300 billion, showing how Asia continues to integrate, both to exploit its own complementaries but also to offset the effects of US-China decoupling.
For its part, Europe had also announced in 2019 an EU-wide strategic industries initiative to support more national champions in clean-tech and other industrial areas to stave off competition from China. Regionalism was clearly overtaking globalism before the pandemic exposed the vulnerabilities of our long-distance interdependence.
What are the likely scenarios for the key world economic centers looking one or two years ahead?
Despite the US stock market’s remarkably quick rebound, we should of course be wary of the proverbial dead cat bouncing and giving investors illusory hope of recovery. Numerous factors militate against the sanguine view of a simple U or V shaped recession. Once revolving credit lines are tapped out, numerous large firms will collapse or be consolidated. Industries from commercial real estate to aviation will suffer enormous write-downs – on office buildings and shopping malls, airlines and airports. Furthermore, domestic unemployment is reaching Depression-era levels, and the current relief packages don’t yet amount to the stimulus that many Western publics may need for years to come. Precautionary savings and muted consumption will govern household spending decisions, and business investment will sag. A long-drawn-out W shape is therefore the most likely economic scenario for the years ahead.
Major European employers and governments may collapse…
Europe’s collective stimulus measures amount to roughly the same as that of the US Federal Reserve, but spiralling government and corporate debt is an ever greater concern in the Eurozone. While European social policy keeps households afloat far better than America’s meagre welfare, America’s single market is far more efficient than the eurozone, where leaders won’t agree to a sufficiently large mutualized debt scheme in the form of pan-European “corona-bonds”. ECB president Christine Lagarde made clear that the purpose of the European Central Bank “is not to reduce bond spreads”. Southern Europe is once again on its own, and as large employers (and the states or provinces that depend on their tax revenue) collapse, governments may fall.
Asia has led global growth in recent years and will continue to do so once the pandemic subsides. Even as China experienced its first quarterly economic contraction in more than four decades, its annual growth is expected to remain in positive territory. For Southeast Asia, Thailand, Malaysia, and Indonesia will take a hit this year, but Vietnam and the Philippines continue to attract investors pulling manufacturing out of China.
…but Asia can expect to sustain itself
Importantly, Asian countries agreed to the Regional Comprehensive Economic Partnership (RCEP) last year, paving the way for greater fluidity of goods, services, and the movement of people in the years ahead. Fundamentally, with a ten times greater population than either Europe or America, Asia’s advantage lies in burgeoning urbanization, a large youth demographic, and rising consumption. Asians don’t need to export to the world to sustain growth nearly as much as they need to simply continue bringing down internal barriers and connecting their bottom billion to infrastructure and markets.
As the pandemic fog lifts, tentative steps towards reviving business travel and tourism will also likely play out along regional lines. At the moment, the US-Canada border is closed, the Schengen agreement suspended, and Chinese travellers staying within their country rather than fanning out as the world has become accustomed to. Even with airline fares at rock bottom, it is still unclear who will be allowed to travel where until we have immunity certifications and clarity about how long people may need to self-isolate once they reach their destination. With digital connectivity and tele-commuting becoming the new norm, firms will save costs by cutting back on travel anyway.
Global connectivity accelerated the spread of the virus, but science diplomacy and video-conferencing apps also enabled global business continuity. We should continue to invest in global connectivity, even if major economies only use it sparingly.
Parag Khanna is a leading global strategy advisor, world traveler, and best-selling author. He is Founder & Managing Partner of FutureMap, a data and scenario based strategic advisory firm. Parag’s newest book is The Future is Asian: Commerce, Conflict & Culture in the 21st Century (2019).
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