Thursday, 9 April 2020

Is globalisation really at an end?

Today we're going a little "Economics with a C".

Since the start of this Covid-19 pandemic I've seen an awful lot of comments and articles assuring us that globalisation is coming to an end. The world, they say, will change fundamentally after the pandemic is dealt with. China will become the global pariah and everyone will be tripping over themselves to bring manufacturing capacity back to their own shores. 

The reason for this? Erm, nobody really seems quite sure. Everyone is sure that it will happen, it's just that nobody can explain why, aside from "because China behaved badly". Well let's test that theory with a little thought experiment shall we?

Hands up who was aware that China has an appalling human rights record? Ok hands down. Now hands up who was aware that China has been systematically rounding up and "re-educating" Uyghur muslims in camps, in what has variously been described as a form of ethnocide? Ok hands down. Now hands up if - as a result of this knowledge - you have genuinely made a committment to checking the products you buy to make sure you don't purchase anything made in China, thus indirectly supporting the regime by helping to finance it. If your hand is up now, odds are good that you're lying, if only to yourself.

That China is ruled by an awful, authorititarian regime that treats its citizens as a commodity to be exploited and surpressed, should not be news to anyone. It is the living embodiment of the government described in George Orwell's book "1984". We've known this for a long time. If this has come as a sudden revelation to you then might I humbly suggest you pay more attention to the world around you. And yet China has remained the world's factory (to an extent) for many years now. 

Just recently the UK government agreed to allow the Chinese telecomms giant Huwawei a role in developing its 5G network, despite the many warnings about the potential consequences and pitfalls of doing so. That China has been accused of conducting cyber attacks against the UK and its allies, and has a reputation for stealing data from networks its involved in to pass on to its security services, seems to have fallen on deaf ears, though now suddenly there are rumours the UK might be reconsidering the idea, as if it has only just had this sudden epiphany that maybe China might not be the most secure and reliable partner to help you build your national telecommunications network.

But let's put China to one side for a moment and talk Russia instead. Do you remember how the world reacted to Russia using radiological poisons on UK soil, not just once, but twice? Two dead, three more hospitalised. A major operation launched to trace others who might have come in contact with the poisons. Remember how all our allies immediately denounced Russia and unanimously turned against it, effectively cutting Russia off from the international community until it turned over those responsible?

No, nor do I.

Remember when Russia had a hand in intervening in Ukraine, causing a civil war and annexing territory for its own purposes, along with providing military support to the rebel movements to help them fend off Ukrainian attempts to recapture their lost land? Remember how everyone immediately swept into action to decouple themselves from Russia and bring an end to Russian influence in Europe for example?

Wait, what's that you say? Germany is still going ahead with its plans for new gas pipelines to Russia? Ohhhhh right, I forgot about that.

"But Mr D with a C, this is different. China's actions - or inaction - have caused a major global economic crisis!"

Do you remember the 1973 oil crisis? I don't, because I wasn't born then. Quick summary; the OPEC countries put an embargo on oil destined for countries they had identified as supporting Israel in the Yom Kippur War. Unsurprisingly this caused a massive economic shock in those countries. A similar shock was felt during the 1979 oil crisis, triggered by the Iranian revolution and later the Iran-Iraq war.

Now, remember how countries in the west immediately decided to shield themselves from future shocks of this sort by decoupling themselves from the influence of OPEC? No, nor do I. Oh, but I guess there is hope. Remember how the US completely turned its back on Saudi Arabia, as a result of Saudi Arabia having a human rights record that makes China look positively innocent, along with the small matter that it was almost certainly involved in helping to fund and support the 9/11 attacks in the US that killed just shy of 3,000 people and injured around 25,000 more? 

No, nor do I.

Funny thing the world. You'd be amazed what kind of slights and misdemeanours people are prepared to look past in order to secure their economic future, or even just to save a few pounds buying cheap tat that they could easily buy elsewhere. For those who have their fingers crossed in glee that somehow globalisation is at an end and their preferred economic fantasy is about to rise up in its place, the lesson is that history is not kind to their ambitions.

What's even less kind is the details.

Based on the way some people have been talking, you'd be forgiven for thinking that China is the global source of all things medical and that without Chinese supplies the world has been falling over. There is a slight problem with that theory. For a start, China is the third largest importer of medical products globally by value. In terms of exports, China is only the seventh largest by value, shipping out less than half what the US does. Even in terms of products such as face masks, where China is the largest exporter globally, it's share is just 25%, quite a way short of what some seem to think it is.

Added to this is the further problem of just simple economics. Ask yourself a question; why do you want to reshore certain manufacturing from abroad? If your answer is; "to avoid the problems caused by a relatively rarely occuring global shutdown due to a viral pandemic" then chances are your argument still needs a hell of a lot of work.

Unless you're anticipating a Covid-19 scale pandemic to occur pretty much every few years then your argument falls apart as it attempts to cross the first fence. You're essentially advocating the spending of billions upon billions of pounds (which the taxpayer will have to fund) to entice producers to all return to the UK. And for what? You'll drive up the prices and drive down the quality of a whole range of goods, but without a clear rationale for doing so.

The problem with ventilators and face masks here in the UK for example has stemmed from a demand spike. It's not that the products are made abroad, the problem is that there has been a sudden incredible spike in how many are required, coupled with basically the entire globe requiring these same products. And guess what? The UK is now mobilising to meet that requirement. 3D printers are finally living up to their hype, at least for now (better late than never). British engineering and manufacturing firms - of which there are a great many, it's just that nobody notices or appreciates them - have rallied to the cause and are beginning the process of pumping out thousands of new ventilators, potentially just ahead of the peak demand for them.

You can't plan an entire economy on the basis of preparing for one or two freak events. All you're essentially doing is taking the economic harm caused by a freak event with an uncertain probability of actually occuring, and which represents a brief suppression of economic activity, and you're converting that into a guaranteed suppression of economic activity (through much higher prices) that becomes a permanent, baked in feature of your economy.

Congratulations, idiot.

What's been more interesting is the trends we've seen in response to the crisis that point in the opposite direction. While home working might rise a little, the lockdown has demonstrated that it has certain limits in most industries. Those hoping for a home working revolution are probably going to have wait a bit longer.

More interesting has been the bonfire of the regulations. At a time of crisis a lot of "necessary" rules and regulations have been cast aside to keep the UK moving, and many have thus been exposed as either completely unnecessary or of extremely limited utility. There is a distinct chance that post Covid-19 the UK could in fact become more economically liberal, not less.

Indeed a lot of economic sacred cows have been slaughtered recently. We've been told for years that British people simply won't do jobs like fruit picking, that they are too lazy for it. My contention - to anyone that would endure my ranting for long enough - has been to point out that those jobs simply aren't advertised here in the UK, because it's cheaper and easier for companies to recruit directly from eastern europe, with not a small amount of exploitative practices helping to make that recruiting choice much easier.

In respone to the crisis the call went out for UK fruit pickers. The result? All of the hiring companies have been massively over subscribed and forced to turn away thousands of applicants. Who would have thunk it, eh? Turns out that if you actually offer the jobs to British people then they will take them.

So in summary, if you're pinning your hopes on globalisation dying to make way for your preferred economic order, don't hold your breathe. 

China will take a hit, reputationally and financially. We'll see some decoupling for certain. But don't expect the entire world order to suddenly turn on its head. We were already at that stage pre-Covid where lower cost manufacturing was gradually shifting away from China as its labour market became progressively less competitive, and while we might see a degree of acceleration of that process, chances are China will remain a major global manufacturer for quite some time to come.


  1. Nice riposte :-) Is it a freak event though - all too predictable following SARS, etc.

    Also - I'm laptop shopping and have boycotted Hauwei - I may not be your average punter though. (PS I appreciate all lapttops will probably have Chinese components in)

    1. I wouldn't want one of their laptops or phones full stop, Coronavirus or not!

      I think the scale of Covid-19 is the freakish element. We've had viruses, but nothing on this economy halting scale.

  2. All of your 'Nor do I' comments just appear to show that you are ignorant of the response, rather than that there wasn't one.

    1. There were responses in all cases, but mostly token.

  3. Thanks to 1973 crisis the West went out and sought out other oil supplies. It didn't happen over night but the oil industry we have today is structured the way it is because of Arab OPEC members' actions back then. Economic sanctions don't work and more of a gesture.