COVID-19 and the Future of Globalization

In their speech and interaction with Heloisa Menezes, Anil Gupta & Haiyan Wang present the case of COVID-19 serving as a tipping point for a new normal of globalization.

The COVID-19 pandemic has brought us all to confront what deep global connections can transmit. Many observers argue that COVID-19 is hammering the last nail to the coffin of globalization. Globalization has been under attack since well before the pandemic crisis. In recent years, we have seen a rapid rise of populism, nationalism, isolationism in all continents. But globalization brought to the world enormous benefits. As an indicator of global well-being, life expectancy has been rising across rich and poor countries. More than a billion people worldwide have been lifted out of poverty, previously poor and isolated emerging markets have become growth engines after joining the global economy. Decades of growing at two to three times the pace of advanced economies have lifted the share of emerging markets in global output to approach that of the advanced economies. So, instead of ending globalization, COVID-19 might serve as a tipping point towards a new normal of globalization.

While we see convergence across nations, we see disparities within countries on the rise. Inequality within society has tripled. In advanced economies, the ratio of GDP per capita of average 90th percentile over 10th percentile declined in the three decades after the Second World War, but became flat in the ‘80s, and went up over the last 20 years. This means that the broader share of prosperity in the three decades after the Second World War has been replaced by those on the top getting far better off. Such a tilt is stark in the United States; the top 1% share of net personal wealth has almost doubled since 1980. Nearly 40% of all personal net wealth is in the hands of the top 1%. 

If we look beyond the trade tensions in COVID-19, we see some long-term forces at play well before we entered the crisis.

COVID-19 is adding ice on frost for the poor. Over 30 million Americans have already filed initial unemployment claims over the six weeks from mid-March. COVID-19 will widen the digital divide, income divide, wealth divide, and social divide. We know that such a divide feeds populism and nationalism. If U.S. President Donald Trump were to win the second term, we will see the U.S. becoming more inward-looking; we will see more global entrenchment from the Trump administration. In Trump and his advisors’ minds, patriots and globalists are at two opposite ends.

Geopolitically, the great power rivalry will likely intensify. US-China relations hit the lowest point before the pandemic crisis, and COVID-19 could make the relations even more toxic. A global disaster like COVID-19 demands a global solution, but right now, there is a vacuum of global leadership for international cooperation. The U.S. is not willing, and China is not yet capable or not yet welcomed to play such a role. We see more finger-pointing, more suspicion of foreigners and immigrants, less trust, and more conspiracy theories. Thus, as soon as the COVID-19 curve flattens, we are likely to see trade wars resumed. All in all, COVID-19 fans geopolitical and political winds against globalization.

COVID-19 will also accelerate the retreat of old globalization. For most people, their everyday encounter with globalization is products made abroad. Apple says that it works with suppliers from over 43 countries on six continents. If you look around you, you can probably pick up items and products imported or made from imported components or materials. However, hyper-globalization in terms of merchandise trade is becoming yesterday’s story. The share of global merchandise trade as a percentage of global GDP has been going downwards since 2008. World merchandise trade used to grow at twice the pace of world GDP growth, but that speed has slowed dramatically. In 2019, for example, we saw merchandise trading volume in dollar terms decline by 3%. According to the World Trade Organization, the volume of global merchandise trade could fall between 13% to 32% in 2020 compared to the previous year.

If we look beyond the trade tensions in COVID-19, we see some long-term forces at play well before we entered the crisis. One is the end of the commodity boom, because China has slowed down and has shifted to a less commodity-intensive model. Second, the rise in wages, land costs and other costs have reduced the cost advantages of producing in emerging markets as compared to automated production back at home. Third, faster responses to market trends and the need for ever-faster shipping speed also drive a shorter supply chain. COVID-19 accelerates each of these factors -falling commodity prices, more automation, more e-commerce, shorter supply chains- thus pushing merchandise trade to slide further down.

The open-source movement that already had been going on for over 20 years has picked up pace now.

Another key dimension of measuring globalization is in terms of foreign direct investment. In contrast to merchandise trade, total FDI stock has continued rising. Companies are not returning home in droves for several reasons. One, faster growth and bigger pie in emerging markets are still very attractive, and companies do want to take a bite. Second, rising trade barriers have prompted a shift from local-for-global to local-for-local. Third, more companies are also shifting their allocation of supply chains from a China-centric strategy to a “China +2” strategy to buffer shock in one location. 

Another dimension for globalization is international trade in services. In contrast to the decline in merchandise trade, the world services trade has maintained growth. COVID-19 has hit service trade hard, through the restrictions on transport, travel, closure of many retail hospitality establishments and cancellation of cultural, sporting and recreational activities. But one sector has seen booming demand, the information service sector.

Cross border data flows have been ramping up at a breakneck pace of over 50% a year. It is a lot deeper and far more impactful than only people talking on WhatsApp or WeChat. By data, we mean four things. One is communication, that is, people communicating with each other across countries. WhatsApp, Facebook, and Twitter tell us that there is a lot of cross-border communication. The consumption of digital goods is also on the rise. For example, in terms of streaming, the share of global music revenue was less than 20% in 2018, and in 2020, it might well be closer to 60%. The picture is changing very rapidly.

There is also collaboration. The rise of born global companies is an example. Even the senior management of companies, the Board of Directors, or factories or R&D offices are distributed across countries, so there is collaboration primarily around economic activities or scientific activities among people located in different countries. It is a diffusion of ideas and technology. The pace of collaboration happening across countries is tremendous. The open-source movement that already had been going on for over 20 years has picked up pace now. Due to COVID-19, most of the economic activities have slowed down or come to a halt, so right now, it is around medicine, finding a vaccine, and so on. Beyond COVID-19, a lot of this will become the new normal in terms of cross-border collaboration, open-source, and data open-source algorithms.

This new era imposes questions for companies as well as countries, such as issues of data privacy, data nationalism, technology nationalism, etc.

The cross-border data sharing or global cloud holds great significance. For instance, if cement factories around the world belonging to a major multinational cement company are local-for-local, they still share the manufacturing know-how, best practices, distribution, logistics know-how and become more productive and smarter rapidly. This is how the global cloud is impacting operations. As offices collaborate through the global cloud, they become more productive. Today, colleges and their entire curriculum is online. There is Coursera, edX, and Khan Academy. This means that whether it is South Africa or India or China, the pace at which the quality of education is rising has picked up dramatically. Even at the level of the individual, knowledge is getting shared almost instantaneously, making each of us as individuals more productive. Answers to questions on products, well-being, or reviews of employers can be crowdsourced too.

According to The Information, one of the most influential media companies in their domain, once organizations go remote, and have gone through the hump of converting from physical in-office to remote, the cost keeps going down and down and close to zero. Besides remote work, there are other activities that will keep moving remotely, and we will keep moving cross-border. Not long back when physical goods were primarily traded, emerging economies, in particular, were quite small in size. All emerging economies put together, including China were just 20% of the world’s GDP. Now, they are close to becoming as large as the advanced economies in total. 

The size of India’s economy used to be 1/20th the size of the U.S. economy back in 2000. Now, it is about one-seventh. As these emerging economies acquire bulk and scale, other economies don’t need to export to them, which means that local-for-local production now becomes economically rational. This shifts the supply chain, and not just from the point of view of risk reduction but purely from the point of view of economic rationality that we are moving away from production in one corner of the world to sell in another corner of the world so that labour arbitrage or economies of scale can be captured to produce local-for-local, connected by data.

All these changes are not the death of the old globalization or multinationals. Multinationals will be alive and well, but they will be producing mostly local-for-local or regional-for-regional, but they will be connected by bits rather than atoms. In terms of the structure of products, every product is also a bundle of not just hardware but also software and digital services. Tesla cars, for example, is not just a piece of hardware. In fact, even more important than the hardware is the software and services. The battery and the performance, pace, and speed with which the battery can feed the motors are all riding on software, and keeps getting upgraded periodically. In short, the economic contribution of the data flows is measured in terms of how they impact productivity, be it in factories, offices, colleges or at an individual level, because ultimately economic growth is all about productivity.

COVID-19 as well as digital globalization are having a positive impact on sustainability.

In the old days, people used to think of economic globalization as productivity that was being driven by trade in merchandise, traded goods. Those days are dying, and the new digital globalization is on the rise. This new era imposes questions for companies as well as countries, such as issues of data privacy, data nationalism, technology nationalism, etc. The future of digital globalization is an important question. Irrespective of the political ideology, IP rights will remain an important issue, but taxation of data and prevention of cyber hacking is yet to be fully figured out.

The current times are tumultuous, and will be remembered as such in the future, but from the economic aspect, it is a phenomenal turning point in globalization.

Heloisa Menezes in Conversation with Anil Gupta & Haian Wang

Heloisa Menezes: How can China and India collaborate with other countries to advance innovation in the digital economy?

Anil K Gupta: If we look at China, India, Brazil, and maybe the U.S., there are two ways to do that. One is in terms of globalization of R&D. For example, Microsoft has one of the biggest R&D centers in India, China and Brazil. As they collaborate and become more productive in terms of knowledge creation, that itself is a collaboration between countries to increase productivity in that particular domain. That would be one example of how digitalization is playing out. Then, there are IT services. The big Indian IT service companies are very present in Brazil, which naturally means collaboration between their headquarters operations in India and Brazil, but they are actually serving the North and South American markets from there. That would be another example of how digital collaboration is playing out.

Haiyan Wang: It is paramount that there is global collaboration in terms of developing medicine and vaccines, developing monitoring and tracing mechanisms at a global level, and building global reserves of medicine and protective equipment. However, as we look to the digitized globalization, we might also see the digital world to be more divided, in a sense that in one camp it is probably China, and on the other, it is the United States and its allies. We see more walls. For example, in terms of laying out the 5G infrastructure, there is a clear line of whether the Chinese Huawei should be used for laying that infrastructure or not. A lot of emerging markets face a tough choice between choosing the Huawei infrastructure versus listening to the cause of the United States. Data privacy issues also become very sensitive, and we might see a lot of the IT sectors, medicine and pharma sectors, and researches amongst universities become politically sensitive and become the grounds for geopolitical competition.

Anil K Gupta: It is unclear how the 5G story plays out in terms of Huawei versus the Western competitors, but we know that 5G is happening and it will happen. It will gather pace, and by the end of 2021, there will be a lot more 5G around. In an era of 5G, cross-border data flows will be far greater than they have been. To that extent, both stories are playing out; this competition story about 5G but also what that infrastructure does to the potential for data.

Heloisa Menezes: Will global companies adopt the governance structure with centralized decision-making power or a decentralized one?

Anil K Gupta: At the level of companies, centralization is not going to work. Companies already have been moving away from that. Whether you are an American company or a German or Chinese, you have to be global, and global means heterogeneity. Therefore, you need the leaders of your operations in different countries, including not just marketing, but manufacturing and R&D to be coming together. It will be more like a network of top lead or top leadership, and that network will be sitting in different parts of the world, and it is already happening. Because of the connectivity, fidelity, and the pace or speed of connectivity, that network actually will be able to collaborate fast, make decisions faster, and so it will appear as if it is centralized action, but it will not be centralized coming from one building in some corner of the world. It will be centralized but coordinated.

Haiyan Wang: Also, the speed in terms of your response time to local market signals needs to be getting faster and faster. If you wait for decisions to come afar, then you may miss the signals, you may miss the opportunities to react to the local market conditions.

Heloisa Menezes: What role do you foresee for sustainability in the new globalization? Which roles will the long-range effects of climate protection and sustainability play on the de-globalization in comparison to the Black Swan?

Anil K Gupta: COVID-19 as well as digital globalization are having a positive impact on sustainability. First, we have now learned to live with bluer skies, even in some of the most polluted cities on earth. Once people have seen that, they are not going to forget that. Second, in the new economy, even physical goods have more software and services built into them, which means that the production processes are less polluting for each unit of manufactured goods or each dollar of manufactured goods. Third, society as a whole has now seen the value of science, so there will be a greater willingness to listen to what scientists say about global warming. Finally, there is a possibility of collaboration across countries, especially among scientists. Depending on what happens in the November 2020 elections in the U.S., it could very well go back to also being collaboration among countries.

Haiyan Wang: A lot also depends on the rising emerging markets; how much of a green growth model they will adopt. The old commodity-intensive, energy-intensive, pollution-intensive development model of China definitely should not be continued in other major emerging economies, such as India, Africa, and Latin America. So far, we have seen that despite the slowdown of economic growth, China seems to have been sticking to getting more of a greener development model. Let’s hope that we will continue on that path.

Heloisa Menezes: I would request you to share some closing remarks, please.

Haiyan Wang: In conclusion, at a macro level COVID-19 will accelerate the trends already at play. One, we need to be mindful that the inequality gap will get wider and frustration could become a fertile ground for populist politicians to champion nationalism and populism. Second, at a macro level, physical connections ¾whether it is product flows or people flows¾could slide downhill and stay in the valley for a long time. Multilateral organizations’ roles and influences will likely weaken because of the lack of trust in their performance during a crisis. At a micro level, for leaders and individuals, COVID-19 is a wake-up call that we must be prepared for the next big global disruption. Organizations need to have contingency plans in place, have their ears to the ground in far corners to make sense of early, vague signals. They need to be able to decide and analyze what second and third-order effects could affect their businesses. Finally, workplaces will see the permanent change, and those who can get the distributed workforce to be more productive, more collaborative, and more innovative will stay ahead. 

Anil K Gupta: Some positive things ahead are that digital globalization growing at plus 50% a year is likely to continue for quite some time. The impact of digital products and services through communication, collaboration, and sharing of ideas and technology is reflected in high productivity, and it will remain high. There are two areas of concern. First, the very high and rising inequality in pretty much every corner of the world is a setup for social revolution, and revolution could happen anywhere or everywhere. Number two is the rising tensions between the U.S. and China. Today, we are not in an era of collaboration between the U.S. and China. We are in an era of the Cold War. We know from the US-Soviet Union days that the Cold War can be managed, and so a cold war between the U.S. and China can hopefully be managed. But when you have a Cold War, you can never rule out the possibility, the risk of a hot war. 

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