When Corona Meets Deglobalization

Peter A.G. van Bergeijk discusses the impact the Coronavirus
is having on deglobalization

Suddenly deglobalization is no longer a hypothetical possibility but a reality. The IMF predicts a reduction of the world trade volume for this year by 11% in its April 2020 World Economic Outlook and even this pessimistic view is beaten by the World Trade Organization that has an optimistic COVID 19 scenario that assumes a decrease of world trade by 13% – the WTO’s pessimistic scenario is a 32% free fall. What can we learn from earlier periods of deglobalization?

World openness 1880 – 2021

Source: P.A.G. van Bergeijk, Deglobalization 2.0, updated using
IMF WEO April 2020

The Great Depression with its enormous negative impact on world openness and economic welfare was preceded by the worst pandemic of the previous century: the Spanish Flu. Estimates of its death toll vary widely from twenty to hundred million. With a world population of about two billion that amounts to some one to five percent mortality. With COVID 19 these number look like a chilling possibility as well. The pandemic that preceded the Great Depression did not cause it. Recovery of the recession triggered by the Spanish Flu was relatively quick and spontaneous. World trade did not collapse. A major difference between the context of the Spanish Flu and the economic background against which COVID 19 now is emerging is that our world was already in the downward phase of Deglobalization 2.0. The pandemic comes on top of the deglobalization wave.

Pandemics are signs of the times

Indeed, with hindsight the Spanish Flu was a sign of the impact of a virus in a globalized world, in a sense a forebode of a turning point in globalization. That turning point was due to the rising costs and decreasing benefits of globalization. It would bring the world of the 1930s what I have called Deglobalization 1.0.

COVID 19 can of course not be seen as such a sign, but the fact that preparation for pandemics was not sufficient and also the break-down of global cooperation reflect the second underlying mechanism of deglobalization. We can observe both in the Great Depression of the 1930s and in the Great Recession that the leading power of the time (the hegemon) deserted the rules of the game that underpinned globalization and were actually designed by its interest in an open trade and investment climate. An open stable and relatively peaceful system allows other countries to develop and grow faster capturing a larger share of the benefits of globalization. In the early phase of globalization a smaller share from a larger economic pie may still be an improvement. At some point the costs of being a hegemon, however, outweigh the benefits. This is where the emergence of China as the new hegemon comes into play.

It is ironic, but sad, that the United States and the United Kingdom (the hegemons that helped to build a constellation in which trade, democracy and peace were reinforcing aspects of the world order) are spoiling global and European governance. Continuing Brexit is a dangerous mistake, but it is a disaster that the United States, in the midst of a pandemic, cuts its support for the World Health Organization, in the same vein as it paralysed the World Trade Organization earlier this year. This attack on global governance is dangerous, but it is not unexpected as discussed in Deglobalization 2.0 – it is after all behaviour that one can expect from a declining hegemon in a period of deglobalization.

What did we learn from history?

The first thing is that isolationism offers no protection against a highly contagious virus. Indeed, probably the most scary thing about the Spanish Flu was its ability to reach even the most remote corners of our planet. Mind you, in a world without mass tourism, global production networks and refugee flows. We have also learned that sound policies can counteract the negative economic forces that turned the 1930s into the Great Depression. I do not think that the expansionary monetary policy does any good in this crisis that is essentially a negative supply shock x it is perhaps best seen as a signal – but support of effective demand is welcome especially if it can be organised more efficient by focussing on the needs of new industries that we need to fight COVID 19, that is machinery and protective gear for the health sector, the testing industry (including case monitoring), distribution and logistics and ICT. Finally, we have learned that the deglobalization virus in the 1930s spread especially in autocratically governed countries, but that it first showed up in the democratic world during the recent phase of deglobalization. A striking difference between autocracies and democracies is the difference in death toll of the virus and it may reflect the fragmentation and lack of solidarity in modern democracies.

Why I am still an optimist

The first reason to be optimistic is the significant resilience of world trade and investment during global crises. Global firms have had a good exercise with the collapse of world trade by twenty percent in 2008. That collapse did set in motion the process of deglobalization, but the good news is that world trade and investment recovered to previous peak levels within a year. The finding that deglobalization started during the Financial Crisis is also a reason for optimism because Deglobalization 2.0 thus preceded Brexit and the Make America Great Again movement. We should not confuse the symptoms and the disease. The attack on supranational governance has an underlying disease that can be cured if we fight the underlying causes that have driven the deglobalization process so far, that is greater inequality and a lacklustre trickling down of the benefits of international trade and investment. And last but not least, the outlook for openness of the world economy is still much better than in the 1930s. Yes, deglobalization exists. Yes openness will be much lower than previously expected. But as illustrated in Figure 1 will in all likelihood remain at a level that is two to three times the level in the 1950s. Even if trade and investment flows would decrease according to the WTOs gloom and doom scenario our societies would remain much more open than in the 1950s, connected via the internet at a level never seen before in history.

Deglobalization 2.0

Peter A.G. van Bergeijk, International Institute of Social Studies of Erasmus University, The Netherlands.