If you’ve read my previous columns, globalization was in trouble even before the pandemic. The decades-long open system of trade that dominated the world economy has been damaged by the financial crisis and—more recently—the Sino-American trade war. Now, COVID-19 has added a third body blow to globalization.
The number of passengers at major airports dropped by 97% year-on-year. Lockdowns have sealed borders and created havoc to commerce. Over 20% of transpacific container ships have been canceled in May. As some economies reopen, global movement and free trade will be far from normal. Travel is already being politicized; witness the opening of Europe to the exclusion of Americans. This will create even more bias and entrenchment toward self-reliance. The global wave of looking inward by major governments well before the pandemic will only be reinforced by COVID-19.
Consider what’s happening to the flow of people from one region to another. The Trump administration has suspended immigration, arguing that jobs should go to Americans instead. Many of the people coming from abroad were serving a critical need for tech companies where they simply couldn’t find Americans to fill those positions. Other countries are likely to follow America’s lead. On May 12, Narendra Modi, India’s prime minister, announced to the nation that a new era of self-reliance has begun. The recent border skirmish between China and India, which led to the death of 20 Indian soldiers and unknown Chinese casualties, will clearly hamper any trade between the two nations. India has already banned numerous items coming from China, reinforcing the notion of self-reliance.
While China hawks in Washington talk of plans that would see medicines, microchips, and other sensitive products be made in America again, the Japanese government has earmarked billions in their COVID-19 stimulus as subsidies to help firms move high-value production back home from China. The European Union is talking about creating a fund to buy stakes in firms with the goal of “strategic autonomy.” On May 12, a Chinese spokesman announced a ban of many beef imports from Australia citing reasons of food-safety, but almost in the same breath, condemned Australia’s “erroneous words and deeds” in calling for an international probe into the origins of COVID-19.
The flow of capital is also suffering. Multinational firms will likely cut their cross-border investment by one-third this year. Chinese venture-capital investment in America has dropped to a level 60% below what it was two years ago. America has instructed its main federal pension fund to stop buying Chinese shares. Countries representing close to 60% of world GDP have tightened their rules on foreign investment. Trade will suffer as countries abandon the idea that firms and goods are treated equally regardless of where they come from. And the push to bring supply chains back home in the name of resilience is accelerating.
However, there is one major underlying factor that continues to persist, which was one of the fundamental reasons the world embraced globalization: the indisputable truth about demographics and how the aging population of most developed countries over the long haul will need to rely on a global community to continue the lifestyle to which they have become accustomed.
Case in point: Roughly half of Japan’s coffins are made in China. It’s an interesting example of globalization, China-style. It doesn’t always involve globe-spanning supply chains. Since the country embraced capitalism more than 30 years ago, China’s astonishing growth has also been driven by an intensely localized variety of globalization in which a specific export sector is dominated by a single Chinese city or county.
The coffin-makers of Zhuangzhai, a small city of 100,000 people in the eastern province of Shangdong, is a case in point. Between them, Zhuangzhai’s three main manufacturers export 740,000 coffins annually, almost all of them to Japan. Yunlong, the largest firm in Zhuangzhai, began making complete coffins for export in 2000, as labor costs in an aging Japan soared to 10 or 20 times those found in Zhuangzhai. Yunlong is unfazed by talk of the rich world decoupling from China. Some Japanese clients tried sourcing coffins in Vietnam and Indonesia, but they found that workers in Southeast Asia lacked “discipline,” so they returned to Shandong. Demography is a bigger worry. It is not just Zhuangzhai’s workers who are aging. With more than one in four Japanese over the age of 65, coffin sales are brisk. China’s hyper-local version of globalization may prove surprisingly resilient in the face of decoupling.
These three body blows have wounded the open system of trade. A trading system with an unstable web of national controls won’t necessarily be more humane or safer. The developed countries will find life to be more expensive and less free, while the developing world will find it harder to catch up. The way to make supply chains more resilient is to diversify them and not to domesticate them, which concentrates risk and forfeits economies of scale. Just like a human fighting a virus, the more diverse germs you’re exposed to, the more robust your immunity to fight off threats. Diversification is critical to sustained security against all sorts of threats. It’s the same reason a savvy investor diversifies their stock portfolio.
For our part, we’ve been working hard on diversifying our supply chain to ensure we provide a robust and reliable global sourcing solution to our customers. Given the current state of the PCB industry and today’s economic and political climate, I suspect this particular supply chain isn’t going to be domesticated anytime soon. We must find ways to make the existing supply chain more resilient while being smart about diversification. A fractured world living in homogenous silos will make solving global problems much harder, let alone finding a vaccine and engineering a global economic recovery.
Mehul J. Davé is CEO and chairman of Entelechy Global Inc. and chairman of Linkage Technologies Inc.