Reverse of Globalization trends

Post the experiences of the COVID-19 pandemic, questions will be asked whether the multi-decade growth in the globalisation of economies will come to an end, or potentially even reverse. This would have significant, structural long-term consequences for global economies and financial markets.

During this crisis, some of the dependencies associated with the globalisation of economies have become painfully evident. Vulnerabilities identified have included no//limited access to domestic manufacturing capacity in key segments of the economy, as well as long supply chains and high regional dependencies. Previously, the economic benefits of globalisation were expounded by governments and business, without much intensive focus on the potential shortfalls.

COVID-19 has changed the balance of that debate, hopefully in the short term, but I fear its effects could be longer lasting. The increasing nationalistic tone of political debate, evident before COVID-19 in the election of Trump and BREXIT, will undoubtedly become louder and add to this risk. National vs globalisation debates will also take place against the backdrop of a substantial increase in domestic unemployment, adding to the pressures on halting or reversing some of the trends. Any move away from globalisation could have significant consequences for economic growth and geo-political relations.

This is undoubtedly the most significant and substantial risk that we face as a result of COVID-19, particularly regarding global growth and financial markets. There were already signs of stress in the global economic system and it will require huge political leadership to avoid it escalating into something unpleasant.

More immediately, I doubt whether Trump will be able//want to reverse the China tariff increases implemented over the last couple of years and this may unnerve financial markets. Indeed, a greater risk is that such restrictive trade policies are extended to other countries. Restrictions on the free movement of workers is another sensitive issue that could get wrapped up in de-globalisation sentiment. Disappointing comments from Trump (on green card access) and SA cabinet members (on Zimbabwean workers) could reflect that emerging trend. Under this pressure, the collective ideal associated with globalisation may suffer against shorter-term priorities with negative consequences for economic growth. Our central view should be that we can no longer rely on globalisation as a tail wind for economic growth and financial markets.

Anti-China sentiment

Another substantial risk for global economic growth is a sustained period of anti-China sentiment. This would certainly be a concern if the COVID-19 post-mortem identifies that China lacked transparency on the initial virus outbreak.

This risk is primarily at the geo-political level but may also spread to the consumer if the post-mortem reveals that China fell short of its moral obligations. Judging by consumers’ short memories, the former is the more substantial risk and would most likely manifest itself in trade restrictions. While it is not my base case, it could very easily form part of a negative de-globalisation theme.

It must be remembered that COVID-19 has not occurred in isolation. Even prior to the pandemic there was a feeling that previous administrations, particularly in the US, had been far too accommodating towards China’s human rights abuses and, more importantly, its aggressive geo-political ambitions. For the global powers, there is little doubt that economic growth trumped broader considerations. I expect the China hawks in the US administration will exert their significant leverage to punish China from an economic standpoint. In addition, we must assume that US trade tariffs on Chinese products, implemented over the last couple of years, are also unlikely to be removed as we exit this crisis.

Addressing neglected country risks

The COVID pandemic has embarrassed several countries in their lack of preparedness for a potential crisis. Part of this reflected countries’ reluctance to invest for uncertain or unknown outcomes. In addition, however, over the last 20 years countries have been prepared to accept and rely on international companies and bodies to manage potential risks. The disappointing performance of international bodies such as the World Health Organization (WHO), and the lack of domestic supply in certain critical products, has focused minds. Post the crisis, there will be a reassessment of the domestic capability to deal with a wider collection of future risks and not to be too reliant on internationally-funded organisations. The US will undoubtedly lead this charge. Governments will be forced to increase investment in risk areas like antibiotic research, pandemic supply chains, climate change and domestic manufacture of critical products/. components.

I will pose some final questions on this topic. Will the disappointing response to the crisis result in the unwinding of certain cross-border bodies that have grown and importance over the last two decades? Will the WHO survive in its present form if the US removes funding? Will Italy remain committed to the EU, after the northern European countries once again prioritized themselves over their southern partners in a crisis? 

Tax systems will need to change

There are many uncertainties about what the post-COVID-19 environment will look like. One thing we know for certain, however, is that once this pandemic is concluded, all countries will face significant fiscal pressures. This will be the case for countries that went into the crisis with reasonably strong positions but for others the position will be even more critical. For example, in SA the long-term fiscal consequences of COVID-19 will be enormous, raising questions about government’s achievable priorities.

Apart from reducing expenditure, the other significant lever government must manage fiscal deficits is taxation. Governments will have little choice but to look at both corporate and income tax regimes to address the fiscal deficits. Initial reviews will centre on closing tax loopholes – always a focus with governments, but typically lobby groups have been able to de-rail implementation. The extent of the fiscal pressure will focus minds, and presently “favoured” parties will come under tax scrutiny. This could include private equity (carried interest), the cruise industry (offshore registration), the self-employed (company tax) and even a review of tax treatment associated with different capital structures.  

Radical financial remedies become mainstream

A slightly left field issue. The unprecedented monetary and fiscal response to the crisis will raise questions about whether such policies should become more permanent in nature and enter mainstream political debate. For example, only six months ago Modern Monetary Theory (MMT) was denounced as intellectually challenged and inappropriate for the US. However, the justifiable monetary and fiscal responses to the COVID-19 crisis have echoed many of the points raised by MMT. There is definitely a danger that radical economic and financial policies will become mainstream, with associated risks. Issues could include MMT, Debt Forgiveness and Universal Basic Income (UBI).