Part of The Great Shutdown and its medium-term effects — a series from the Ninety One Investment Institute
May 2020
Will the pandemic spur deglobalisation?
Previously InvestecAsset Management
Investment Institute
view
fastSahil Mahtani Strategist
The fast view
— The longer the pandemic and the economic crisis it has spurned lasts, the greater the chance it sends the globalisation that began after the Second World War into reverse.
— Yet the type of globalisation that characterised the 1990s and 2000s was already receding before this crisis. In its place regionalisation was leading—a variant of globalisation but not in and of itself deglobalisation.
— Our base case is a continuation of that regionalisation trend. A self-reinforcing process of deglobalisation is still possible but we consider this a risk case. Meanwhile, COVID-19 also poses an upside risk to globalisation given the extraordinary positive impulse to digital services trade.
— There is a temptation to draw simple conclusions from COVID-19, for instance, a self-reinforcing deglobalisation that prompts an increased risk of higher inflation. Assessing the ways in which globalisation affects inflation, we think there may be an upward bias to inflation in longer-term timeframes, but in the context of a disinflationary impulse in the short to medium-term, and our base case of continuing regionalisation, COVID-19 is unlikely to lead to precipitously higher inflation.
Will the pandemic spur deglobalisation?
Harold James recently cited historian Johan Huizinga’s warning that the period following the Black Death in Europe turned out to be the “waning of the Middle Ages,” — not just the resulting economic destruction, but “the mysticism, irrationalism and xenophobia that eventually brought an end to a universalist culture.” In other words, just like the fourteenth century but on a less dramatic scale, this episode may spur a reflexive process in which culture and economy push against global integration.
That analogies to such extreme scenarios are even being mentioned in public discussions is a sign of the scale of the re-think that COVID-19 has prompted among academics, market practitioners, and policymakers. The future of globalisation was already in question prior to the virus, with activity stagnating by many measures in the face of growing public scepticism.
When The Economist looked at a dozen measures of global integration, eight were in retreat or stagnating, of which seven lost steam around 2008.1 ETH Zurich’s KOF Globalisation Index, which measures the economic, political and social dimensions of globalisation across 122 countries, has a sub-index that specifically looks at economic integration along regulatory and outcomes-based indicators; that index has stalled since 2008, albeit at a high level relative to history.2 Meanwhile, the foreign value added share of G20 gross exports, a measure of the intensity of global value chains, also peaked in 2008.3
1. “Globalisation has faltered,” Briefing, The Economist, January 24, 2019.2. Gygli, S., Halg, F., Potrafke, N. and Sturm, J.E., The KOF Globalisation Index – Revisited, Review of International Organizations, 14(3), 543-574.3. “The changing nature of international production: Insights from Trade in Value Added and related indicators,” TiVA indicators, 2018 update, Organisation for Economic Co-operation and Development.
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Will the pandemic spur deglobalisation?
Four indicators of globalisation
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Figure 1: World trade/GDP (%) Figure 2: World FDI inflows/GDP (%)
Source: World Bank, World Development Indicators, April 2020. Source: World Bank, World Development Indicators, April 2020.
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Figure 3: KOF Globalisation Index
Source: The KOF Globalisation Index – Revisited, Review of International Organizations, 14(3), 543- 574.
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Figure 4: Foreign value added share of gross exports, 2005-2016 (%)
Source: OECD, Trade in Value Added (TiVA) database, December 2018. EU28 and G20 averages are unweighted averages of countries’ foreign value added share of gross exports. Estimates for 2016 are preliminary projections.
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Will the pandemic spur deglobalisation?
There is now the reasonable fear that the longer the pandemic and the economic crisis it has spurned lasts, the greater the chance it sends the globalisation that began after the Second World War into reverse. Globalisation is a big word—we think of it here as the international exchange of goods, services, people, data and capital. For the purposes of this piece, we will focus on the first two.
While the globalisation we knew in the 1990s and 2000s is slowly receding, it is simplistic to assume the pandemic materially adds to a deglobalising impetus. After all, that form of globalisation was already receding before this crisis. In its place regionalisation was leading—a variant of globalisation but not in and of itself ‘deglobalisation’. Our base case is a continuation of that regionalising trend. A self-reinforcing process of deglobalisation is still possible but it should be seen as a risk rather than a base case. Meanwhile, COVID-19 also poses upside risks given the positive impulse to digital services trade.
Globalisation as regionalisation Confirmation bias run amok
The economist and psychologist Daniel Kahneman once said that if he had to single out any particular cognitive bias as the most pervasive and damaging, it would probably be confirmation bias.4 Confirmation bias is believing what we want to believe by favouring information that confirms existing preconceptions. Unfortunately, it has been rife during the pandemic.
Almost no one has changed their minds as a result of COVID-19. Instead, most are doubling down on pre-existing ideas. Populists on the right think this episode has vindicated their trade scepticism and their concern about relying on other countries for anything.
National security-types think that Chinese secrecy, disinformation, propaganda, and uneven cooperation means they have been right all along to flag the Western overreliance on China as a trading partner.
Meanwhile, globalists dismiss such views as narrow nationalism, and feel vindicated that the twenty-first century is going to be about global, not national problems, which all countries have a responsibility to solve.
As Roberts and Lamp have pointed out, all these narratives are less coherent than they look.5 Instead the reflections around COVID-19 are a particularly salient example of confirmation bias run amok.
4. Yagoda, B., “The cognitive biases tricking your brain,” The Atlantic, September 2018.5. Roberts, A., and Lamp, N., “Is the virus killing globalisation? There’s no one answer,” Barrons, March 15, 2020.
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Will the pandemic spur deglobalisation?
Trade data tells a different story
A look at the actual trade data tells us a different story of what is likely to happen.
Except for US-China direct trade, goods-related globalisation was already becoming more intra-regional than inter-regional.
For example, in the early 1990s, North America absorbed 35% of East Asia’s exports, while today that figure is under 20%. East Asia’s share of exports to itself is growing every year. If headline measures of globalisation have stalled in recent years, it is because Asian countries are consuming more of what they produce—an entirely natural outcome as they move up the value chain.
The trend towards regionalisation is true even of geographies that were already well integrated into the global economy. Europe and central Asia’s export share to itself peaked at 75.7% in 2005 but at 70% today is still higher than it was in the early 1990s—around 67% in 1990.
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Figure 6: Europe and central Asia export partner share (%)
Source for figure 5 and 6: The World Bank, World Integrated Trade Solution.
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Will the pandemic spur deglobalisation?
Globalisation has stalled in recent years
Globalisation has stalled in recent years but that is also because two of the most traded global products (by HS code, short for Harmonised System, a WTO taxonomy of products) are petroleum and cars—each of which have both cyclical and secular factors depressing consumption.6
6. World Trade Organisation Data Portal, Bilateral imports by detailed HS codes (2,4,6 digit).
For instance, the peak of new US autos and light truck sales in this cycle, at 17.5 million vehicles in 2016, is not much higher than the last peak of 17.4 million seen in the year 2000. If cross-border trade in autos was not stagnating, that would be the surprise.
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Figure 7: Most traded goods by HS 2 Code (as % of world GDP), 2017
Source: World Trade Organisation Data Portal, Bilateral imports by detailed HS codes (2,4,6 digit).
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Figure 8: US autos and light truck sales (in ‘000s)
Source: Federal Reserve Bank of St. Louis Economic Data (FRED), “Light weight vehicle sales,” March 2020.
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Will the pandemic spur deglobalisation?
Most trade is intra-regional
Most trade is intra-regional, as shares of gross value exports show, and that has typically not been as controversial as trade between large international powers.
In North America, which initially looks slightly different to Europe and East Asia, the regional trend still holds. By including Latin America export shares it represents two-fifths of the whole.
Regional trade is less politically contentious because large countries are always trying to expand their influence among smaller countries that are their neighbours. Indeed, regional trade has political momentum to grow.
Figure 9: East Asia and Pacific destination partner share (% of total, 2018)
East Asia & Pacific
Middle East & North Africa *Sub-Saharan Africa
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North AmericaEurope & Central Asia MENA *
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Export destination partner shares for three regions
Figure 10: Europe and Central Asia destination partner share (% of total, 2018)
North America
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Europe & Central AsiaNorth America South Asia
Latin America & Caribbean
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LatAm
Figure 11: North America export destination partner share (% of total, 2018)
East Asia & Pacific
Middle East & North AfricaEurope & Central Asia
North America
South Asia
Latin America & Caribbean
Europe & Central Asia
North AmericaEast Asia & Pacific MENA
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South Asia
Source for figures 9,10,11: World Integrated Trade Solution, “Exports, imports and trade balance by country and region,” 2018.
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Will the pandemic spur deglobalisation?
Regional trade has political momentum to grow
Many countries have made regionalisation a key initiative of their foreign economic policy. China’s One Belt, One Road, while somewhat stalled currently, is the most eye-catching example of this. It is also true of more formal trading arrangements like China’s Regional Comprehensive Economic Partnership, and Japan’s efforts with the Trans-Pacific Partnership.
Tariffs on imports from East Asia have declined by six percentage points between 2011 and 2017 while they rose for North America by just under one percentage point in the same period.
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Source: The World Bank, World Integrated Trade Solution.
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Simple average of tariffs for the US and China, 1992-2018
While a simple average of China’s tariffs on its overall external trade is still more than twice those of the US’ (7.5% vs 3% in 2017), it is the US’ trajectory that is worse, showing a jump after 2016, whereas China’s reached an all-time low in 2018.
Source: The World Bank, World Integrated Trade Solution. Source: World Bank, World Development Indicators, 2018.
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Will the pandemic spur deglobalisation?
Global value chains are complex
Gross value trade data is useful to understand the overall shape of trade, but it can be misleading because it does not highlight the role played by complex global value chains. Famously most of the value generated by China’s export of an iPhone to the US is imported by China from other countries.
The value-added data, which net out intermediate imports required to generate the product, tell a similar story about regionalisation.
Network analyses produced by the World Trade Organisation have been used widely to visually simplify the global value chain activities given their complexity, see Figures 15 and 16. The size of the bubbles shows the magnitude of value-added exports, the thickness of the connectors shows the importance of the bilateral flows, and the arrows indicate the net direction of the flow. Minor bilateral trade flows are set to zero.
Figure 15 (value-added exports for purposes of direct consumption, e.g. French wine for consumption in England) shows that most trade is regional, but there are still strong trade networks between the US, China, and Germany.
Figure 15: Value-added exports for purposes of direct consumption, all goods and services
DEU CHN USA
MEX
CAN
KAZ
IRL
BRA
FIJ
LAO
PAKPHIHKG
MON
CYP
KGZ
RUS
MAL
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ITA FRAGBR
Source: Li, X., Meng, B., and Wang, Z., Global value chain development report, World Trade Organization, 2019.
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Will the pandemic spur deglobalisation?
The next chart (value-added exports that cross two borders for production, e.g. a part made in Thailand, then assembled in South Korea, then produced for export in China) shows that most complex value chains are in fact regional. Indeed, there are no major linkages between the three industrial giants – at least at this level of abstraction.
What this tells us is that global value chains are overwhelmingly regional. While the US-China effort to disengage their economies from each other is important, it is not the whole story. It has not even been the main story of the globalisation of goods.
Figure 16: Value-added exports that cross two borders for the purposes of production, all goods and services
DEU CHN USA
MLTESP
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Source: Li, X., Meng, B., and Wang, Z., Global value chain development report, World Trade Organization, 2019.
Country codes: AUS: Australia; AUT: Austria; BAN: Bangladesh; BEL: Belgium; BGR: Bulgaria; BRA: Brazil; BRN: Brunei; BTN: Bhutan; CAM: Cambodia; CAN: Canada; CHE: Switzerland; CYP: Cyprus; CZE: Czech Republic; DEU: Germany; DNK: Denmark; DNR: Denmark; ESP: Spain; EST: Estonia; FIJ: Fiji; FIN: Finland; FRA: France; GBR: United Kingdom; GRC: Greece; HKG: Hong Kong; HRV: Croatia; HUN: Hungary; IDN: Indonesia; IND: India; IRL: Republic of Ireland; ITA: Italy; JPN: Japan; KAZ: Kazakhstan; KGZ: Kyrgyzstan; KOR: South Korea; LAO: Laos; LTU: Lithuania; LUX: Luxembourg; LVA: Latvia; MAL: Malaysia; MDV: Maldives; MEX: Mexico; MON: Mongolia; NLD: The Netherlands; NOR: Norway; NPL: Nepal; PAK: Pakistan; PHI: Phillippines; POL: Poland; PRT: Portugal; ROM: Romania; RUS: Russia; SIN: Singapore; SRI: Sri Lanka; SVK: Slovakia; SVN: Slovenia; SWE: Sweden; TAP: Taipei; THA: Thailand; TUR: Turkey; USA: United States of America; VIE: Vietnam.
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Will the pandemic spur deglobalisation?
Regional trade agreements are becoming more complex
Moreover, deal momentum is on the side of a regionalised version of globalisation rather than wholesale deglobalisation. Regional trade agreements (RTAs) have become more complex in recent years, going beyond market access in goods or services. They include provisions not traditionally associated with trade agreements such as government procurement, environment and labour. Among RTAs notified to the WTO, 50% contain provisions that liberalise investment, over 70% have provisions on competition, 66% on government procurement, 57% on the environment and over 30% on labour.7
Data for Figure 17 above does not go beyond 2015, but several deep trade deals have been signed since 2016. For example, on 30 December 2018, the Trans-Pacific Partnership agreement entered into force for Australia, Canada, Japan, Mexico, New Zealand, and Singapore (but not the United States). On 30 May 2019, the African Continental Free Trade Agreement entered into force for 22 states.
If any deglobalisation has been happening, it has been happening naturally, because emerging market countries, and especially China, are consuming more of what they produce.
7. Acharya, R., “Regional trade agreements: challenges and opportunities,” International Trade Centre, December 20 2018.
Figure 17: Regional trade agreements by number of policy areas
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Source: International Trade Centre, December 2018.
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Will the pandemic spur deglobalisation?
Overall, 16.7% of China’s domestic value added in 2015 was driven by consumption that happened abroad, down from 23.5% a decade earlier (see Figure 18). That looks set to continue, COVID-19 or not.
It is probably alarmist to characterise the deepening of China’s internal markets as a form of deglobalisation. In fact, it is only a statistical result of China’s imbalanced form of growth, which reflects a savings and export-driven economy in one time period before becoming a consumption-driven one in the subsequent period.8
To the extent there is a serious threat to globalisation on the horizon, it is not COVID-19, but the Chinese government’s Made in China 2025, an aspiration to raise domestic content of core production components to 40% by 2020 and 70% by 2025. If successful, that would clearly be a negative for China’s trading partners and would represent a retreat from the regional globalisation strategy that has made China prosperous. It remains to be seen whether China will be successful in this regard.
8. “Trade in Value Added: China,” Organisation of Economic Cooperation and Development, December 2018.
Figure 18: Domestic value added in foreign final demand, China
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Source: TiVA: China, OECD, December 2018.
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Will the pandemic spur deglobalisation?
Assessing our base and risk cases
Base caseUltimately, our base case is a continuation of the above trends of regionalisation, which have been evident since the mid-1990s, albeit at a slightly faster pace. East Asia’s export shares to itself continue to rise, while more of what China produces will be consumed at home. Regional trade agreements become the norm, as countries give up on large, global trade deals and focus on integrating services trade on a regional basis.
In this scenario, countries increasingly prioritise fundamental objectives such as widely shared prosperity and economic security over the abstraction of market integration. They unwind the most intrusive of their existing global trading arrangements. They curb the most volatile financial flows across borders. The unfettered movement of people across borders becomes seen as a utopian aspiration. Instead, countries adapt to a more managed flow of goods, services, people, capital and data based on domestic need. Unchecked corporate power to sue governments, raise mark-ups, and avoid taxation are tackled by growing public dissatisfaction.
This scenario is not ‘deglobalisation’, but a reversal of what Dani Rodrik has called ‘hyperglobalisation’. There is plenty of multilateralism at play—from cooperation on trade and taxes to agreements to monitor border flows and climate change. In fact, this scenario has much in common with the earlier—and arguably more successful—Bretton Woods period of globalisation (1945-1971).
During the period of hyperglobalisation, which took off after the 1990s, “international economic integration came at the expense of domestic disintegration, deepening pre-existing economic, spatial, and cultural divides between the winners and losers. It was also predicated on the unrealistic and unfulfilled expectation that the regulatory approaches of countries with very different economic and social models, such as the US and China, would tend to converge. We will have to settle for a thinner model of globalisation that leaves nations room for rebuilding domestic social contracts.” 9
Our base case, of course, is that we were any way travelling towards this thinner model of globalisation, one that was more focused on intra-regional integration.
9. Rodrik, D., “Have we reached peak globalisation?” Bloomberg, January 24, 2020.
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Will the pandemic spur deglobalisation?
Downside riskWhat is the downside risk to globalisation from COVID-19? It is essentially a repeat of the scenario that killed an earlier age of globalisation, which began in the 1870s and ended in the 1930s. In this scenario, COVID-19 is the spur that turns public opinion decisively against globalisation, driving an increase in tariff and non-tariff barriers that destroys economies of scale and penalises companies across industries for their global reach.
In this future, the impulse is to re-shore spreads beyond healthcare and agriculture towards non-strategic products. Some share of economic output is lost permanently because many business models that were optimised for hyperglobalisation become unviable in a world where many countries are simultaneously attempting partial autarky.
As some countries withdraw their demand from the global economy, even countries oriented towards openness are forced to do so as well to protect the capacity utilisation of their production bases, spurring a permanently lower level of integration. The far-right and far-left take advantage of the crisis to promote a negatively protectionist vision for their societies, permanently displacing established technocratic elites. Barriers to the free flow of capital and people are higher than ever.
This scenario is clearly what makes people fear the impact of COVID-19. However, there is also an upside risk to globalisation from COVID-19, one that is arguably more likely. This comes from the upside impulse to services trade.
The upside risk to globalisation from COVID-19 comes from the upside impulse to services trade.
Will the pandemic spur deglobalisation?
Upside riskBefore we entered this crisis, services trade was already growing faster than that for goods. Between 2008-2018, services exports grew at an average annual rate of 3.9% vs 2.3% for goods.10 Physically delivered services, like tourism, have clearly taken a hit during the period of social distancing given their emphasis on face to face interaction, but new types of services have also received a massive positive shock that will encourage remote, tele-intermediated interpersonal interactions. As Richard Baldwin and Eiichi Tomiura put it, “since these interactions are the heart and soul of many services, COVID-19 may well end up increasing trade in services.”11
There are many examples of this already happening within national borders. Microsoft indicated a +775% increase in its Teams calling and meeting monthly users in Italy after shelter-in-place orders.12 Meanwhile, the pandemic has acted as a catalyst for the accelerated adoption and expansion of telehealth services, which likely translates to more care being delivered virtually in the future, even though such services are likely to be limited to within the national border for the time being.
Meanwhile, it is also clear that some services are even being delivered across borders. MarketAxess’s March activity levels, reported record market share in investment grade and high yield fixed income. This episode is creating a growing acceptance of trading fixed income electronically.
Zoom, which was serving 10 million customers a day at the beginning of the year, most of them in business meetings, now serves 200 million people a day—with many meetings taking place across borders.
It does not require a leap of imagination to predict a strong rise of international services trade, or to imagine the domestic services winners of COVID-19 putting increased pressure on politicians and regulators to standardise international services trade. It is therefore easy to imagine a world in which cross-border services are delivered much more commonly and frequently. This would present an upside case for globalisation.
10. World Trade Statistical Review 2019, World Trade Organisation, p. 10.11. Baldwin, R., and Tomiura, E., “Thinking about the trade impact of COVID-19,” in Baldwin, R., and Weber di Mauro, B., Economics in the Time of COVID-19, Centre for Economic Policy Research, March 2020.12. “Barking Dogs and Screaming Kids: Working from Home’s Winners & Losers,” Jefferies, April 13, 2020.
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Will the pandemic spur deglobalisation?
We have skewered the temptation to draw simple conclusions from COVID-19—the self-reinforcing deglobalisation scenario in particular. Typically, that scenario has been paired with the resulting risk of higher inflation. We have assessed that claim and tried to understand the ways in which globalisation affects inflation.
While there may be some upward bias in inflation over a longer timeframe from COVID-19, when we view this in the context of a disinflationary impulse in the short to medium term and our base case of continuing regionalisation, we think COVID-19 is unlikely to lead to precipitously higher inflation.
Inflation became much lower and more stable throughout the 1990s and 2000s. The most widely supported explanation for this phenomenon was that monetary policy had been much more effective, especially in reducing inflation expectations. This explanation now looks slightly quixotic and self-congratulatory, because even when central banks signalled to markets in the decade after the 2008-09 crisis that they were willing to tolerate higher inflation, inflation remained stubbornly weak. Observers now put more emphasis on the complementary and arguably much more significant factor of globalisation in keeping inflation low through the 1990s and 2000s.
Assessing the inflation risk from COVID-19
15
Will the pandemic spur deglobalisation?
But how exactly does globalisation affect inflation? In a speech in 2017, Mark Carney outlined the three ways in which globalisation affects domestic inflation.13
Resource utilisation — External demand uses up more capacity and therefore pushes domestic utilisation
up. During the 1990s and 2000s this exerted upward pressure on domestic inflation, as exports/GDP rose in importance nearly everywhere.
— If the pandemic leads to less globalisation, then this would push resource utilisation down in many countries. There is evidence this is being considered. As Joerg Wuttke, president of the European Chamber of Commerce in China, puts it, if there is one lesson people are drawing from the pandemic in this regard it is that “single source is out and diversification is in.”14
— Diversification in this respect entails redundancy and lower capacity utilisation.
This would be offset in some cases by the fact that many SMEs will go out of business and not be there for the eventual rebound, tightening capacity among the survivors. Which effect wins out will be an empirical question, but assuming the extraordinary monetary and fiscal stimulus is successful at stabilising the economy, then the ultimate effect of lower resource utilisation is lower inflation.
13. Carney, M., “[De]Globalisation and inflation,” Bank of England, September 18, 2017.14. “The changes COVID-19 is forcing on to business,” Briefing, The Economist, April 11, 2020.
Changes in import prices — Prices of imports affect domestic inflation both directly—through the final goods
and services bought by households—and indirectly, through the prices of imported intermediaries used in the production of final goods and services in the consumption basket.
— During the 1990s and 2000s this imparted a steady disinflationary bias to domestic inflation.
— Changes in import prices occurred directly and indirectly. On the direct effects: the integration of lower-cost producers lowered domestic prices for consumers, especially in goods, which were much more globalised than services.
— On the indirect effects: globalisation led to a dramatic increase in the use of imported intermediaries in domestic production. The information and communications revolution made a great unbundling of production into these global value chains possible. Intermediate goods represented 80% of the increase in total trade over the two decades to 2017.
— If the pandemic led to materially less globalisation, inflation from imported prices will rise. The loss of efficiency through de-scaling activities in more resilient, but less efficient units, should push domestic costs higher. The decline in processing trade as supply chains become more resilient should again increase costs as production does not necessarily take place with the lowest-cost producer.
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Labour markets — The doubling of the effective global labour pool encouraged the shift of the
production of goods and services that use lower-skilled labour intensively to countries with an abundance of lower-skilled workers. It also increased the contestability of labour markets, weakening the extent to which slack in domestic labour markets influence domestic inflationary pressures. As a result, domestic unit labour costs became more closely tied with global labour costs.
— If the pandemic led to less globalisation from a public backlash to outsourcing, and greater productive capacity in advanced economies, the ongoing process of rising global labour competition will be checked. That would reduce the incentive to move production to lower-cost countries and reduce the contestability of labour markets, pushing the price of labour up.
— On the other hand, the information and communications technology revolution cannot be unwound, permanently strengthening the hand of offshore labour, e.g. Zoom and more life-like videoconferencing. That would push the price of labour in high-cost labour economies lower. On balance, the impact of this factor is probably neutral, and in the longer-run, even slightly negative for inflation.
Globalisation’s effect on
domestic inflation via Explanation
Effect on inflation in the 1990s and
2000s
Effect on inflation from a scenario of
less globalisation
Resource utilisation External demand uses up more capacity and therefore pushes domestic utilisation up.
Up Exports/GDP rose nearly everywhere, pushing resource utilisation up in many countries.
Likely DownDiversification and reshoring pushes resource utilisation down. Possibly offset by reduction in capacity from more bankruptcies.
Changes in import prices: direct
The integration of lower-cost producers into the global economy lowers the price of imported goods.
DownCore goods prices fell much faster than services prices (e.g. 0.3% vs 3.4% annually from 1997-2017 in the UK).
UpCore goods prices rise as lower cost producers become less efficient, and as trade barriers rise to protect domestic challengers.
Changes in import prices: indirect
The integration of complex supply chains increased the use of imported intermediaries in domestic production, boosting efficiencies.
DownLed to greater synchronisation of producer price inflation across countries. Doubling share of imported intermediates in GDP causes the importance of global factors for domestic inflation to double too.
UpLikely will lead to much greater fragmentation in inflation patterns across countries. Will re-orient inflation to domestic sources. The move from the most efficient supply chains to resilient ones will reduce complexity but raise costs.
Labour markets Doubling of global supply increased incentive to offshore to lower-cost countries. Also reduced bargaining power.
DownFor instance, in 2009 Blinder estimated that the potential to offshore service sector jobs may have lowered wages by 14%.
NeutralReshoring activity undoubtedly increases the value of domestic labour markets. On the other hand, the ICT revolution cannot be unwound, permanently strengthening the hand of offshore labour, e.g. Zoom and more life-like videoconferencing.
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Will the period that comes after COVID-19 be remembered as the ‘waning of globalisation’? We do not expect that. The hyperglobalisation that characterised the 1990s and 2000s was already receding before the crisis. In its place, regionalisation was growing, a product of a turn away from intrusive global trade agreements, and a natural consequence of East Asia’s growing domestic consumption. That regional form of globalisation is still the future.
The supply chain disruption from COVID-19 is likely to impart an upward bias to inflation over the long haul. However, given that we do not expect a drastic and self-reinforcing process of deglobalisation — instead more regionalisation — and given the disinflationary impulse in the short to medium-term from the economic shock, COVID-19 is unlikely to lead to precipitously higher inflation.
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