Business leaders across the globe continue to guide their organizations through the financial rollercoaster brought on by the COVID-19 pandemic. Due to worldwide government shutdowns, a pause in international business and global supply chains struck a hard blow to globalization.
Foreign direct investment is projected to decline between 30-40% in 2020 through 2021. This expected decrease almost guarantees a global recession rivaling the Great Depression, despite government efforts to mitigate economic decline with fiscal support policies.
Financial analysts and economists hypothesize on the fate of the global economy in a post-pandemic world.
Did COVID-19 Kill Globalization?
Economists have long predicted the crash of globalization. From the global financial crisis of 2008 to the Sino-American war, and most recently the economic shutdowns due to the COVID-19 pandemic, analysts forecast a grim outlook for the state of global economy and trade. Experts worry that the pandemic’s impact will scare away countries from international free trade and begin the process of domestic reshoring. So, this begs the question: Is globalization dead?
1. COVID-19’s Impact on the Global Economy
The ongoing pandemic and subsequent public health response fractured the global economy, disrupted international supply chains, and forced many small companies out of business.
In fact, the International Monetary Fund (IMF) projects that global growth in 2020 will decrease to -3%, a stark contrast from the original projection of 3.3% growth. This economic contraction is most severe in North America and the Euro Area, though present across the world. Throughout the following countries, the IMF projects steep economic declines:
- -5.9% decrease for the U.S.
- -6.2% decrease for Canada
- -7.0% decrease for Germany
- -6.5% decrease for the UK
- -8.0% decrease for Spain
- -9.1% decrease for Italy
- -7.2% decrease for France
2. Look to Global Growth Patterns
While this decline is steep, it mirrors a financial pattern we’ve seen before. Historically, macroeconomic cycles sway international capital flows—the financial side of international trade. When the cycle is good, these capital flows typically grow faster than GDP (Gross Domestic Product). However, when the cycle takes a downswing, the flow shrinks more quickly, meaning that companies with international business tend to retreat to their own border.
Economists agree that this trend suggests an economic rebound is on the horizon. However, international capital flow and global trade likely will not restore until the pandemic is under control.
3. A Move to Diversify Supply Chains
It’s no secret that the ongoing Sino-American trade war and the COVID-19 pandemic have upset global supply chains, a significant factor in the worldwide recession. This disruption spurred talks of reshoring and nationalizing supply for U.S. goods and services.
However, many companies are taking an alternative approach to reshoring. Instead of consolidating the production of goods and services to a single country, businesses are looking to broaden their supply chains to multiple countries in an effort to create shock-proof access to their products should future destabilization occur.
So, while U.S.-based corporations may move away from their reliance on Chinese production and supply, a global approach to product fulfillment continues to be a favorable option for many companies.
Industry Thrives on International Collaboration
Since the boom of globalization between 1980 and 2010, industries have benefitted from international free trade, access to new markets and labor, and a more extensive customer base. While the current global health crisis resulted in the largest and fastest decline in international capital flow in recent history, there is no sign that companies are willing to forego the benefits of globalization in the long term.
1. Governments Are Reprioritizing National Interests…For Now
Globally, there is a shift in national prioritization. Countries are focusing on their healthcare systems, tightening borders, establishing access and availability of medical resources, and maintaining their citizens’ health. This reprioritization has caused governments to temporarily step back from their alliances or interest in foreign nations.
Yet no single country has made moves to reverse investment, strategies, or presence in overseas markets. The scale benefits of globalization provide insights as to why no nation is eager to leave international markets.
2. A Case Study in Global Trade
Between 1980 and 2010, global trade increased 35 times compared to the previous period, meaning that corporate sectors increased their foreign sales by the same amount.
If we look granularly at just one example, Sweden was able to increase its international sales from 200 billion SEK in 1980 to over 1500 billion SEK in 2010, all due to foreign trade investment. Essentially, Sweden benefitted from economies of scale. The size of a market determines the customer base a company can sell to, the cost of goods and services, and how much it can spend on research and development.
If a company has a brilliant idea for a new product, but the R&D costs outweigh how much the product is sold for in a smaller market, it is financially disadvantageous for the company to produce the product. The scale benefits of globalization allow firms to develop innovative products and services and export to markets outside of their home country.
3. Cross-Border Collaboration Furthers Progress
Outside of the corporate sector, science and medicine benefit from cross-border cooperation and sharing of ideas. Collaboration in research pushes forward problem-solving and innovation.
The Human Genome Project (HGP), for example, was an international research project that sequenced and mapped all of the genes included in our species. Over the course of 13 years, HGP developed the ability to “read nature’s complete genetic blueprint for building a human.” Without international collaboration, this scientific feat would not have been possible.
Additionally, advancements in emergency equipment, worldwide drug trials, and even adoption of alternative medicines, such as Ayurveda or Chinese medicine, have all benefitted from global collaboration.
Globalization Will Persist
Countries have bartered and traded goods and services throughout history, and that need still remains despite the COVID-19 pandemic. Access to natural resources, labor, skill sets, and talent cannot all reside within one border, thus requiring global collaboration and free trade.
International connections formed from decades of globalization cannot break from the novel coronavirus. More than ever before, families live in different countries; businesses have markets scattered throughout the globe. The ever-present urge to travel will remain and push forward the desire to visit new places and experience different cultures. All-in-all, the COVID-19 pandemic struck a powerful but non-fatal blow to the future of globalization.
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Come out ahead of your competition in the post-pandemic business landscape, and talk to one of our experts today about how International PEO can help.