COVID-19 | The threat of a China-led model of globalisation

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Biswajit Dhar

The time for speculation seems to be over. It is now official that the COVID-19 pandemic would have devastating impact on world trade volumes in 2020. According to estimates presented by the World Trade Organization (WTO), global trade volumes could decline between 13 percent and 32 percent.

There are a number of facets of this estimate that need careful consideration. The first is that COVID-19 has brought in such levels of uncertainties that its impact can best be explained through a very wide range.

The second aspect of this deep dive in trade volumes is to understand the implications for global growth, as well as those for individual countries. One reference point for doing so is to consider the aftereffects of the economic recession of the previous decade. In 2009, global trade volumes fell by over 12.6 percent, while global GDP fell by 2 percent. Thus, trade volumes declined in excess of six times than did global GDP growth.

Trends in GDP growth and trade volumes since the early 1970s show that in normal years, trade had increased, on an average, by a factor of three over GDP growth, but uncertain GDP growth triggered a steep fall in trade volumes. The WTO estimates of a precipitous fall in trade, therefore, portends a sharp fall in global GDP.

A third aspect of the numbers provided by the WTO relates to the worst-case scenario, namely, decline in trade volumes by 32 percent. When compared with the corresponding figures from period of the Great Depression, this number is truly alarming. While in the three depression years of 1929-32, trade volumes fell by 30 percent, the WTO is predicting a 32 percent decline in less than a year. COVID-19 could, therefore, result in one of the worst economic crises ever.

It is perhaps not surprising that the global trade would decline dramatically. Over the past two decades, global production has been woven into the regional and global value chains, which means that even a slight blip in the ‘just-in-time’ business model can potentially create significant disturbances to the supply side. The supply-side has been extensively disrupted as more than 93 percent of world’s population faces partial to complete closure of international borders.

Simultaneously, the demand-side has been severely impacted by almost complete lockdown. Estimates show that more than 3.9 billion people, or half of the world's population, are facing government-enforced lockdown. This implies that a vast majority of economic activities in these countries have been affected.

Given such large-scale economic disruption, most countries can expect at best a ‘U-shaped’ recovery. The contours of this recovery have been spelt out in the stimulus packages that several western economies have announced over the past fortnight.

The packages have one factor in common, and this, not unsurprisingly, is the revival of their domestic enterprises, especially the small and medium enterprises. These economies seem to be emphasising on strengthening local production facilities, which, no doubt, is one important ways of putting back the jobs that have been lost to the pandemic.

With economic recovery seemingly dependent on providing impetus to domestic economic activities, what could be the likely impact on trade post the pandemic? We will argue that global trade stands at a crossroads for at least two reasons. First, the current model of hyper-globalisation could well have its sceptics among policy makers in many countries, especially in the developing world. As mentioned above, the disruptions in the realm of trade is likely to impact their GDP, because of their substantial exposure to trade.

Alongside, most emerging economies have also experienced sharp outflows of portfolio flows in Q1 of 2020, which has been estimated to be largest ever, even exceeding the worst points of the economic recession of 2008.

The second source of rethink about globalisation could be threat from a rising China. In recent days, reports have suggested that China’s manufacturing sector is getting back in business. If this is indeed a reality, it will be the third instance in the past two decades when China would have turned an adverse economic situation to its advantage. The first was in the post-9/11 phase when China emerged as an economic powerhouse, and the second was the financial crisis of 2008, when, again, the dragon was able to consolidate its economic position.

If history repeats itself, China would be in a position to dominate the global economy through trade and would surely emerge as the undisputed leader of globalisation. This possibility could make many countries to think about their commitment to a China-led model of globalisation.

Biswajit Dhar is Professor at Centre for Economic Studies and Planning, School of Social Sciences, Jawaharlal Nehru University. Views are personal.

This is the fifth article in a multi-part series, World After COVID-19, which looks at the probable developments in various sectors: macro economy, trade, healthcare, agriculture, judiciary, international politics and sports.