Will Covid-19 Have a Lasting Impact on Globalization?

Will Covid-19 Have a Lasting Impact on Globalization?

by Steven A. Altman - May 20, 2020

As leaders wrestle to guide their organizations through the Covid-19 pandemic, decisions running the gamut from where to sell to how to manage supply chains hinge on expectations about the future of globalization. The pandemic has prompted a new wave of globalization obituaries, but the latest data and forecasts imply that leaders should plan for - and shape - a world where both globalization and anti-globalization pressures remain enduring features of the business environment.

The crisis and the necessary public health response are causing the largest and fastest decline in international flows in modern history. Current forecasts, while inevitably rough at this stage, call for a 13-32% decline in merchandise trade, a 30-40% reduction in foreign direct investment, and a 44-80% drop in international airline passengers in 2020[i]. These numbers imply a major rollback of globalization’s recent gains, but they do not signal a fundamental collapse of international market integration.

The volume of global goods exports in 2020 could fall to a level last seen in the mid-to-late 2000s, according to the latest WTO forecast. That would be a tremendously painful drop, especially in the context of today’s larger and more complex world economy. But even the most pessimistic trade forecasts do not imply a retreat to a world of disconnected national markets. Most of the run-up in trade integration since the end of World War II should remain intact.

If plummeting trade flows are unlikely to undo globalization, what about the even steeper decline predicted in foreign direct investment (FDI)? Like other capital flows, FDI tends to be volatile, so a double-digit decline is not as shocking as one might presume. FDI flows, for example, fell 38% during the global financial crisis. Nor do shrinking FDI flows necessarily augur a real retreat from corporate globalization. The foreign business activity of multinational firms does not always closely track FDI trends.

The collapse of international travel, in contrast, stands out against a much steadier growth trend, and its damage is indisputable. Tourism contributes more to global output than automotive manufacturing, and business travel facilitates international trade and investment. As of late April 2020, every country had imposed restrictions on international travel, and 45% of countries had partially or completely closed their borders to foreign visitors. Airlines were flying 90% fewer seats on international flights, as compared to 62% on domestic flights. This unprecedented collapse does, however, follow an international travel boom. Even if international airline passengers fall by two-thirds, there would still be more people flying abroad than there were in 2003.

What Are Globalization’s Post-Coronavirus Prospects?

Current forecasts call for international flows to start growing again as the pandemic comes under control. Thus, 2020 is likely to be a low point for many globalization metrics. But how deep will the plunge really be? How fast can we expect global flows to rebound? And how might future flow patterns look different from the past? None of these questions can be answered definitively yet, but leaders can find clues about the future and actionable implications for their companies by focusing on five key drivers of globalization’s trajectory:

1. Start with global growth patterns, where the key lesson is that international flows tend to swing dramatically with macroeconomic cycles. In good times, they usually grow faster than GDP, and in bad times they shrink faster, too, as people and firms hunker down behind borders.

This time around, robust growth can only be restored once the pandemic is clearly brought under control. But remember that globalization can also be a powerful contributor to growth and health. Countries with higher scores on the DHL Global Connectedness Index tend to enjoy faster economic growth. And there is some evidence that more connected countries, even after controlling statistically for levels of economic development, are less vulnerable to infectious disease outbreaks, in part because of their stronger health care systems.

This means global business leaders can go beyond just watching disease trends and economic data - they can help tilt the balance from negative to positive feedback loops by contributing to health, growth, and international cooperation. Companies across industries have already swung into action to manufacture urgently needed medical supplies. Large corporations can also soften the pandemic’s economic impact, for example, by following Unilever’s lead in paying suppliers faster and extending support to employees, contractors, and customers. And they can support open markets, as 3M did when it resisted a proposed block on its mask exports from the U.S. to Canada and Latin America.

2. Supply chain policies have come back to the top of the agenda, and shifting approaches have the potential to reshape trade and FDI flows. The key globalization-related debate here is redundancy versus reshoring. Will companies and countries seek greater safety in international diversification, or will they try fostering domestic self-sufficiency? Economic logic almost always favors the former approach, coupled with national stockpiles for true essentials, but politics will sometimes force the latter.

Research by NYU Stern Professor Pankaj Ghemawat highlights several characteristics of politically sensitive industries, such as production of necessities for health or national security, sales to government rather than private buyers, and the size of an industry’s domestic workforce.

If redundancy becomes the norm and reshoring the exception, expect just a modest long-run drag on global trade growth, coupled with greater diversification of countries’ trade partners.

3. Superpower frictions and fragility had already destabilized the international business environment before Covid-19, and the pandemic adds new layers of complexity. It has led to a vast expansion of state power, while introducing pandemic control as yet another arena for ideological competition. In this environment, where companies come from and how well their home country governments get along will matter even more than before to decisions about where to raise capital, which markets to prioritize, and which supply bases to cultivate.

Many have predicted that Covid-19 will hasten a fracturing of the global economy along regional lines, with competing blocs centered on China, the United States, and perhaps Europe. But the fact that Europe, the world’s most connected region, has struggled to mount a unified response to the pandemic is just one reason that a resurgence of regions should not be a foregone conclusion. Most international flows already take place within regions, and short-distance trade has not grown faster than long-distance trade over the past few years. Be ready for the possibility of a more regionalized world, but don’t count on it.

4. Ongoing technological shifts such as the adoption of e-commerce, videoconferencing, and robots have all been supercharged by Covid-19. Before the pandemic, many focused on how new technologies could reduce global flows, e.g. via manufacturers substituting robots at home for low-cost labor abroad. But many pandemic-induced shifts could also strengthen globalization if they are not curbed by protectionist policies. Cross-border e-commerce expands export opportunities, especially for smaller companies. Forced experimentation with remote work, where successful, could spur more services offshoring. And even 3D-printing sometimes leads to more rather than less trade.

Business leaders can think productively about Covid-19, technology, and globalization, by taking a structured approach to considering both internal and external implications. Internally, think how individual functions can harness opportunities afforded by new technologies, while managing organizational change with sensitivity to the heightened stress employees and teams are facing. Externally, think about how technological trends could potentially change a company’s standing vis-à-vis its competitors, customers, suppliers, and so on. For most companies, technological trends should lead to more globalization in some areas and less in others, rather than a uniform shift in one direction or the other.

5. Public opinion about globalization may take another negative turn due to Covid-19, scaling back the surprisingly strong support for trade and immigration reported in recent polling. More international travel does accelerate the spread of infectious diseases, and economic stress could boost calls for trade protectionism. While robust public health strategies do not require ongoing barriers to globalization, nationalist politicians will point to the pandemic and failures of international coordination in the response to fortify opposition to globalization.

Customers and employees increasingly expect corporate leaders to take a stand on social issues, making public opinion about globalization a potential management issue. The blending of anti-globalization and anti-capitalist movements further complicates the role of business in the public debate about globalization. And leaders of multinational corporations face the special challenge of public and government engagement across national divides. Focusing on facts, becoming more sensitive to inequality, and emphasizing real economic contributions can help to support a healthier globalization debate.

In conclusion, Covid-19 looks like a “bend but won’t break crisis” for globalization. International flows are plummeting, but globalization - and opposition to globalization - will continue to present business opportunities and challenges. Careful attention to the drivers of globalization’s future can help companies navigate through and even profit from globalization’s turbulence. A volatile world of partially connected national economies expands possibilities for global strategy even as it complicates the management of multinational firms. Now is the time for global corporations to show their value by harnessing the best of the world’s capabilities to end the pandemic and bolster the recovery.

Steven A. Altman is a senior research scholar at the NYU Stern School of Business, executive director of NYU Stern’s Center for the Globalization of Education & Management, and an adjunct assistant professor in NYU Stern’s Department of Management and Organizations.