The Business Times

The death of globalisation?

In the wake of the Covid crisis, the tide is slowly turning away from outward-looking policies. Is this the end of globalisation as we know it and what will it mean for open economies like Singapore?

Published Fri, Oct 2, 2020 · 09:50 PM

THE scenes are familiar around the world, and eerily reminiscent of the dark days of the Great Depression - long lines of workers given their marching orders, chain-bolted gates with "Closed for Business" signs hung permanently in shopping malls and factory sites, queues for free food and vouchers. What is less obvious, and more insidious, is the undercurrent of thought gaining influence in the wake of the Covid-19 crisis, a wave rolling towards big changes in the global economy and trouble for open economies like Singapore.

In this line of thought, the pandemic has laid bare the flaws of a highly globalised economic system underpinned by the theory of comparative advantage. A system which, in its previous life brought prosperity to nations, also left them helpless in a global health crunch. They argue that there is now a need to redress the balance by cutting back on the international division of labour. This awakening has already caught the attention of politicians and is creeping into policy-making in governments and boardrooms across the United States and Europe.

Yet, the seeds of the anti-globalisation movement were not planted by the Covid-19 virus. Economies closed in on themselves in the 1930s after the Great Depression led to a wave of protectionist trade policy.

Fast forward to 1999, when protesters marched into Seattle where the World Trade Organisation (WTO) met to kick off a new round of trade talks. The anti-globalists then were largely leftists, idealists and environmentalists, venting anti-capitalist rhetoric against a world they saw controlled by big businesses putting profits before people.

Today, they are joined not just by business groups but also politicians in the West, as well as ordinary citizens who are fed up after watching the rich grow richer and the poor poorer in recent years.

The pandemic underscores the longstanding worry of governments and corporates seeking to safeguard the global supply chain from disruption.

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When the Chinese city of Wuhan was locked down, the car industry in Europe also came to a standstill, because its supply of key components was cut off. Wuhan, the epicentre of the Covid-19 pandemic, is a major motor-car parts manufacturing hub. Other Chinese cities are critical sources of parts for consumer goods like iPhones. They are also big suppliers of active pharmaceutical ingredients for global drug production.

Fragility of supply chains

For many European political leaders, Europe's "fumbling inability" to make face masks or the basic chemicals required for pharmaceuticals was the most disconcerting shock of the crisis, according to a report in US-based Politico magazine recently.

"Nurses in wealthy countries like Italy, Spain and even the US donning trash bags for lack of gowns showed the fragility of international supply chains," its Brussel-based trade reporter Jakob Henke Vela writes.

The European Union's (EU) Internal Market Commissioner Thierry Breton says Europe may have gone "too far in globalisation" and become too dependent on "one country, one continent". Many European politicians are calling for manufacturing to return to the EU.

In what may be the strongest sign of the shift in European thinking, German Chancellor Angela Merkel says the pandemic reveals the need for a "certain sovereignty here", secured through a "pillar of domestic production". The traditionally liberal leader joined her French counterpart Emmanuel Macron in pushing for a set of Europe-based "strategic capabilities" which, observers say, is likely to end up in a re-shoring of certain European key industries.

The rise of China has left Western politicians leery that excessive reliance on factories in Asia would sabotage their national interests. Thus, to protect the US production of critical technology, the Trump administration is urging US semiconductor manufacturers like Intel to bring home the new crop of cutting-edge factories.

Even in Asia, where global trade is the livelihood of many states, the tide is slowly turning away from outward-looking policies. Japan's "stimulus" package, which provides a soft landing for Covid-hit Japanese businesses, contains subsidies to repatriate overseas factories.

In cosmopolitan Singapore, public opinion is leaning on the government and employers to put Singaporeans first in its hiring policy and to raise the entry barrier for foreign workers.

Homegrown manufacturers in Singapore are pushing harder for local manufacturing of "strategic and critical" food and biomedical products and to boost domestic manufacturing output.

Says Inderjit Singh, an ex-politician and manufacturing veteran: "We learnt from this crisis that we can't be too dependent on others for basic needs. If we have local enterprises as the main drivers, we'll be able to pivot and convert some of the manufacturing lines to support emergency products needed in an emergency."

Meanwhile, Singapore has kickstarted local food production to ease dependence on imports. Rooftops of multi-storey car parks are being converted into vegetable plots. The goal is to produce 30 per cent of Singapore's nutritional needs locally by 2030.

"With Covid-19 upon us for some time, food-supply disruptions are a real risk," then Environment and Water Resources Minister Masagos Zulkifli said in March, adding that the government has launched an "express grant" support to help local farms speed up the production of fish, leafy vegetables and eggs.

Resilience vs efficiency

At heart is the issue of resilience versus efficiency. The pandemic has exposed the weakness of the relentless pursuit for efficiency by building plants and supply chains in low-cost locations overseas, especially in Asia. It has alerted businesses to the need also for resilience. Executives now talk more of just-in-case (rather than only just-in-time) production, of building inventories, diversification and shorter supply chains.

Experts say efficiency comes at the price of resilience, leaving us vulnerable to systemic shocks. More efficiency means less resilience and vice versa. The question is where to draw the line between the two.

The status quo is unacceptable. "A new balance" has to be struck between resilience and efficiency, says Singapore's Minister for Trade and Industry (MTI) Chan Chun Sing. In looking to draw up a list of strategic industries for re-shoring, Europe is trying to do just that. But it's a tough call.

"This could be for a lot of sectors," Natixis bank's chief economist Alicia Garcia Herrero is quoted as saying in the Politico report. "If the next crisis was a collapse of the electricity system, you would need to re-shore production of turbines."

Push that argument further and it could mean the end of globalisation, she adds. "It would be autarky."

Self-sufficiency hard-liners in the West want to roll back globalisation altogether. Armed with new technologies like 3D printers, they see a prime opportunity to rein in supply chains for machinery that stretch out to East Asia.

Philippe Legrain, an economist at the London School of Economics who was an adviser to the president of the European Commission, is wondering if Covid-19 is "the nail in the coffin for the current era of globalisation".

Writing recently in Foreign Policy, a US news publication that focuses on global affairs, he says the pandemic "is likely to have a lasting impact, especially when it reinforces trends that are already undermining globalisation". It might deal a blow to fragmented global supply chains, reduce the hyper mobility of international business travellers and provide political fodder for nationalists who want greater protectionism and immigration controls.

The Economist has written off "the greatest era of globalisation". Having taken three body blows in a dozen years - the 2008 financial crisis, the US-China trade war and Covid-19 - the influential weekly says the open system of trade is so wounded that the powerful arguments in its favour are now ignored.

Nevertheless, most experts and officials cling to the belief that globalisation will survive, perhaps in a lesser form, in the aftermath of Covid-19. Only last month, the G-20 rich countries pledged to "cooperate and coordinate responses" to support the recovery of global trade and investment. In May, WTO members reaffirmed that multilateral cooperation is "more important than ever".

What it means for Singapore

Of course, the cost of deglobalisation has surged with greater integration of the world economy today, argues the Financial Times' chief economics writer Martin Wolf. Yet at the same time, it also requires "a far higher level of global cooperation to manage our global commons".

Singapore is already working overtime at it, tirelessly pushing to connect the world digitally to keep trade and business flowing. It also continues to invest in airports and ports as well as human capital to stay open as a global hub for business, finance, talent, trade and data flows.

"At a time when some countries are closing their doors, we are keeping ours open," Singapore's Prime Minister Lee Hsien Loong says.

Painting a picture of hard times in the near distance, he speaks of industries that depend on travel - aviation, hotels and tourism - struggling to get back on their feet, yet may never fully recover. It's everyone for himself as countries strive to cut back dependence on others, especially for essential goods and services.

"(They) will have less stake in each other's well being," he adds. "They will fight more over how the pie is shared rather than work together to enlarge the pie for all."

It will be, as Mr Lee points out, a less-prosperous world and also a more troubled one with China and the US jousting more for control. "It will become harder for countries to stay onside with both powers," he notes.

Industries hit hard by Covid-19 and permanently changed would have to reinvent themselves to survive, he says. Workers would have to learn new skills to stay employed.

But Mr Lee is hopeful that Singapore's economic strengths, international reputation built over decades and its strong links to the global flow of trade, capital and people would help it conquer the challenges and rise stronger from the crisis. "We just have to work harder and smarter at it," he points out.

Indicating that Singapore has the advantage of a headstart, Deputy Prime Minister Heng Swee Keat says it has been pushing for industry transformation since 2016, long before the virus struck. "The investments over recent years in skills development and retraining appear all the more relevant today."

In hindsight, Singapore was prescient in stepping up investments in research and development and biosciences, "the returns of which were, for a long time, uncertain", according to him. Now, he says, they're showing up in medical technology, biologics and vaccine development which are among the growth areas.

Still, don't expect a return to the pre-Covid world. Start building a "new economy" instead - and now, according to Mr Chan. A new economy that is open but more mindful of safety and sustainability, one that makes the best of Singapore's strengths to stay ahead in competing in a world that's grown sceptical of free trade, where there is greater focus on resilience than efficiency.

Rising tensions among major powers will keep states on edge in the new normal, while businesses pay more attention to diversification.

Production and supply chains would assume new shapes to take full advantage of digital technology.

"We must chart a new direction for a very different and uncertain future," Mr Chan says. "I don't have all the answers but ground realities are fast evolving, often without precedence. Staying still is not an option."

David Leong, who runs Straits Trades Incorporated, a company which focuses on the property, education and technology sectors, thinks Singapore must reinvent its economy "to remain relevant to both superpowers", adding: "We need to build an economy that can serve not just as a springboard, but also a shock absorber to them."

Economists Selena Ling and Irvin Seah don't see the need to tinker with the economic system as it is. But Ms Ling, who is OCBC's head of Treasury Research and Strategy, says Singapore would need to "adapt and evolve as the world changes and navigate the tectonic shifts" in a "bi-polar global economy" after Covid-19. The irony is this may entail "more proactive specialisation and more targeted policy intervention".

Mr Seah, a senior economist at DBS, says Singapore has just the tool it can reach for in its survival kit to pull through and stay relevant and competitive in the more dicey world to come. "We must continue to maintain our economic agility and invest in new technological areas."

Singapore has got it right in pushing for economic restructuring and building capabilities, he notes. These would provide the resilience to face the challenges on the horizon. "We just have to speed up our efforts," he adds.

In particular, the push to go digital. The goal is to get ready for the day when online shopping, working from home, telecommuting and Zoom meetings become the new normal. Covid-19 has brought that day nearer.

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