A move away from globalisation

Suspicion and strained supply chains were already testing the global system before Covid-19 heightened isolationist impulses

When Xi Jinping promised the world’s movers and shakers in January 2017 that China would champion globalisation, it looked as if the baton of global economic leadership was being picked up seamlessly by Beijing as Donald Trump prepared to usher in an era of American isolationism.

Almost five years later a new world order has emerged, but it is not the one those gathered in Davos that day seemed to have in mind. Instead of a continuation of the post-cold war era of growth underpinned by free trade, the world faces a fractured economic system where the post-pandemic supply shock and mistrust bred by the virus pushes countries towards an autarkist impulse for self-sufficiency.

Autarky is a Greek word meaning “self-reliance” and was popularised as shorthand for economic nationalism in the 19th century. It gained some credence as an economic model when the young Soviet Union in effect shut itself off from world trade, and the nationalist impulse towards self-sufficiency appealed to Hitler. It also flourished in the postwar world, especially in Africa, though the creed of globalisation has left few examples outside North Korea.

There were already some signs of nationalist-driven challenges to the prevailing system exemplified by Brexit, the rise of Trump, and a growing suspicion that China was not prepared to play by the rules set by the US and its proxies.

The Covid-19 pandemic has accelerated these trends, experts believe.

Evgeny Postnikov, a senior lecturer in international relations at the University of Melbourne, said the pressures of the pandemic have delivered a stark realisation about how much countries rely on imports and products enmeshed in the global supply chain.

From the initial scramble to protect production of face masks in France, to the control of vaccine technology, the pandemic has thrown up countless examples of how quickly the existing world order began to buckle under the domino effect of nationalistic urges.

“Governments can’t be relying on strategic competitors to supply crucial goods and services,” Postnikov said. “Trade and security were seen differently but now both are treated as high politics. That is why autarkist push is not going away. If anything it will get stronger, and that is quite worrying.”

The power cuts across northern China in recent weeks have led Beijing to accelerate its drive to become more self-sufficient. After signs that China would wean itself off fossil fuels by shutting hundreds of coal-fired power stations, the hint last week from Beijing of a rethink on slashing emissions is a crushing blow to global cooperation on the climate crisis.

Under the “Made in China” policy launched in 2018, China is already trying to develop more capacity in semiconductors, the lifeblood of consumer goods ranging from Teslas to toasters, and PlayStations to printers, as well as

other strategic products. The country’s belt and road initiative is binding dozens of nations in Asia, Africa and Europe into Beijing’s economic orbit.

India, which was slow to begin dumping its corporatist economic model in favour of a more globalfacing one, has also given a name for its plan to head back in the opposite direction: Atmanirbhar Bharat. This translates as “self-reliant India” and is designed, in the words of the foreign minister, Subrahmanyam Jaishankar, to extricate the country from “global commitments not to our advantage”.

Hence India’s withdrawal last year from the pan-Asian Regional Comprehensive Economic Cooperation pact (Rcep) over concerns that its huge agricultural sector would be sacrificed on the altar of free trade.

In Britain the loss of cheap migrant labour means employers are looking again at their business models. Last week Britain’s “chicken king”, the head of the country’s largest poultry producer, called for a rethink of how food is produced. “Three months ago I was vocal about the government needing to help with labour issues,” said Ranjit Singh Boparan, the owner of 2 Sisters Food Group, which processes 10m chickens a week. “I’ve now come to the conclusion that in reality it can’t fix all the problems.”

He no longer believes the solution is more visas for foreign workers: instead, the price of food will have to rise in line with the cost of producing it. “I need to invest, increase automation and make our factories more welcoming for new recruits,” he said.

The supply shock has “thrown sand in the gears of the world economy”,

iPhone

Apple may slash the number of iPhone 13s it will make this year by up to 10m because of a shortage of computer chips amid a worldwide supply chain crunch that led the White House to warn that “there will be things that people can’t get” at Christmas.

Apple was previously expected to produce 90m units of the new iPhone models this year.

Ikea

The world’s largest furniture retailer said stock shortages would continue for as long as another year.

Jon Abrahamsson Ring, the chief executive of Inter Ikea, told the Financial Times that the company had hired its own trains to transport materials from Asia to Europe to try to circumvent shipping bottlenecks.

“This is here for a longer period than we thought of at the beginning of the crisis,” said Ring.

QinetiQ

The FTSE 250 defence technology company said “technical and supply chain issues on a large complex programme” could cost $20m, equivalent to a tenth of its profits before tax in its 2021 financial year.

QinetiQ, which was privatised in 2003, is a key supplier to the UK’s Ministry of Defence, providing services ranging from maintaining Typhoon fighter jets to engineering navy warships and army vehicles. Shares fell by 13% after the company said it could result in a one-off writedown in its profit guidance.

Shipping

Dozens of behemoth cargo ships adorned with tall stacks of brightly coloured containers still dot the coastline off southern California. Environmentalists and public health advocates are concerned as container ships awaiting entry are compounding the levels of contaminants that have long come from the ports and that impact the local environment.

The ports bring in 40% of goods shipped to the US and ship out 30% of its exports, according to state records. The freight system also generates $9bn in tax revenues for California and is responsible for a full third of the state’s economy.

But it comes at a high cost. The system is also responsible for nearly half of California’s air pollution. For more than a year now, the ports have been packed, leaving between 40 and 60 ships at anchor awaiting entry. In September, the number got into the 70s. according to George Magnus, an independent economist and associate at the China Centre, at Oxford University. “It is hard to disentangle structural issues around the supply chain with the process of globalisation. Everything is more complicated and more expensive. It looks like a symptom of a decomposing global economy.”

He said the world economy should begin to realign by next year but that the current crisis could have a “corrosive impact in the medium term” as companies seek to diversify from sole-source supply and secure strategically important products such as semiconductors, batteries and energy.

More than 80% of industries have experienced supply chain disruptions because of the pandemic, according to the consultancy Deloitte, and about 75% of companies have brought forward plans to repatriate manufacturing from overseas by building smart factories closer to home.

A study by the Reshoring Initiative, in the US, has forecast that the country will add 224,213 jobs from abroad in 2021, an increase of 38% on 2020.

There are similar moves in the UK, where a report predicts factories could make almost $6.8bn more goods in 2021 as the pandemic and Brexit could encourage home production.

The rising cost of labour in countries such as China have added pressure on corporations for a rethink of the way their products are made. For example, labour costs are now cheaper in Mexico than in China. Another problem is that the controversy over the origins of coronavirus has poisoned relations already struggling with battles over tariffs, Hong Kong and alleged Chinese infiltration of foreign communications networks through Huawei.

“The virus has bred mistrust,” said Magnus, “and the division sown by this has been a shock for China.”

Britain’s withdrawal from the EU was a shock to the world’s trading system, and when Trump took power days after that Xi speech at Davos, one of his first acts was to pull out of the Trans-Pacific Partnership trade deal.

“We’re not going to end up with lots of North Koreas – the autarkist state par excellence,” said Postnikov. “But what we will see I think is a world of smaller regional blocs where there are shorter supply chains. The TPP, Rcep, Brexit – it’s all unilateralist, whereas before these problems were viewed through a multilateral lens.”