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Coronavirus highlights the deglobalisation trend

Donald Trump wants US businesses to bring home supply chain – and therefore jobs. The spread of the coronavirus will help him in this task.

Donald Trump wants US businesses to bring home supply chain – and therefore jobs. The spread of the coronavirus will help him in this task.
Garry white employee

by
Garry White

in Features

11.03.2020

Assessing the short-term impact of the coronavirus on equity markets is extremely challenging, if not impossible. World leaders and central bankers have offered soothing words and financial support, but the progress of the virus and the economic impact of containment measures cannot be calculated with any degree of certainty. This, in part, explains why the recent market selloff was so sharp and severe and central bank action has been significant, with large interest rate cuts.  

But whatever economic damage occurs over the coming months, some of the longer-term implications of the infection are clear. Diverse supply chains provide cheap labour and economies of scale for big business, but the virus has demonstrated that security of production has been sacrificed in order to save costs. Coronavirus will be the final nail in the coffin of globalisation.

Some goods are too important to risk

The actions of Indian authorities last week demonstrated exactly why security of production matters. The country restricted the export of 26 active pharmaceutical ingredients and formulations until further notice, sparking concerns about global shortages of some common drugs.

Export restrictions have been placed on medicines ranging from paracetamol to antivirals such as shingles treatment acyclovir. India is the biggest supplier of generic medicines, accounting for about 20pc of world exports. These restrictions are a direct result of factory shutdowns in China because, even though these drugs aren’t manufactured there, the base ingredients are.

One especially significant issue for the UK relates to food security, as around half of the food we consume comes from abroad. Actions to prevent a global pandemic in a worst-case scenario could lead to a halt in international shipping and cargo flights. Although there is no suggestion that this is a likely outcome for coronavirus, food security is even more important than access to medicines should the most unfavourable scenario occur. As the government strikes trade deals as we exit from the European Union, supporting Britain’s farmers has to be a vital component of our future as an independent nation.

Insourcing replaces outsourcing

Outsourcing has been extremely popular in the boardrooms of big business, but it has created a raft of problems. As market data group Bloomberg notes in its description of globalisation in its glossary: “The international free market has mainly benefited multinational corporations in the western world to the detriment of smaller businesses, cultures and common people.”

According to an assessment by JP Morgan, although no US industrial sector is reliant on China for more than 20pc of its inputs, the main US sector dependent on China is electronics, followed by furniture, machinery then clothing. Supply-chain issues in the provision of chairs, lathes and cheap jumpers are hardly a major crisis, but the exposure of the US electronics sector is a major concern.

Apple and Microsoft, two companies that have been major drivers of the equity bull market, have already warned that they will face a financial hit as a result of the closure of assembly plants in China. Bringing manufacturing back home is a central policy of Donald Trump’s offer to the US electorate, but many companies have responded by shifting operations elsewhere in Asia. These moves have not really shrunk supply chains or achieved what Donald Trump really wanted – bringing jobs back home.

The coronavirus situation is likely to be a more effective way to force executives to rethink their strategy – giving them an incentive to shrink global supply chains because it makes them more secure.

States to get more active

We are also likely to see governments encourage the rise of new “national champions” in areas of national importance. Many businesses around the world rely on cutting-edge technology from companies such as Huawei, after China surpassed US prowess in important areas such as 5G infrastructure. This advance has been driven by state investment and encouragement of Beijing’s Made in China 2025 policy and this progress has become a major defence and security issue for Western governments. When the fallout from coronavirus is added into this mix, the tailwinds supporting deglobalisation are mounting by the day.

Globalisation is not only coming under fire from Washington hawks, it’s got Europe worried too. French finance minister Bruno Le Maire recently admitted that his country’s manufacturers were overly dependent on suppliers from China and Asia. “This epidemic shows that supply problems create strategic problems in certain industries,” Mr Le Maire said. He mentioned the pharmaceutical and auto industry as areas where this issue was particularly acute.

Another issue that will help to drive deglobalisation by making distant supply chains more costly is new regulation to reduce carbon emissions. Shipping is regarded as one of the world’s most polluting activities and, after targeting road transport, power and aviation, seaborne transport is now firmly in the sights of climate activists and regulators.

A sulphur cap on bunker fuel was introduced in January and S&P Global Platts analysts have calculated that the new rules on sulphur could cost the global economy £1 trillion over five years. Much of this cost is likely to be passed on to the companies via rising shipping costs and other measures are likely. The European Union has proposed a new regulation that would force any ship using a port in the bloc to increase their “carbon intensity performance” and contribute to a European maritime decarbonisation fund. Shipping costs are likely to rise.

Moving supply chains to make them more secure will not happen quickly or easily. There will be costs involved and a temporary hit to profit margins. But supply chains are only as strong as their weakest link – and the longer the supply chain, the bigger the risk. Coronavirus will accelerate deglobalisation. 

A version of this article appeared in Friday’s Daily Telegraph.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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