Globalization Confronts a Doomsday Virus Prediction

(Bloomberg) --

For the prognosticators on the U.S. National Intelligence Council who sat down in 2004 to consider what the world might look like in 2020, the answer hinged heavily on one big question: What did the future of globalization look like?

Their answer: Not great.

By 2020, they predicted, globalization would face a political backlash in a world increasingly plagued by identity politics. Yet if anything was going to really derail economic integration, it would likely be the mass spread of a virulent new disease.

“Short of a major global conflict, which we regard as improbable, another large-scale development that we believe could stop globalization would be a pandemic,” the council warned in a report laying out the findings of its “Project 2020.” A death toll in the millions and a virus that “put a halt to global travel and trade during an extended period” would certainly leave globalization “endangered.”

Just a bit over two months into 2020 and it’s not hard to make the case for why that rings true.

There is an alternative view that holds globalization may actually be a lot more resilient today than it seemed in 2004, in the halcyon days before smartphones had taken over our lives.

But what would it take in the months ahead to get to Doomsday for globalization? It all hinges on the reaction from policy makers to the coronavirus crisis. So here are three things to watch for. If these happen, we should be ready for the shape-shifting in globalization we’ve seen in recent years to morph into a deep freeze.

1. New barriers to exports. White House trade hawk Peter Navarro, in a recent Financial Times interview, criticized  the export controls some countries have placed on medicines and medical supplies like face masks. His motivation may be pure. But Navarro tends to like anything that makes his argument for a shift away from globalization. So what if he used those export controls by others to argue for the U.S. to do the same? Navarro has said he wants to repatriate supply chains for national security reasons and advocated stricter controls on tech exports to China. What if he convinced President Donald Trump to ban exports of not just face masks or medicines but shipments of an eventual vaccine? And other countries followed suit? What if the controls shifted to food stockpiles?
2. New import restrictions. Chinese trade data for January and February pointed to the damage so far from China’s industrial shutdown last month. Exports were down 17.2% in dollar terms. But what if the U.S. and other countries started limiting imports of goods coming by air and sea not just from China but from South Korea, Italy and other affected countries? And those countries retaliated and did the same? So far the focus on supply chain vulnerabilities has focused on China. But what if all trade was deemed contaminated?
3. A collapse in global governance. The weekend emergence of a battle between Saudi Arabia and Russia over oil production caused crude prices to tumble dramatically on Monday. What if such discord spills to the G-7 or the G-20? What happens if, driven by fear of a virus, global economic policy makers can’t get on the same page? Or, worse, actively start working against each other in an area like, say, currencies?

Robert Hutchings, the former diplomat and Princeton academic who led the National Intelligence Council as it prepared its 2004 report, said in a recent email exchange that the point they were trying to make was “that globalization is a ubiquitous force that carries with it bad consequences as well as good.”

Ominously, he added: “We particularly wanted to argue that globalization is not irreversible.”

Charting the Trade War

China’s exports fell more than expected in the first two months of this year as the coronavirus outbreak led to extended holidays, depressed factory output, and blocked transport and movement across the country. Imports also declined, although increases in commodities purchases offset some of that.

Today’s Must Reads

• Buying time | The U.S. will show China some flexibility on its pledges to boost American imports as long as Beijing ensures exports don’t surge when production returns to full strength.
• Deal scrutiny | U.S. officials are dragging Europe’s technology industry more deeply into a trade war with China, threatening the region’s ability to create its own semiconductor giants.
• Virtual hit | The coronavirus epidemic in China cast the production of the world’s electronics into disarray. What’s less well known is that it also disrupted the global supply of digital goods for games.
• New shock | Oil prices plunged  as Saudi Arabia launched a price war. A sustained slump would savage budgets from Venezuela to Iran, threaten America’s shale revolution, and create political and economic problems around the world. 
• Southern charm | Potential trade partners are pursuing South America’s commercial bloc after a sweeping deal with the EU showed most of its members are open to business.

Economic Analysis

• China trade | The surprise swing in the Chinese trade balance into deficit is another shock to the economy — though probably only a temporary one.
• Hong Kong pain | Hong Kong’s economy is expected to post record contraction in 1Q, as a plunge in mainland China’s growth shrinks external demand for both goods and services

Coming Up

• March 11: U.K. trade balance
• March 16: EU trade chief Phil Hogan  speaks in Washington
• March 17: Japan trade balance

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