The coronavirus won’t kill globalisation, but might just change global business for the better

Look out for changes to industrial policies as governments realise the need to prioritise sectors such as medical supplies, to meet domestic needs in time of crisis
While companies will push to diversify supply chains and pay more attention to ESG factors, their preference for globalisation – and the profits it brings – won’t change

Tai Hui

Published: 5:00pm, 1 May, 2020

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Human beings are social animals. They prefer to gather in groups, whether in markets, places of worship, bars or restaurants. Industries were created around this behaviour.

The Covid-19 pandemic has disrupted this way of life, yet we find new ways to meet our friends and families. In the age of social distancing and virus containment, meetings, prayers, happy hours and romantic dates are all moving online.

People’s preference for globalisation is the same. Consumers want cheaper and better products. Companies want to maximise profits by selling to more markets, and produce at lower costs by taking advantage of economies of scale. Global corporate profits and global trade as a share of the world economy have risen in tandem since the 1970s. These preferences are not going to change.

While the Covid-19 pandemic may prompt companies to rethink their strategies, the principles of globalisation remain fundamentally intact. What remains to be seen is the likely impact of government policies in response to the pandemic.

Health care and medical supplies are one area where governments are likely to play a more hands-on role, deploying industrial policies to reduce dependence on imports and ensure sufficient domestic capacity in case of another outbreak.

Government-led investment in this sector could pick up once the pandemic is under control. A more responsive policy aimed at saving lives rather than increasing economic efficiency makes sense.

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Yet, politicians should not use this as an excuse to introduce protectionist measures in other sectors, which would ultimately cost their consumers more. With rising unemployment rates and surging government debt around the world, politicians might be motivated to close borders to goods, services, workers and capital for political reasons.

In the middle of this potential long-term shift is China. Some manufacturing processes have already moved out of China in the last decade due to rising labour costs. These processes often end up in South and Southeast Asia.

Trade tensions between the United States and China in the past two years have prompted more companies to plan ahead and diversify risks. Some expect the coronavirus-related disruptions to production to accelerate the exodus from China.

Overall, China is set to transition from the world’s factory to a factory for China and the world. China’s share of global manufacturing rose from 7 per cent in 2000 to 25 per cent in 2018. While this is likely to decline over time, it will still be one of the world’s largest manufacturing hubs.

International companies will continue to invest in China because of its domestic market, but with greater focus on high-value-added production and services.

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This also implies a fresh wave of globalisation and investment could benefit other emerging economies in South and Southeast Asia, Latin America, and Central and Eastern Europe. However, not everyone will make big gains.

Instead, the success of these countries will be determined by the ease of doing business. Besides, business executives will also need to navigate forces such as protectionism, which will evolve in the years to come.

Unfortunately, the pandemic is complicating these dynamics at a time when the unity of traditional power blocs, such as the European Union, is also being tested.

Moreover, global investors are paying more attention to how companies are handling their social and environmental responsibilities. Environmental, social and governance factors, or ESG, are now an essential part of all major institutional investors’ evaluation processes.

Economies that are able to prioritise suitable social and environmental protection frameworks could appeal to CEOs. Such frameworks could include labour protection, emission standards and government policies helping companies to fulfil ESG criteria. Companies are less likely to save costs by picking host countries with more relaxed requirements because their home country regulators and global investors will demand certain standards.

In sum, the Covid-19 pandemic will cause structural shifts in global politics and the world economy for years to come. Global economic integration is in for a considerable shake-up.

Global supply chains will have to become more diversified; this could generate new investment opportunities for Asian investors. Companies will need to strike a new balance with a broader range of stakeholders, and pay more attention to workers, the local community and the environment.

This could imply lower profitability in the short run, but well-run companies will find ways to grow their business for their shareholders in more sustainable ways.

Tai Hui is chief market strategist for the Asia-Pacific at JP Morgan Asset Management

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This article appeared in the South China Morning Post print edition as: Virus crisis likely to change global business for the better

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