What the Economy Will Look Like in a Post-Epidemic World
Tl;dr: This article talks about possible trade consequences on globalization and on the world economic system once the pandemic will be over. The end of China as the factory of the world and a comeback to local production is discussed.
Let’s talk about globalization.
I like to think that globalization started after 1945 as trade treaties and defense alliances were forming around the world.
I also like to think it stopped in 2008 with the bankrupt of Lehman Brothers which spurred a global recession.
Let me say that again: a global recession.
To understand how managers in the US can impact farmers in Mongolia, we need to have a look at history.
The Origin of Trade
Originally, there were tribes of men, completely independent from one another.
Whatever one tribe would do in America had no impact on a tribe in Canada, less even on a tribe in Europe or China.
While tribes could not count on anyone else, they were also completely independent from one another.
They were free from all external influences at the cost of total responsibility.
If a tribe was in trouble, no other tribe would come to help it. Simultaneously, this tribe did not have to go help any other tribe either.
Tribes became villages and villages became cities. Cities started trading with each other and developed both economically and socially.
Once they became dependent on trade and a certain quality of life, there was no turning back.
Who would give up fancy clothes for a bearskin, right?
Except that these fancy clothes were furnished by a city far away in exchange for your own resources.
That’s how dependencies get created and trade is essentially that: you depend on your trade partner for what they bring you and they depend on you for what you bring them.
It’s a win-win relationship.
Trading partners become richer, it’s basic economics (as long as the total value of traded goods is equal on both sides).
Yet, trading would eventually come at a price: independence.
Trading Decreases Independence
Once you start trading, you become dependent on your trading partner and your fate is not entirely within your control anymore.
If the city you trade with is victim of war, or a coup, or even a strike, you lose resources which may be dangerous if the life of the city depends on traded resources.
Think of Hawaii.
What would happen if boats and planes full of food stopped coming?
I don’t think the people would go bare-hand fishing, would they?
The Story of Dubai
Dubai is another excellent example of a city that greatly suffered from globalization.
Dubai was originally a port and a worldwide exporter of oyster pearls. The entire economy was based on it. When the Japanese started producing cheaper oyster pearls though, the economy of Dubai collapsed.
It was tragic. People lost their jobs. They were hungry.
This story has so profoundly marked the people of Dubai that when they found oil, they avoided making the same mistake and diversified right away.
As such, only 10% of Dubai’s revenues come from oil. The rest come from different industries (tourism, financial services, etc).
The importance to diversify is the lesson of this story.
Diversify in partners, diversify in goods, diversify in industries.
If you manage to create a country that exports natural resources, welcomes tourists, manufactures unique products, grow food and sell services, you got yourself a dream-like economic situation.
Unfortunately, as the virus crisis showed, the world economy is not diversified enough.
It depends on a (too?) large extent on China.
China
When the factories stopped in Wuhan, it took only a couple of days for the S&P 500 to fall, showing how dependent on China industries around the world have become.
Be it as a consumer or as a producer.
This type of risk is something the world will not be able to keep on coping with in the future as China, having the political system that it has, appears to be less stable than a democracy.
Consequences
From this claim, we can draw the first two consequences that the virus will eventually have.
The first one concerns the end of China as the factory of the world.
While this tendency had already been (rightfully) initiated by the Trump presidency, it will increase.
The world has become in need of a second factory of the world, or of several small factories, but the general dependency on China has to end.
This first claim sparks the second one.
As globalization has been receiving its fair amount of backlash, I believe it is now time for a comeback to the local economy.
There are several reasons for that.
The first one is global warming.
Transportation is by far one of the biggest CO2 emitters in the world.
As the international community makes efforts to curb down their emissions, coming back to the local economy would help to make the air purer.
The second reason is jobs. We can’t keep up with the number of European factories that closed down to produce in cheaper countries.
A comeback of jobs would be welcome for the economy.
The third reason is simply preferences.
For some years now, marketers have been inscribing on product packages when the product was made locally or at least, nationally. Mentalities have evolved, and people are slowly but surely coming back to “national preferences”.
The Bottom Line
Conclusion: I’m just a student behind his computer, but my credits speak for themselves: I was always very good to predict who would date who in highschool (and rightfully predicted I wouldn’t date anyone).
On a more serious note, this crisis has shown how vulnerable the world is to viruses due to the extensive traveling and exchange happening in all parts of the world.
The immense sanitarian, human, economic, and mental cost that something as stupid as a virus will cause will be too great for the world not to react.