Global trade after COVID-19: From fixed capital to human capital
By Alexis Crow, Global Head, Geopolitical Investing
PwC & Samir Saran, President, Observer Research Foundation (ORF).
Some commentators have trumpeted the “end” of globalization in the wake of rising protectionism over the last half decade, the sudden economic stops wrought by COVID-19, and the corollary disruptions of supply chain activity around the world.
The truth, though, is that for companies and investors involved in the exchange, transmission, and sale of goods, services, technology and finance, globalization is anything but dead. Granted, the landscape has dramatically shifted since the 1990s, and executives will need to be nimble and agile in navigating the new environment, which is currently in a state of flux.
Indeed, more recent developments in the global trade environment including green frameworks, digital protocols and regional partnerships offer a glimpse not of the demise of globalization, but rather, of what global trade may look like in the post-COVID-19 era.
Three emerging paths forward
Within a turbulent geopolitical context, the shape of a post-COVID-19 trade landscape is becoming clearer, particularly regarding the digital, green and regional spaces.
1. The digital realm
Data protection and securing user privacy in the digitized world has been a major issue of cross-border friction. But here we are seeing concrete efforts being made. To this end, the EU General Data Protection has offered a common template that has even inspired the California Consumer Privacy Act.
This is not to say that all contentious issues have been resolved. One complicated issue has been the taxation of digital services. Although there has been an attempt by the OECD to devise a framework for digital taxation, a multilateral solution has not evolved so far.
The fact that there is some early convergence on contentious issues is a positive dynamic and suggests that even though an overarching framework governing the digital realm is elusive so far, consumer interest will be the guiding force in determining the nature of regulation.
2. The green space
Climate action is the base on which economic policies of the twenty-first century are likely to be formulated—increasingly, at least in the developed world, “going green” is the new industrial and growth strategy.
To be sure, there are challenges. Recent discussions on the EU’s carbon border adjustment mechanism, essentially an emissions-related import tariff, are the first sign of movement towards a global “carbon club”, shutting out exports from countries that may not comply. But the current moment presents a historical opportunity for cooperation. As climate commitments strengthen across the globe, economies of scale have led to rapidly falling costs for green energy and technology.
3. A region-based approach
While many Western countries have been contending with populist movements in the years leading up to COVID-19, and then resurgent strokes of economic nativism in the wake the pandemic, countries in Asia signed the largest trade agreement in history—the Regional Comprehensive Economic Partnership (RCEP) in November 2020.
Effectively, RCEP incorporates some rich income Asian countries within the ASEAN community; and in a historic step, it is the first framework to include China, Japan and South Korea together within a trade agreement. While some commentators argue that RCEP is less comprehensive than other deals such as the Trans-Pacific Partnership agreement, the convening of RCEP signatories signals Asia’s continued commitment to connect “multiple factory floors” at a regional as well as a global level.
The cementing of RCEP—with the participation of some of the fastest growing economies in the world—raises the question: do regional trade agreements help or hinder the global trading landscape? With variegated standards on data privacy, green and carbon, and with countries at various stages of economic growth and employment, a global architecture might be elusive. It can therefore be argued that as efforts are underway at reforming the global trading system, regional or bilateral agreements are helpful in providing building blocks for greater cohesion.
Reaping the benefits of a global division of labour and capital
Even though the global trading architecture has taken severe knocks from both populism and the pandemic, nearly one-third of the world’s population and one-third of global GDP have recently been incorporated in a historic trade agreement.
And even amidst the “great lockdown” of 2020, the contraction of global trade in goods was less than half of that of the trough of 2009, in the wake of the global financial crisis. Moreover, an asynchronous regional recovery from COVID-19 has meant that many companies have been able to make up for the loss demand in one region (such as Europe) by the growth in demand in another region (such as China). And uneven sectoral activity, such as the working-from-home dynamic, is propelling demand for critical goods such as semiconductor chips, which is propping up export markets for countries such as South Korea. The growth of the electric vehicle industry and the commitments by governments to “build back greener” are also contributing to cross-border flows of metals and materials.
Nevertheless, as policy-makers set their priorities on rebuilding their societies, the lure—or mystique—of self-sufficiency remains strong. Indeed, the COVID-19 pandemic has caused severe losses to income for both advanced as well as emerging economies—the former experiencing a loss of 11% of income of 2019 levels, and the latter nearly double, at 20%. Yet, the way out of economic desolation is not via isolation, or constructing a fortress nation.
As countries increase investment in non-defense related R&D in sectors such as biotech and electric transport, it is important to consider that innovation is implicitly tied to immigration. In the United States, this has been the case throughout the 19th and 20th centuries, and with immigration as one causal factor of the blossoming of cutting-edge technology businesses and the growth of entrepreneurship in the country. Thus, data shows that the vitality of human capital is inherently cross-border and reliant on immigration. Recognizing this is a requisite component of any industrial, or rather, post-industrial policy, for advanced economies and for emerging and developing economies that are shifting from old to new economic growth.
*This article was first published and adapted from The World Economic Forum.