How disruption in global supply chain will change economics and politics after COVID-19
COVID-19 has exposed the risk that globalization can bring: supply chain disruption. In the past, as the world began trading between nations, each country was able to specialize in their most efficiently produced products. This approach is based on Ricardo’s Comparative Advantage Theory.
However, when the supply chain gets disrupted by external factors, such as a global pandemic, war or other unpredictable forces, the entire premise of international division of labor and specialization becomes nullified.
Trading nations are now facing a trade-off between profit from trade efficiency and risk exposed by globalization. As a result, corporations have learned that they need to hedge their risk gradually by moving away from globalization and towards a true free market economy.
Although moving completely away from established global supply chain would be difficult, it is also unlikely that the existing supply chains will continue to operate without hedging risk.
What would be the likely outcome of this anti-globalization and global supply chain disruption?
- Companies would be more willing to restore their production facilities to their original country, not because Trump has been urging the US companies to do this, but because corporations need to mitigate against risk.
- However, some of the mega multinational companies, such as Apple, which already has an established supply chain and production in China and across the world may take a long time to move away from this model as they are heavily invested in the current system.
- Politically, the tension between China and the US would accelerate, to the extent that their relationship may resemble the Cold War rivalry previously seen between the US and the former Soviet Union. The bipolarization of international relations would inevitably force countries to pick a side. I have written a subsequent article in the Macro Trend explaining what impact the looming cold war between US and China would have on the financial market,
- Trade protectionism would gain momentum and lead to slower economic growth, especially in the emerging markets as they rely heavily on trade.
- Consumers would bear some of the increased production costs as companies would have to increase their product prices. However, combined with a looming economic recession and high unemployment, such price increase would dampen their consumption.
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