Please refer to the assigned articles and apply what you have learned in Econ 335 to answer the following questions.
2. According to the briefing article “Slobalisation”, how has the pattern of world trade and commerce changed as globalization faded since 2008? According to the briefing article “Goodbye Globalisation”,
3. According to the briefing article “Torn Apart”, what has been the trend for supply chains and international commerce in recent years since 2017? Please refer to the Chart of Chain Reaction in the article for details. How can firms/businesses adapt to the new era? (10 points)
Q1. According to the briefing article “Slobalisation”, what is slowbalisation? Please refer to the eight measures in the first two rows of Chart 1 in the article for details. What are the underlying causes of slowbalisation mentioned in the article?
Slowbalization is a term that describes the reaction against globalisation. After World War II in 1945, world trade grew tremendously as countries partnered in the production of goods and services. Despite the massive increase in globalization over the years, a lot of people remained separated from the global economy. The Economist (2019) states that trade has fallen from 61% of the world GDP in 2008 to 58% as of 2019. Additionally, the capacity of supply chains responsible for the distribution of unfinished goods across the globe has declined. In other words, the statistics indicate that the current trends in global trade are contrary to what globalization brings. Hence, the term "slowbalization" is used to depict the decline in globalization. Globalization is associated with greater investment, particularly, cross-border investment. However, The Economist asserts that long-term cross-border investment by all firms, known as foreign direct investment has declined from 3.5% of world GDP in 2007 to 1.3% in 2018. This is a notable attribute of "Slowbalization."
According to The Economist (2019), there are eight underlying causes of the slowbalization. One factor has been the decline in trade in goods and services as a percentage of GDP. According to The Economist, trade has galled from 61% of the world GDP in 2008 to 58% as of 2019. The second factor is the decline in intermediate imports as a percentage of GDP. The Economist records that since 2008, intermediate imports dropped from 19% of world GDP to 17%. There is also a decrease in multinational profits as a percentage of all listed firms' profits. According to The Economist, the rate of return on all multinational investment dropped from an average of 10% in 2005-07 to a puny 6% in 2017.
There is a decrease in FDI flows as a percentage of GDP as global FDI fell by 20% in 2018. The Economist also argues the decline in the stock of cross-border bank loans as a percentage of GDP has contributed to the slowbalization, down from 60% of GDP in 2006, to about 36% as of 2019. The sixth underlying cause is the decline in gross capital flows as a percentage of GDP, falling from 7% in early 2007 to 1.5%. The seventh cause is the decrease in the share of countries catching up as after 2008, the share of countries catching up with the rich countries in terms of purchasing power parity declined from 88% to 50%. Finally, there is a decrease in S&P 500 sales abroad.
Q2. According to the briefing article “Slobalisation”, how has the pattern of world trade and commerce changed as globalization faded since 2008? According to the briefing article “Goodbye Globalisation”, how has globalisation been affected by the covid-19 pandemic?
According to The Economist (2019), the pattern of world trade has shifted since the 2008 financial crisis, as most multinational firms lost a significant percentage of their share of global profits, and long-term cross-border investment declined massively. Countries have resorted to making policies that protect domestic trade and companies, especially tariffs that control the percentage of imports. Most of these policies have also been strict to foreign business firms to discourage their control over domestic markets. For instance, The Economist notes that China raised tariffs and used its antitrust apparatus in 2019 to block the acquisition of NXP, a Dutch chip firm, by Qualcomm, an American company. Such moves are meant to safeguard the share of multinationals in the domestic markets.
Global trade is also shifting away from physical goods to intangible ones, with numerous cargos in transit now carrying components that feed into supply chains. The emerging pattern of cross-border commerce is more regional, matching the trend of shorter supply chains. According to The Economist, a decade ago, a third of the FDI flowing into Asian countries came from elsewhere within the same continent, a number that increased to 50% by 2019. The shift towards regional commerce was seen with the creation of a new version of NAFTA, known as USMCA. The same is happening at Asia regional blocks and the European Union.
COVID-19 had a significant effect on globalization because it contributed to lockdowns that sealed borders and disrupted commerce. The pandemic will entrench a bias towards self-reliance which will leave economies vulnerable (The Economist, 2020a). The push to support national firms for sustainability and the emphasis on bringing supply chains back home in the name of resilience will accelerate the decline in globalization. According to The Economist, the pandemic curtailed the free mobility of people, goods, and capital. As America put restrictions on immigration, other countries are expected to follow the trend and this is possibly going to impede labor supply as well as demand for goods and services. The pandemic has caused a further decline in long-term investment even as multinational firms consider cutting their cross-border investment further.
Q3. According to the briefing article “Torn Apart”, what has been the trend for supply chains and international commerce in recent years since 2017? Please refer to the Chart of Chain Reaction in the article for details. How can firms/businesses adapt to the new era?
According to The Economist (2020b), before the outbreak of COVID-19, there was a tendency for some countries to over-rely on certain nations for goods and services, to an extent that the domestic producers felt threatened. In 2018 after Donald Trump was elected the president of the United States, he launched a series of trade deals that saw a rise in tariffs imposed on imports, particularly from China. It was notable because China had remained the top supplier of some goods across the globe. For instance, The Economist notes that China alone supplied about 42% of the world's exports of personal protective equipment in 2018. Additionally, 60% of the ingredients for antibiotics imported by Japan came from China. The same year, countries like the United States sought ways to increase demand for local producers. After the COVID-19 pandemic, countries began prioritizing their regional trade allies, such as the trade deal between America, Canada, and Mexico on sourcing car parts from within the region. Another shift in supply chains was the adoption of automation which would become a substitute for offshoring.
Between 2017 and 2019, the largest share of imports was from South-East Asia and North America. According to the chain reaction chart by The Economist (2020b), most imports came from North America, especially chemicals/metals, other transport, car parts, machinery, vehicles, and agriculture. The majority of electronics, furniture, optical, textiles & clothing, and their inputs, came from South-East Asia. This data indicates that the United States placed a lot of focus on regional trade rather than international trade, and when it was otherwise, the emphasis was on getting the goods from cheaper sources in South-East Asia.
Businesses will need to make their supply chains more resilient by diversifying them. Such diversification avoids the risk of risk concentration and allows firms to benefit from economies of scale. Firms could look for countries with favorable trade policies for multinationals and concentrate some of their efforts there, especially sourcing goods and services that are cheaper and readily available. I will help businesses enlarge the supplier base to reduce the risk of disruptions witnessed during the COVID-19 pandemic. Firms need to move closer to the customer base to curb potential cross-border disruptions. Finally, firms must invest in digital technologies, as most customers have switched to purchasing and ordering goods via the internet.
The Economist. (2019, January 24). Globalisation has faltered. The Economist. https://www.economist.com/briefing/2019/01/24/globalisation-has-faltered
The Economist. (2020a). Covid-19’s blow to world trade is a heavy one. The Economist. https://www.economist.com/briefing/2020/05/14/covid-19s-blow-to-world-trade-is-a-heavy-one
The Economist. (2020b, May 14). Has covid-19 killed globalisation? The Economist. https://www.economist.com/leaders/2020/05/14/has-covid-19-killed-globalisation