Will countries across the globe turn to economic Isolationism?

  22-Aug-2020 10:30:12

Global isolationism Economy Post Covid world

For the longest time after the 18th century, European countries enjoyed global supremacy and were a locus of economic and political power. After World War I the United States came to the fore as an economic and military superpower. They drove the global economic force in their favour and prospered rapidly throughout the 19th and 20th century. At the brink of the 20th century, ‘Globalisation’ marked the beginning of a new economic era and started shaping and changing global dynamics in numerous ways. Technology enabled goods, services and even labour to move freely across countries, increasing the volume of international trade and global output. Advanced nations were outsourcing jobs to developing nations who provided cheap labour and manufactured goods at a lower cost. The southeast asian block benefited massively from globalisation. Their per capita incomes increased, productivity went up, and just about in a decade, millions were lifted out of absolute poverty. These emerging economies would soon go on to challenge the economic dominance of the west. The People’s Republic of China became the manufacturing hub of the world. From Iphones to toys, intermediate electronic goods to apparel almost every category was being manufactured in China. Software industry in India experienced a boom in the 1990s and it would be safe to say that it has been flourishing till date. A more powerful economy allowed these nations to invest in Research & Development, go on space missions, become nuclear powers and gain importance in International Affairs.

As the world became more connected, it also became more interdependent. The western influence in the global political economy today is gradually fading as China has emerged as an economic superpower. India has a demographic dividend and a rising middle class driving its consumption along with a flourishing service sector at its advantage. Meanwhile, post the global financial crisis, the United States reported job losses in the manufacturing sector or less skilled labour., increased dropout rates, and overall anti-globalization sentiment in American households. Donald Trump's unexpected win in the 2016 Presidential Election had already pointed towards protectionist policies and withdrawal or reformation of multilateral trade agreements in the United States in line with his "America First" agenda. Meanwhile, BREXIT caused a stir in the Eurozone, which seems to be disintegrating day by day.

As of 2018, 2.4 million people migrated to the EU from non-EU countries. The strongest members of the European Union are riddled with the refugee crisis within the eurozone. The eastern European countries including Poland, Hungary, Czech Republic, and Austria have a strong sentiment against immigration. With Greece and Italy facing a stark debt crisis, the burden-sharing among the EU continues to be highly uneven. All the above issues have added up to a breeding discontent among governments and citizens regarding a multilateral approach towards trade and politics. Right-wing Nationalist parties have gained prominence over these last 5 years. Isolationism sounds like an extreme term but the western countries are favoring a more inward-oriented approach to growth and development.

Realisations post the Coronavirus Pandemic

Amidst an already sluggish global economy, the US-China trade war, and unsorted geopolitical issues, the world faced a fierce, unforeseen blow by way of the Covid-19. Burdened Healthcare infrastructure, lockdowns, and no vaccine have led to a loss of lives, a public health crisis, and wounded economies. World trade is expected to plunge by 13%- 32% in 2020. International trade has taken a hit, which is very evident while looking at international trade data. India's volume of trade has also seen significant fluctuations in the first quarter. The pandemic has been an eye-opener in terms of understanding the scale of interconnectedness between nations and their inability to function independently. 70 % of the active pharmaceutical ingredients used in the U.S. market are procured internationally and almost all of the Ibuprofen sold in the U.S. comes from China. China's share in U.S. imports is 12.4%, Japan occupies 5.3%, India 2.1%. Vietnam, Taiwan, and South-Korea are also among the U.S. top 15 trade partners. The U.S. is just an example but the following holds for most of the developed economies. Outsourcing jobs and manufacturing of intermediate goods might have reduced production costs for sure but they have made production in all countries, across almost every industry, contingent on international trade.

Today, as global value chains are disrupted and international movement is obstructed, countries recognize that they need to focus on the integration of the domestic economy and gradually reduce reliance on trading partners. In India, Prime Minister Narendra Modi is urging citizens to build an 'Atmanirbhar Bharat' stressing on the importance of self-reliance. India witnessed a record of $790 million of trade surplus in June for the first time in eighteen years as imports saw a sharp contraction. The go local campaign has encouraged and benefited many young entrepreneurs and new enterprises. Relief packages and policies around the world are focused on supporting domestic industries.

At the same time countries are taking cognizance of the fact that overcoming a global health crisis or economic recovery is not possible without international cooperation. In a situation so complex and exceptional, adopting an altruistic attitude is the right way to go. And we are seeing countries and global institutions support each other and use their strengths during these trying times.

What can we expect from the future ?

The idea of de-globalizing is indeed unachievable and quite fatuous. We definitely can't go back to the pre-globalization era, it would lead to a structural collapse of the global economy. So complete economic isolationism is neither feasible nor advisable for a country. What we can expect, however, is an emphasis on producing within one's geographical territory. Trade policies prioritizing national interest and protecting domestic industries will be implemented. Reforming existing trade agreements, tariff and non-tariff barriers will be tools for the same. Asian nations have achieved economies of scale in the production of intermediate goods and manufacturing over the decades.Now,, nations across the world will start building and investing in new plants, new products, and capital equipment. Self-reliance is a gradual process and substitution of unnecessary imports takes time and a lot of assistance from the central governments. Hence a comprehensive and realistic action plan should be chalked out instead of immediate and sentiment-driven responses motivated by aspirations for political power. One good thing is that stalled international trade has allowed local businesses and entrepreneurs to be innovative. A new range of local businesses right from food-products, customized products, apparel, self-help apps, digital healthcare products has taken off. To achieve efficiency in production, we will most definitely see an advancement in capital machinery and operations which can take the load or function during the current or future crisis like this one.

Countries will consciously try to reduce their dependence on China and Beijing is well aware of that. Western countries might want to relocate their plants and operations in China as the first move. Beijing will continue to focus on its vibrant domestic market and might block the entry of foreign products and services in retaliation.

Developing and developed nations will have a different approach while targeting self-reliance. While developed nations focus on producing essentials within, developing nations will have to up their game when it comes to technical advancement, modernization, and creating a highly skilled and capable workforce. While countries can't produce goods in which they enjoy a geographical comparative advantage, we never know where genetic engineering, biotechnology might take us. So does this mean that we will stop trading with other nations? No that is not happening. Consumers will always buy what they think is of superior quality and affordable. Domestic industries will inevitably have to become more competitive to meet that demand. International trade would still happen, but countries will build capacity so that their economies don't fall apart as rapidly during a future crisis.

From a political perspective too, no country wants political instability and increased defense expenditure at this time. No one is willing to sabotage their goodwill in international diplomacy and hence even superpowers like the U.S. and the U.K. will prefer a minimum engagement in external conflicts. As for India, we can just hope that there is no escalation in border conflicts with our neighbors.We will see a more individualist perspective among nations worldwide that doesn't jeopardize economic ties for political differences. As common people, we remain hopeful that the global economy becomes more resilient and the global community more united.

By:Yeishita Kelkar