By Dr. Rajkumar Singh
With a pandemic of this magnitude that has brought even developed economies to their knees, the international order will certainly take a new shape in post-COVID19. A key takeaway is going to be the reorientation of global supply chains along the lines of economic nationalism.
The fight of major Asian economies like South Korea, Japan, India, as well as, China against COVID-19 has caused immense damage to both life and livelihood, with the International Monetary Fund (IMF) stating that for the first time in almost 60 years, Asian economies will see “zero growth” in 2020. This was not the Asian Century that had been imagined; a realm of economic prosperity, connectivity and shifting of the global power stage to Asia with Asian powers at important tables had been the reality under which the 21st Century was to operate.
At the regional level, a post-COVID-19 economic and political Asian trajectory is concurrently emerging. A major change in a post-COVID Asia, if not the world, is going to be a rise in and increased thrust by administrations on economic nationalism. Prolonged focus on extended and specialised global supply chains is going to be discouraged; extreme over-reliance of global supply chains on China, be it in sectors of pharmaceuticals, consumer goods, electronics or automobiles, has become alarmingly clear during the COVID-19 pandemic.
Dimensions of economic nationalism
Economic nationalism, unlike economic liberalism, will prove to be a zero-sum game. It will allow nations to benefit at the expense of other countries or groups; it threatens the positive sum-game interdependency a globalised international order has thrived on. Beijing has followed a dual policy of implementing economic nationalism in its own national initiatives.
Economic nationalism is hence not new in China; it has varied forms of management and aggressiveness under Xi Jinping’s Communist Capitalism lead. What is emerging as a disturbing trend is the emergence of economic nationalism as a core foreign policy tool among countries like Japan, India and South Korea as well.
These are critical top trading partners of China and this trend is likely to severely damage its supply chain networks. Implementation of economic nationalism in a pre-coronavirus world could have worked in favour of China. It ultimately promotes a national-interest oriented and non-intermediary form of trade that does not necessarily follow international norms but rather bilateral settlements. It would have ultimately supported China’s BRI objectives, as it has done in the past with Hambantota Port in Sri Lanka and BRI’s extensive Pakistan associations threatening Indian sovereignty.
Economic nationalism in pre-COVID era worked in Chinese favour because while Beijing followed its national interest-driven economic plans, it also actively engaged in institutions like the WTO, IMF, UN, AIIB and New Development Bank (NDB) while spearheading agreements like RCEP. This allowed it to present a global leader narrative, enunciating inclusion in the erstwhile Westernised world order, while becoming the world’s production centre.
China’s global might and political power stems from its economic prowess. However, in a post-COVID 19 order, economic nationalisation will strengthen ‘Make in’ self-territory initiatives and also lead to shifting from single-source supply chains. Ultimately, the pandemic is only going to strengthen trends that have been already in the play of moving away from China-centric supply sources.
Economic nationalism in globalisation
While economic nationalism is at the core of competing foreign policy outlooks, it has been harder to implement the same due to the heavily ingrained globalization framework modern trade has been built around. However, the resurgence of economic nationalism must be studied in the context of the emergence of an environment that has become increasingly unfavourable towards economic integration.
Take for example India’s decision to not join RCEP; it came in light of intense domestic pressure, with the agrarian sector and political affiliate parties of Modi’s Bharatiya Janata Party (BJP) citing disapproval with the FTA. Similarly, public disapproval and pushback against the TPP as well as the Trans-Atlantic Trade and Investment Partnership (TTIP), even with their net economic benefits, lead to US withdrawal from the same.
Even though globalisation is here to stay and will not be completely done away with, a largely localised manner of globalisation with national interests at its core is highly likely to be implemented. This trend, which has seen a reflection in Japan’s post coronavirus manufacturing withdrawal from China, goes to show that thrust in economic nationalism and protectionism in brewing and could possibly have the potential to bring massive changes to the existing global economic and trade system.
Never let a good crisis go to waste, an old saying goes. Even in the dark times of the current Covid-19 pandemic there are opportunities for those who suffer less than others. That’s especially true in the economic sphere. Stock markets around the world went south after the virus hit as companies suffered dramatic losses in sales and profits, weakening their balance sheets and leading to steep declines in market values.
Some are now in such a weakened state that they are vulnerable to takeover by foreign investors. Although protectionism was a characteristic of industrial policy before the Covid-19 crisis, and economic nationalism is a long-term trend caused by trade and tech wars between China, the United States and Europe, the virus has reinforced this behaviour among the major trading powers.
European governments don’t mention suspected predators by name, but their protective measures are clearly directed at Chinese investors. M&A specialists confirm that, in particular, state-owned enterprises from China are looking for a bargain in Europe. This shows us the other side of the coin: industrial policy isn’t only a defensive measure to protect your golden eggs at home. It can also be an offensive attack to strengthen your domestic industries through merger and acquisitions abroad.
The current prospect and trends
China is the usual suspect in this regard. Chinese firms have been on a buying spree in Europe for the past few years. The lack of transparency in their financing has aroused the suspicion that they get more than a little help from their friends in the Chinese government. Yet when foreign companies want to invest in China, they still face many restrictions. This absence of reciprocity, along with the suspicion that Chinese investors get their orders from Beijing to target companies from systemically important industries abroad, has caused a backlash in Europe and the United States.
Although the Trump administration hasn’t specifically changed its stance on foreign direct investment since the outbreak, it is likely that screening through its notorious Committee on Foreign Investment in the United States (CFIUS) will be even more restrictive, especially for the medical supply chain.
The world economy certainly wasn’t a place of harmony and cooperation before the Covid-19 crisis hit. Free trade open borders were already under attack by populists, and economic nationalism had already weakened the rules-based world trade order. But the pandemic has brought out an “everyman-for-himself” mentality among nations that threatens the free flow of goods, services, data, ideas and people even more.
The economic costs for the wealth of nations could be quite high. The Covid-19 crisis could cut global foreign direct investment by as much as 40 per cent in 2020, the United Nations Conference of Trade and Development (UNCTAD) reports. With economic nationalism increasingly disguised as industrial policy, this could make things even worse.
Image Credit: Getty
Author: Dr. Rajkumar Singh, Professor and Head, University Department of Political Science, B.N.Mandal University, Madhepura, Madhepura-852113, Bihar, India.
(The views expressed in this article belong only to the author and do not necessarily reflect the editorial policy or views of World Geostrategic Insights).