COVID-19 and the Global Economy

THE MODERN GLOBAL economy rests on the foundation of modern medicine. The transactions that sustain the global trade of goods and services require an implicit assurance that merchants and financiers are not infecting one another when they meet to conduct business. Economic globalization requires that the nodes of international distribution—ports, airline terminals, railway stations, intermodal hubs—do not function as distribution points for pathogens. Otherwise, the transaction costs in disrupted operations, emergency health care, and labor turnover would outweigh overseas investment, and resources would stay closer to home.

Before the modern era, global transactions in the marketplace or around the field of battle carried a significant risk of infection. The global circulation of pathogens, hitching a ride on explorers, soldiers, and traders, has periodically devastated civilizations. Plagues played a role in undermining the Roman Empire. Disease carried by the conquistadors devastated indigenous communities throughout the Americas. The influenza outbreak at the end of World War I was the final factor in suppressing the first wave of modern economic globalization, which had gathered force at the beginning of the twentieth century thanks to the telegraph, railroads, and modern shipping.

Since then, advances in sanitation and epidemiology, and the development of effective vaccines, have engendered the confident sentiment that global commerce would not again be disrupted by pathogens. Control of diseases such as smallpox and yellow fever brought more and more parts of the world effectively into the international economy. Flu vaccines, in ever more purified form, effectively shielded populations from serious outbreaks. Even more lethal pandemics, such as the SARS outbreak in 2003 and the Ebola outbreak in 2014, have been controlled and contained. Neither influenza, with its high morbidity rate, nor Ebola, with its high mortality rate, caused any significant disruption of the global economy—or, more precisely, any more of a significant disruption than traffic accidents, oil spills, and natural disasters.

COVID-19 appears to represent not only a novel virus but a novel threat to the global economy. The lack of immunity in the population and the large number of asymptomatic carriers make it a very difficult pathogen to control. Epidemiologists are concerned that this particular coronavirus will likely enter the family of diseases, like the common cold and the flu, that precipitate periodic outbreaks throughout the world.1

The rapid spread of COVID-19 has already compromised the circulatory system of the global economy. Port traffic has declined significantly. Airline travel has come to a standstill. The stock market has gone from bull to bear in record time. Quarantines have ground business to a halt, and unemployment rates are rising rapidly. A stark divide has opened up between those who work in the physical world and those who are able to work virtually.

Although the coronavirus causes mild to moderate symptoms in the vast majority of those infected, it can be fatal for people with underlying conditions and compromised immune systems. Similarly, for the global economy to have suffered such a sudden reversal in fortune, it must have had some serious underlying conditions. The looming questions are whether this particular patient will survive and, if so, how its functioning will be altered by the disease.

Even before the latest coronavirus outbreak, economic globalization was facing some very significant challenges. On January 24, 2019, the Economist reported on a gathering consensus that globalization was slowing down.2 As part of this trend, the percentage of trade in global GDP has fallen, foreign direct investment’s share of global GDP has declined, and multinational corporations are playing a less critical role in the global economy. The nature of the game has been changing:

The cost of moving goods has stopped falling. Multinational firms have found that global sprawl burns money and that local rivals often eat them alive. Activity is shifting towards services, which are harder to sell across borders: scissors can be exported in 20ft-containers, hair stylists cannot. And Chinese manufacturing has become more self-reliant, so needs to import fewer parts.

As economist Pankaj Ghemawat frequently points out, the global economy has never been all that globalized in the first place, with cross-border trade amounting to only 20% of global GDP and foreign direct investment representing only 10% of overall investment.3 As a consequence, the global economy was able to expand over the last decade even as the effects of a slowdown took hold.

Technological advances have been accelerating globalization’s retreat. Increased automation means that securing cheaper overseas labor no longer makes sense when parts can be printed out and the final product assembled by robots closer to home. As a result, the global assembly line—and the global logistics that sustain its profitability—is poised to become as outdated as the caravansaries of the Silk Road era or the telegraph stations of the Gilded Age.

Another pre-existing condition for globalization prior to the onset of COVID-19 was its contribution to climate change. Freight transport alone contributes 7–8% of global greenhouse gas emissions, with air transport being the most carbon intensive.4 One obvious method of radically reducing carbon emissions to meet the recommendations from the Intergovernmental Panel on Climate Change would be to return production to local sources.

A final challenge has been political. In the 1990s and 2000s, the critique of economic globalization largely came from the left and was confined to the margins of mainstream politics. After the financial crisis of 2008–2009, a new populist right emerged that challenged globalists, as well as the main political parties of the center right and center left that have long supported globalization. That critique took the form of a sharpened skepticism concerning the institutions of European integration, culminating in the successful Brexit referendum in 2016. Skepticism also helped push the populist right into power in Hungary, Poland, the Czech Republic, Austria, and Italy. Donald Trump in the United States and Jair Bolsonaro in Brazil both took advantage of this sentiment to gain office. New right leaders erected trade barriers, targeted transnational corporations, or pursued other policies designed to retard globalization and strengthen local manufacture.

COVID-19 is attacking a system of globalization that has already been altered by economic, technological, environmental, and political factors. It is not the first time that economic globalization has faced challenges. In the past, there have been financial crises large and small, as well as expected (Y2K) and unexpected (9/11) events. But this time, some fundamental changes are afoot, and the global economy post-COVID-19 will necessarily look different.

First of all, the global economy will shrink. According to projections from Moody’s Investor Service at the end of March, global economic growth will be negative for 2020, with particularly severe contractions in the United States, Europe, Japan, and certain countries in the Global South including Mexico and Argentina.5 At the same time, Moody’s predicts a strong economic rebound in 2021, led by China and India. These projections assume, with little evidence but much wishful thinking, that COVID-19 will have minimal economic impact after 2020. Furthermore, to ensure a global rebound, the consensus among both G20 members and opinionmakers has favored more globalization, not less.6

While the more industrialized countries and the international financial institutions urge a quick turnaround in overall economic output, they pay little attention to the nature of that output or the underlying conditions that made the global economy so vulnerable to pandemics. Previous disruptions to supply chains, such as the 2011 earthquake in Japan, were one-time events. Because of its potential to become a new and chronic part of the risk environment, COVID-19 introduces a greater degree of unpredictability into the global supply chain, prompting manufacturers to hedge their bets by looking more seriously into reshoring production back home.7 National governments that engage in the same risk assessment will decrease reliance on imports for such critical medical supplies as masks.8 The global economy may well rebound quickly when the COVID-19 threat passes, but it might be even less globalized in terms of trade and investment.

Another unpredictable element involves borders. Globalization promoted a borderless world, most obviously in the European Union with its unimpeded internal movement of goods, capital, and workers. Free trade agreements such as NAFTA replicated this model for goods and capital. Because of COVID-19, borders have reappeared in Europe’s Schengen Area. To the extent that these borders remain or harden elsewhere in the world, it will effectively exact a tax on globalization and add yet more topography to the so-called flat world of the global economy.

On the opposite side of the cost-benefit ledger, automation will encourage the localization of manufacture. Economists who have examined how automation has spiked at times of recession expect a similar surge as a result of this economic downturn, with low-income workers, the young, and workers of color at greatest risk.9 Automation will also have a differential impact around the world, one that is difficult to quantify. But the World Bank estimates that a staggering 85% of jobs in Ethiopia, 77% of jobs in China, and 72% of jobs in Thailand could be replaced by robots.10 COVID-19 alone will not be responsible for causing an economic transformation analogous to the massive reduction of the agricultural workforce in the industrial era, but it could very well represent a moment of punctuated equilibrium in this technological evolution.

The pandemic could have a comparable effect on the global carbon footprint. The economic shutdowns have already cut carbon emissions worldwide, in some places quite dramatically, as in the 25% reduction in China in February.11 But economic rebounds in the past have produced commensurate rebounds in carbon emissions, such as the 5% global uptick after the 2008–2009 financial crisis.12 The bailout plans prepared in the United States, Europe, and elsewhere have made few, if any, provisions to lock in carbon reductions through large-scale shifts to sustainable energy production, manufacturing, and agriculture.

Stimulus packages do little to address the economic inequality, between and within countries, that globalization aggravated and COVID-19 is worsening. Although the stock market correction certainly reduced the wealth of the very rich, growing unemployment is more negatively affecting those without a cushion of savings. Once the virus hits countries in the Global South as hard as it is now affecting Europe and the United States, the development gap will deepen. The provision of some crisis assistance from north to south will do little to address the more endemic problem of economic inequality.13

A final consideration is whether COVID-19 will shift the center of gravity of the world economy. The Chinese economy was hit hard early in the crisis, as it closed down manufacturing. But it is also the first country to bring the pandemic under some measure of control, and it has been reopening its economy even as other countries, like India, are just starting their shutdowns. This recovery has allowed China to provide pandemic assistance to countries now struggling with the disease.

Because of the substantial economic blow it is now enduring, which will be larger and more sustained than China’s, the United States is poised to lose whatever remains of its global leadership.14 It is having difficulty meeting the resource needs of domestic hospitals and cannot hope to compete with China by assisting other countries. Even before the pandemic, the United States faced a serious debt problem at all levels—federal, household, corporate—which the economic shutdown and subsequent federal bailout will aggravate.15 The debt that Britain accumulated during World War II precipitated its eclipse as a global power and replacement by the United States. COVID-19 may play that same role by transferring the fulcrum of the global economy from the United States to China, a trend already underway.

The current pandemic will not by itself transform the global economy. It will, however, reveal existing vulnerabilities and encourage certain trends. But much depends on how individual governments and the international community respond to what COVID-19 has revealed about the way the world works—and doesn’t work.

  1. James Hamblin, “You’re Likely to Get the Coronavirus,” The Atlantic, February 24, 2020. 
  2. The Steam Has Gone Out of Globalization,” The Economist, January 24, 2019. 
  3. Pankaj Ghemawat, “Globalization: Myth and Reality,” Harvard Business Review, February 24, 2017. 
  4. Alan McKinnon, “Freight Transport in a Low-Carbon World,” TR News 306 (November–December 2016). 
  5. Puneet Wadhwa, “Moody’s Cuts India 2020 GDP Forecast to 2.5%; Global Growth to Dip to –0.5%,” Business Standard, March 27, 2020. 
  6. UK Prime Minister’s Office, “G20 Leaders’ Summit—Statement on COVID-19: 26 March 2020,”, March 26, 2020. Kori Schake, “Globalization Is the Best Medicine for a Sick Planet,” Bloomberg, March 27, 2020. 
  7. Kemal Derviş and Sebastián Strauss, “Amid Rise of Nationalism, Coronavirus and Climate Change May Spur a New Wave of International Cooperation,” MarketWatch, March 8, 2020. 
  8. Keith Bradsher and Liz Alderman, “The World Needs Masks. China Makes Them—But Has Been Hoarding Them,” New York Times, March 13, 2020. 
  9. Mark Muro, Robert Maxim, and Jacob Whiton, “The Robots Are Ready as the COVID-19 Recession Spreads,” Brookings, March 24, 2020. 
  10. World Bank Group, World Development Report 2016: Digital Dividends (Washington, DC: International Bank for Reconstruction and Development, 2016). 
  11. Meegan Crist, “What the Coronavirus Means for Climate Change,” New York Times, March 27, 2020. 
  12. Matt McGrath, “Coronavirus: Air Pollution and CO2 Fall Rapidly as Virus Spreads,” BBC News, March 19, 2020. 
  13. Global Humanitarian Response Plan: COVID-19, United Nations Coordinated Appeal, April–December 2020 (Geneva: United Nations Office for the Coordination of Human Affairs, 2020). 
  14. Kurt Campbell and Rush Doshi, “The Coronavirus Could Reshape Global Order,” Foreign Affairs, March 18, 2020. 
  15. John Feffer, “There’s a New Crash Coming,” Foreign Policy in Focus, September 19, 2018. 

Inference, April 3, 2020

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