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The state of globalization in 2021

Economic

The state of globalization in 2021

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As the coronavirus hit the world, closing borders and stopping international trade and capital flows, the question arose as to the lasting effects of the pandemic on globalization. However, a closer look at the latest data paints a much more optimistic picture. While international travel continues to decline significantly and is not expected to pick up again until 2023, cross-border trade and the flow of capital and information have largely stabilized, recovered or even grown over the past year. The bottom line for business is that Covid-19 has not pushed globalization back anywhere near what it would take strategists to limit their focus to their home countries or regions.

Cross-border flows collapsed in 2020 as the Covid-19 pandemic swept the world, adding to doubts about the future of globalization. As 2021 begins, the latest data paints a clearer – and more hopeful – picture. Global business will not go away, but the landscape is changing with important implications for strategy and management.

The Covid-19 pandemic is unlikely to bring the world’s globalization below the level seen during the 2008-09 global financial crisis (the worst setback to international trade and capital flows in decades), according to the 2020 edition of the DHL Global Connectedness Index, the we released in December. The index measures globalization using more than 3.5 million data points on trade, capital, information and people flows.

The only part of the index that shows an unprecedented collapse due to Covid-19 is the flow of people. Commerce has recovered strongly, capital flows have recovered, and digital information flows have increased. Consider the business impact of developments in each of these four areas:

1. Trade flows

The recovery in world trade has exceeded even the most optimistic early projections. The trade in goods declined faster in March and April 2020 than during the Great Depression and the global financial crisis. But it started growing again in June and shot back to pre-pandemic levels in November. Despite early disruptions, trade has proven to be a lifeline for economies and health systems. Trade in medical devices and electronics (for work from home) rose sharply as social distancing shifted spending from local services (e.g. restaurants) to imported goods.

The trade turnaround should destroy the idea that Covid-19 is the last straw for global supply chains. Many companies have already put pandemic-era reshoring plans on hold, realizing that concentrating production at home often increases costs without adding resilience. Diversification across efficient domestic and / or overseas production sites along with investments in technology and inventory usually makes more sense, and surveys show that more companies are pursuing these strategies.

Expect supply chain shifts to accelerate as business travel re-opens, but most pre-pandemic trends, like China plus One Sourcing, will continue. With trade still flowing, companies risk falling behind competitively if they miss out on imported inputs or export sales. Hence, efforts to strengthen resilience must fit into broader supply chain strategies that address shifts in demand and production costs across countries, geopolitical tensions, and advances in automation and other technologies.

2. Capital flows

Cross-border investment flows were hit even harder by Covid-19 than retail. Investors withdrew record amounts of portfolio capital from emerging markets at the beginning of the pandemic, but these inflows stabilized quickly and then recovered in late 2020. Courageous fiscal and monetary responses have so far prevented the Covid-19 crisis from turning into another global one Financial crisis.

However, international corporate investment is still subdued until 2021. Foreign direct investment (FDI), which businesses buy, build, or reinvest in operations overseas, fell 42% in 2020, to a level last seen in the 1990s. Companies are understandably cautious about investing in new “greenfield” expansions amid a fragile and uneven economic recovery. However, international mergers and acquisitions (M&A) showed signs of picking up in late 2020 and the international share of M&A activity remained stable over the past year. Corporate dealmakers seem to have become more averse to international transactions in particular.

The outlook for international corporate investment should brighten as pandemic macroeconomic uncertainty, lockdowns and travel restrictions ease. But a tighter scrutiny of overseas takeovers for national security reasons will remain, and supply chain diversification and partial relocation will improve the prospects for some projects while making others less attractive. The business case for investing in overseas operations will still rely on traditional factors such as access to markets and resources, but risk assessments should place more emphasis on geopolitical factors in the current context.

3. Information flows

Before the pandemic, there were signs of a slowdown in the globalization of information flows. The growth in international internet traffic, telephone calls, license fees, and scientific collaboration had all declined. But then digital flows rose as the pandemic sent work, play and education to the internet. International internet traffic increased 48% from mid-2019 to mid-2020, and international phone call minutes increased 20% in March compared to the same month last year. According to a study, cross-border e-commerce sales of consumer goods rose 53% in the second quarter of 2020. However, domestic data and calls also increased significantly during the pandemic. So we cannot yet say whether the information flows will have become more or less globalized in 2020.

Looking ahead, the growth of digital flows will slow down again as the pandemic spike subsides. But the boom in digital flows in 2020 will have accelerated two longer-term shifts in the business environment. First, it expands the opportunities for trade in services. The Covid-19 crash course for remote work teaches companies ways of working that enable them to tap foreign talent pools more effectively. Second, the expansion of cross-border e-commerce can help smaller businesses go global, but it also means businesses of all sizes must be on the lookout for new competitors to ride this wave into their markets.

4. Streams of people

While trade, capital and information flows all played positive roles in responding to the pandemic, personal mobility had to be limited to curbing transmission of the virus, resulting in an unprecedented decline in human flows this year. The number of international travelers decreased by 74% in 2020. International travel is unlikely to return to pre-pandemic levels until 2023.

Business travel accounted for only 13% of international travel prior to the pandemic, but it plays a key role in facilitating trade, investment and management for global businesses. Corporate travel agendas in support of external sales and business development are expected to recover before traveling to internal corporate meetings and attending conferences and trade shows. This means that executives in multinational corporations should, in the medium term, pay particular attention to the effects of travel restrictions on internal team function, learning and innovation. Remember that global teams are more prone to misunderstandings and loss of trust than domestic teams, especially after long periods of no face-to-face contact.

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So the pandemic has not halted most types of international flows. Nor has it clearly turned the tide in the direction of advancing deglobalization. The DHL Global Connectedness Index 2020 report also looks for evidence that the global economy is falling apart into rival blocks. The decoupling between the US and China has progressed somewhat since the trade war began in 2018, but these economies remain highly intertwined. China’s share of U.S. trade skyrocketed during the pandemic, and American multinational corporations like Walmart, Tesla, Disney, and Starbucks continue to invest there. In addition, the average distance traded between countries has increased slightly since 2016. This casts doubt on the claim that we are seeing a major shift from globalization to regionalization.

Many governments have also taken important steps to open up the markets in the past year. The Regional Comprehensive Economic Partnership (RCEP) was signed in November, pledging to facilitate trade in a part of the Asia-Pacific region that comprises nearly a third of the world economy. The US-Mexico-Canada Agreement (USMCA) came into force in July and replaced the North American Free Trade Agreement (NAFTA). And trading under the African Continental Free Trade Agreement (AfCFTA) began on January 1, 2021.

These steps are supported by public opinion data. Majorities in several countries want more international cooperation, and polls in the US show record levels of support for globalization in general and immigration in particular.

The bottom line for business is that Covid-19 has not pushed globalization back anywhere near what it would take strategists to limit their focus to their home countries or regions. Business globalization has never been easy, but if international opportunities and competitive threats were important to a company before the pandemic, they will matter in 2021 and beyond. And since countries more connected to global currents tend to grow faster, we need more globalization rather than less to accelerate the recovery from Covid-19.

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