Since the end of World War Two, the process of globalisation has provided a tremendous tailwind for businesses and societies at large.
It’s facilitated increased trade, cross-border payments, low cost manufacturing, often seamless communication, third-party outsourcing, centralisation of administrative and finance functions and a global talent pool of workers. Things we just take for granted. Over the past few years though, globalisation has reversed somewhat as a result of rising geopolitical and economic tensions between the United States and China. This reversal is likely to gain momentum due to the coronavirus outbreak, in our view. Put simply, we’ve almost certainly passed peak globalisation.
Money, Mobs & Moguls has been doing some eclectic reading of late about the Black Death, one of the worst pandemics in human history. I’m not relating this to scare anyone, but to point to some of the interesting parallels between the 14th century and our own, especially when it comes to globalisation.
The Black Death was absolutely horrific. It’s estimated to have killed at least 50 million people, or 60% of Europe’s entire population. A bacteria found in fleas and carried by ground rodents, is believed to have been the cause. For centuries, it was believed that the source of the plague came from China, but new research shows it started in 1346 in the steppe region, in Central Asia or Eastern Europe.
The plague is thought to have spread by rat fleas on ships. Infected rats on these ships would die, but their fleas would often survive and find new rat hosts wherever they landed. The disease entered Europe through Italy (another spooky parallel…), first entering via 12 ships which reached Sicily in October 1347. It spread in other areas of Italy through the arrival of more ships. In January of 1348, a ship expelled from Italy reached Marseille in France. From there, it spread right throughout Europe, reaching Russia in 1351.
The rapid spread of the disease is believed to have been aided by a burst of economic modernisation prior to the outbreak. Along with rapid population growth, early capitalist devleopments had advanced quickly in the likes of northern Italy and Flanders:
“New, larger types of ship carried great quantities of goods over extensive trade networks that linked Venice and Genoa with Constantinople and the Crimea, Alexandria and Tunis, London and Bruges. In London and Bruges the Italian trading system was linked to the busy shipping lines of the German Hanseatic League in the Nordic countries and the Baltic area, with large broad-bellied ships called cogs. This system for long-distance trade was supplemented by a web of lively short and medium-distance trade that bound together populations all over the Old World.” *
In other words, greater globalisation through increased trade, commerce and shipping resulted in a more rapid and greater spread of the disease.
The effects of the Black Death are difficult to comprehend. Half of Paris’ population of 100,000 died. The impact on Italy particularly was enormous, with around 60% of Florence’s population perishing (one theory is that the changing worldview from this tragedy gave birth to the Renaissance in Italy). Around one-third of people in the Middle East was lost. The ranks of priests, nuns and monks were decimated as they were the ones who had cared for the dying.
Given the population loss, the Black Death led to an extreme labor shortage. All of a sudden, serfs who had been tied to the land had their pick of jobs. The Lords of the time had to better cater to them, which led to significant wage rises and improved conditions.
The Catholic Church didn’t fare as well. People lost their faith believing God had failed to prevent the plague from occurring. Jews fared even worse, as they were often blamed for the outbreak. There were several instances of massacres of Jews in German cities in 1349-1351.
More broadly, historian Johan Huizinga argues that the period following the Black Death turned out to be the “waning of the Middle Ages”. He suggests rising xenophobia, irrationalism and mysticism brought an end to the universalistic culture which had been built prior.
This waning of a “universalistic culture” is intriguing. In our own age, the momentum behind globalisation has also seemingly gone backwards. Think of the U.S. tariff war with China. Or the security concerns over Chinese telecommunications giant, Huawei. Or the immigration restrictions brought in by the current U.S. President. Or the border wall between the U.S. and Mexico. Or indeed the increasing pushback against the internet companies over privacy concerns.
The question is whether the coronavirus might accelerate the momentum against globalisation? My view is that it will, with the following implications:
1) Business supply chains will be revamped. The West hasn’t blamed China for the outbreak yet, but it wouldn’t surprise if this happened soon enough. Donald Trump’s reference to a “foreign” virus hitting America may be the start. In any event, China’s economic disruption showed western companies that they have been too reliant on Chinese manufacturing and logistics for their products. Expect them to further diversify, with Vietnam, Thailand, Indonesia and Bangladesh being among the alternative destinations. The companies may not benefit from the same efficiencies that they had in China, however.
2) A more fragmented internet or splinternet. Splinternet is when governments seek to fence off the web into a series of national internets. China-led or Russia-led internet platforms competing more with America- led ones. This could have all kinds of impacts. From production, to procurement, to data privacy, companies having to deal with different platforms in different countries means more cost, regulation etc.
3) An acceleration in the technology war. The job of any superpower is to control the key lines of communication. In the days of ancient Rome, it was via roads, hence all roads lead to Rome. Nowadays, it’s about data and telecommunications infrastructure. That’s why there’s been a big fight over Huawei and the building of 5G networks. China knows that it’s behind in semiconductor development and the U.S. semiconductor companies hold the world’s most important patents. Expect China to spend big to play catchup, especially if it recovers more quickly from coronavirus and senses weakness in key rival countries.
4) The continued build of the renminbi as an alternative reserve currency. One of the principle lessons that the Chinese learnt from the 2008 financial crisis was that it was too dependent on the U.S. dollar for trade finance. Since then, China has aggressively sought to de-dollarize its trade, with its Belt and Road strategy playing a part. If coronavirus results in the further fraying of U.S.-China relations, China is likely to further prioritise de-dollarisation.
5) Further immigration restrictions. This is an obvious one. If much of the world, including the U.S., was already cutting immigration intakes, the virus is only going to lead to more of the same.
6) More/higher tariffs? If the virus has a more sustained impact on global growth, you can expect countries to fight for a greater slice of the (reduced) economic pie.
7) Increased regulations, complexity, costs. If all of the above is correct, it’s going to result in more regulations and greater complexity for businesses and economies. That will feed through to increased costs and lower profit margins, possibly impacting investment by firms, and ultimately GDP growth. It could also possibly lead to higher inflation, ending an almost 40 year bull market in deflation.
James Gruber is a businessman and writer. He authors a blog on Australian business issues: Money, Mobs & Moguls.