Viewpoint: COVID-19 will reshape globalisation

05 May 2020 | Viewpoint

Economic distancing will follow physical distancing as governments seek to increase resilience and strategic autonomy

John Wyles speaking at a Science|Business event.

John Wyles speaking at a Science|Business event.

The global political, economic and social consequences of COVID-19 will be so many and varied that analysts are struggling to bring them into focus.  As they grapple with the public health impacts, governments have precious little time to anticipate the destructive storms gathering over their economies. They are gripped, however, by a deepening sense of vulnerability and uncertainty. 

Public confidence in the economic and commercial virtues of globalisation is weakening and a search for greater autonomy and a more stable and predictable framework has begun in Europe.

It is now a cliché that the crisis is a lesson in the breadth and depth of interdependence in the world, threaded between countries, civil societies and their trade and commerce. “A long term recession or even depression” is threatening, says Fabien Zuleeg, CEO and chief economist of the Brussels-based European Policy Centre, at a time when political instincts guiding the largest economies are focusing “on greater sovereignty and self-reliance.

The debate on how to reduce vulnerability to black swans and their impacts will also reshape globalisation.  In a search for ‘resilience’ many corporate boardrooms are looking at the options for reshoring or nearshoring of some manufacturing; relocation of research laboratories and service centres; and shortening and diversifying supply lines. “In some respects, we may be talking about a form of distancing which is economic rather than social,” says a senior official at the European Commission.

Reflecting on the likely consequences of the pandemic for China-EU competition, Herman Van Rompuy, former president of the European Council, warned recently that European countries, “Will want to keep more strategic activities in Europe in their own hands. The world will not de-globalise economically, but there will now be a greater tendency to emphasise strategic autonomy.”

Even before COVID-19, the EU was adopting “strategic autonomy” as a geopolitical goal, influenced by the three years the Trump administration has spent bullying its largest companies into “bringing jobs back to America” by relocating manufacturing in the US.

Economic distancing is also acquiring another meaning. Political and business opinion in Europe is converging on the need to mount a vigorous defence of companies and technologies left open to acquisition as a result of sinking stock markets.

“They are becoming easy prey for predators looking for market share and technologies,” says a German banker, reflecting a hardening of anxieties in his country.

China:EU balancing act

But there is one predator that has already been causing European policymakers sleepless nights for several years - China.  In October this year a new EU regulation comes into force drafted specifically with China in mind. Its purpose is to strengthen and coordinate defences against foreign direct investment (FDI) that may be unwelcome on national security and public order grounds.

Screening and powers of approval will remain with the member states, but for the regulation to be effective more than the current 14 countries with national legislation are needed to give it credibility. Meanwhile, Germany and Italy are tightening their procedures and broadening the scope of protection.

In the last few weeks both the commission president, Ursula van der Leyen and the trade commissioner, Phil Hogan have lectured the 27 on the need for more countries to join the defensive line. The intrepid Margarethe Vestager, the competition commissioner, has gone further and publicly advised governments to consider taking stakes in EU companies if necessary to fend off China.

“5G has been an enormous wake-up call,” said one close observer of EU-China trade. “China acquired the technology and rapidly built up a company to exploit it to the point of global near-domination.”

The first steps towards the screening regulation were taken against a background of record FDI into Europe from China in 2016 – a 77 per cent increase to €35 billion in the previous year.  The pace slackened off subsequently after the Chinese government tightened controls on outward investment with the result that state-owned companies, that once accounted for more than 70 per cent of FDI acquisitions in Europe were only 11 per cent in 2019. Consumer products and services, ICT and automotive were the sectors most targeted.

In terms of corporate ownership, China is less of a heavyweight in Europe than the US or Canada, accounts for only 9.5% of foreign-owned companies. This does not lighten the concern in governments and business circles of an acquisition strategy of hunting down advanced technologies and data – sectors that are restricted to foreign investors in China.  Moreover, according to the Mercator Institute for China Studies, significant growth is now underway in R&D collaborations between Chinese firms and European entities.

Striking the right balance between trade, Chinese inward investment, R&D collaborations and security is a difficult challenge for the EU. A 2019 strategy paper prepared by the commission described the four elements of the China-EU relationship that are not easily reconciled. “China is, simultaneously, a cooperation partner with whom the EU has closely aligned objectives, a negotiating partner with whom the EU needs to find a balance of interests, an economic competitor in pursuit of technological leadership, and a systemic rival promoting alternative models of governance,” it concluded.

The coronavirus epidemic and the lack of transparency in China’s early management of its outbreak has boosted suspicion of Beijing in many European capitals. But China is the EU’s second largest trading partner, with all that means for jobs, and a significant owner of European assets and intellectual property.

The EU will not pick fights with China with the relish of the Trump administration, but it will be more guarded than in the past in managing its relationship with this new superpower. If the US withdrawal from its world role continues, the EU, more than likely in eventual partnership with the UK, will need to work with China to preserve what can be preserved of the multilateral system of trade and governance that has served so well during more than seven decades.

John Wyles is a TPN member, a director of Science|Business, and a former Financial Times journalist.

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