“The coronavirus appears poised to accelerate the trend towards an even more fragmented and protectionist global economy, with competing economic blocs and restrictions on trade, investment and technology transfer,” highlights a Moody's report titled “Coronavirus will shape and accelerate globalization, economic, commercial and consumer trends”, a document that raises the pandemic is a world crisis of historic proportions that will probably result in fundamental changes in the way economies, societies and companies operate, being the indicated fragmentation of world trade one of them.

According to the Moody's report, the crisis is also likely to harden attitudes against globalization, particularly as countries and regions aim to become more self-sufficient in light of critical supply shortages many have encountered during the pandemic. “These changes will disrupt production, sourcing, and trade of many kinds. Policy support will be a determining factor for companies to shorten or diversify supply chains,” the report states.

China versus USA

As you read, the globalization that has shaped world economic relations since the late 1980s has already been partially reversed in recent years, which may be reflected in the tension between the United States. and China before the pandemic.

For the post-pandemic era, Moody's expects the relationship between the U.S. and China to become a strategic rivalry in key sectors such as technology, financial services and education, a situation that will inevitably affect the rest of the world, particularly with regard to world trade.

For its part, the European Union (EU) will likely continue to be an advocate of a global trading system based on multilateral rules, but it will also be pushed in a more protectionist direction in the areas of goods critical to its national security.

Remodeling of supply chains

The report argues that the post-pandemic world could see the emergence of a tripolar global economic, financial and trade system, with each of the major economic blocs setting its own rules. As a result, Moody's expects competition between the three dominant players/blocs with corresponding frictions in international trade and finance. Likewise, it anticipates that “the general effectiveness of multilateral organizations would erode in this scenario and the attention paid to bilateral and regional agreements would increase. These trade barriers would pose greater challenges and inefficiencies for companies trying to operate globally or interregionally.

This process would reshape supply chains by accelerating de-globalization forces, while increased nationalism and protectionism will be both cause and effect of their restructuring and shortening, bringing them geo-politically and geographically closer to national markets.

These changes will affect production, supply and trade, especially for pharmaceuticals, food, information technology, defense and energy. Subsidies or tariffs on imports will favor the emergence of “national champion” companies.

Deconcentration of production

According to Moody's, a significant departure from globalization could reshape or even reverse the massive accumulation of concentrated production bases in China and other emerging markets.

In the past two decades, the report argues, China has become the most important supplier to many manufacturing supply chains. Its share of global manufacturing exports has skyrocketed, to 16% in 2018, from just 4% two decades ago, according to the United Nations Conference on Trade and Development (UNCTAD).

Nonetheless, the disruption of coronavirus-related business in China showed how a failure in its manufacturing activity can bounce off a supply line, demonstrating the high dependence of global manufacturing on China's intermediate input supplies in critical areas. such as technology, high-end manufacturing and drugs.

Given this, Moody's expects companies and governments to focus more on the manufacture of critical or strategic products for an entire production line, "either by displacing supply chains or avoiding dependence on a single dominant supplier in a chain." of supply".

This restructuring and reorientation will trigger adjustment costs, among them: the construction of new factories and the training of workers. At the same time, companies will likely consider stockpiling more stocks in some sectors, "resulting in less efficient and targeted supply chain models compared to the pre-pandemic period." “Multinational corporations will likely review their operating models and adjust their cost benefit strategies from cost-focused to security-focused. A new investment plan focused on local production would probably increase inventories, and inevitably raise costs and reduce margins”, ends the section of the report.