Will Covid-19 Have a Lasting Impact on

GLOBALIZATION

Globalization?
by Steven A. Altman
May 20, 2020

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As leaders wrestle to guide their organizations through the Covid-19 pandemic, decisions
running the gamut from where to sell to how to manage supply chains hinge on
expectations about the future of globalization. The pandemic has prompted a new wave of
globalization obituaries, but the latest data and forecasts imply that leaders should plan for
— and shape — a world where both globalization and anti-globalization pressures remain
enduring features of the business environment.

The crisis and the necessary public health response are causing the largest and fastest
decline in international flows in modern history. Current forecasts, while inevitably rough
at this stage, call for a 13-32% decline in merchandise trade, a 30-40% reduction in foreign
direct investment, and a 44-80% drop in international airline passengers in 2020[i]. These
numbers imply a major rollback of globalization’s recent gains, but they do not signal a
fundamental collapse of international market integration.

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The volume of global goods exports in 2020 could fall to a level last seen in the mid-to-late
2000s, according to the latest WTO forecast. That would be a tremendously painful drop,
especially in the context of today’s larger and more complex world economy. But even the
most pessimistic trade forecasts do not imply a retreat to a world of disconnected national
markets. Most of the run-up in trade integration since the end of World War II should
remain intact.

If plummeting trade flows are unlikely to undo globalization, what about the even steeper
decline predicted in foreign direct investment (FDI)? Like other capital flows, FDI tends to
be volatile, so a double-digit decline is not as shocking as one might presume. FDI flows,
for example, fell 38% during the global financial crisis. Nor do shrinking FDI flows
necessarily augur a real retreat from corporate globalization. The foreign business activity
of multinational firms does not always closely track FDI trends.
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The collapse of international travel, in contrast, stands out against a much steadier growth
trend, and its damage is indisputable. Tourism contributes more to global output than
automotive manufacturing, and business travel facilitates international trade and
investment. As of late April 2020, every country had imposed restrictions on international
travel, and 45% of countries had partially or completely closed their borders to foreign
visitors. Airlines were flying 90% fewer seats on international flights, as compared to 62%
on domestic flights. This unprecedented collapse does, however, follow an international
travel boom. Even if international airline passengers fall by two-thirds, there would still be
more people flying abroad than there were in 2003.

What Are Globalization’s Post-Coronavirus Prospects?

Current forecasts call for international flows to start growing again as the pandemic comes
under control. Thus, 2020 is likely to be a low point for many globalization metrics. But
how deep will the plunge really be? How fast can we expect global flows to rebound? And
how might future flow patterns look different from the past? None of these questions can
be answered definitively yet, but leaders can find clues about the future and actionable
implications for their companies by focusing on five key drivers of globalization’s
trajectory:

1. Start with global growth patterns, where the key lesson is that international flows
tend to swing dramatically with macroeconomic cycles. In good times, they usually grow
faster than GDP, and in bad times they shrink faster, too, as people and firms hunker down
behind borders.

This time around, robust growth can only be restored once the pandemic is clearly
brought under control. But remember that globalization can also be a powerful
contributor to growth and health. Countries with higher scores on the DHL Global
Connectedness Index tend to enjoy faster economic growth. And there is some evidence
that more connected countries, even after controlling statistically for levels of economic
development, are less vulnerable to infectious disease outbreaks, in part because of their
stronger health care systems.

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 Coronavirus + Business:
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economic data — they can help tilt the
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loops by contributing to health, growth, and
international cooperation. Companies across
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manufacture urgently needed medical supplies. Large corporations can also soften the
pandemic’s economic impact, for example, by following Unilever’s lead in paying suppliers
faster and extending support to employees, contractors, and customers. And they can
support open markets, as 3M did when it resisted a proposed block on its mask exports
from the U.S. to Canada and Latin America.

2. Supply chain policies have come back to the top of the agenda, and shifting
approaches have the potential to reshape trade and FDI flows. The key globalization-
related debate here is redundancy versus reshoring. Will companies and countries seek
greater safety in international diversification, or will they try fostering domestic self-
sufficiency? Economic logic almost always favors the former approach, coupled with
national stockpiles for true essentials, but politics will sometimes force the latter.

Research by NYU Stern Professor Pankaj Ghemawat highlights several characteristics of

politically sensitive industries, such as production of necessities for health or national
security, sales to government rather than private buyers, and the size of an industry’s
domestic workforce.

If redundancy becomes the norm and reshoring the exception, expect just a modest long-
run drag on global trade growth, coupled with greater diversification of countries’ trade
partners.

3. Superpower frictions and fragility had already destabilized the international business
environment before Covid-19, and the pandemic adds new layers of complexity. It has led
to a vast expansion of state power, while introducing pandemic control as yet another
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arena for ideological competition. In this environment, where companies come from and
how well their home country governments get along will matter even more than before to
decisions about where to raise capital, which markets to prioritize, and which supply bases
to cultivate.

Many have predicted that Covid-19 will hasten a fracturing of the global economy along
regional lines, with competing blocs centered on China, the United States, and perhaps
Europe. But the fact that Europe, the world’s most connected region, has struggled to
mount a unified response to the pandemic is just one reason that a resurgence of regions
should not be a foregone conclusion. Most international flows already take place within
regions, and short-distance trade has not grown faster than long-distance trade over the
past few years. Be ready for the possibility of a more regionalized world, but don’t count
on it.

4. Ongoing technological shifts such as the adoption of e-commerce,

videoconferencing, and robots have all been supercharged by Covid-19. Before the
pandemic, many focused on how new technologies could reduce global flows, e.g. via
manufacturers substituting robots at home for low-cost labor abroad. But many
pandemic-induced shifts could also strengthen globalization if they are not curbed by
protectionist policies. Cross-border e-commerce expands export opportunities, especially
for smaller companies. Forced experimentation with remote work, where successful, could
spur more services offshoring. And even 3D-printing sometimes leads to more rather than
less trade.

Business leaders can think productively about Covid-19, technology, and globalization, by
taking a structured approach to considering both internal and external implications.
Internally, think how individual functions can harness opportunities afforded by new
technologies, while managing organizational change with sensitivity to the heightened
stress employees and teams are facing. Externally, think about how technological trends
could potentially change a company’s standing vis-à-vis its competitors, customers,

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suppliers, and so on. For most companies, technological trends should lead to more
globalization in some areas and less in others, rather than a uniform shift in one direction
or the other.

5. Public opinion about globalization may take another negative turn due to Covid-19,
scaling back the surprisingly strong support for trade and immigration reported in recent
polling. More international travel does accelerate the spread of infectious diseases, and
economic stress could boost calls for trade protectionism. While robust public health
strategies do not require ongoing barriers to globalization, nationalist politicians will point
to the pandemic and failures of international coordination in the response to fortify
opposition to globalization.

Customers and employees increasingly expect corporate leaders to take a stand on social
issues, making public opinion about globalization a potential management issue. The
blending of anti-globalization and anti-capitalist movements further complicates the role
of business in the public debate about globalization. And leaders of multinational
corporations face the special challenge of public and government engagement across
national divides. Focusing on facts, becoming more sensitive to inequality, and
emphasizing real economic contributions can help to support a healthier globalization
debate.

In conclusion, Covid-19 looks like a “bend but won’t break crisis” for globalization.
International flows are plummeting, but globalization — and opposition to globalization —
will continue to present business opportunities and challenges. Careful attention to the
drivers of globalization’s future can help companies navigate through and even profit from
globalization’s turbulence. A volatile world of partially connected national economies
expands possibilities for global strategy even as it complicates the management of
multinational firms. Now is the time for global corporations to show their value by
harnessing the best of the world’s capabilities to end the pandemic and bolster the
recovery.

[i] FDI forecast pertains to 2020/21.

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Steven A. Altman is a senior research scholar at the NYU Stern School of Business,
executive director of NYU Stern’s Center for the Globalization of Education & Management, and
an adjunct assistant professor in NYU Stern’s Department of Management and Organizations.

This article is about GLOBALIZATION

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