Coronavirus reveals globalisation’s weakness

That a rugby match in Dublin between Italy and Ireland can be cancelled because of a virus that germinated in a market in a Chinese city, is a chain of events to appeal to any chaos theorist.

The panic caused by the coronavirus illustrates the fact that despite how interconnected the world has become, national infrastructure and policy systems are still so very different.

With the spread of the virus across China, it seemed that the financial markets would quickly work through the implications. That has not been the case due to another sickness — over-exuberance in financial markets. Nonetheless, in the short run, the sell-off is nearly complete, and markets will likely rally this week.

Ironically, in an age of interconnectedness, and where social media companies are dominant, markets are responding to the risk that humans will have less physical interaction with each other and will enjoy less physical forms of consumption, such as travel and shopping.

At the time of writing, it appears (at least from official numbers) that the Chinese authorities have contained the virus, and globally the number of cases look to have peaked. Here though, the risk is that the Chinese authorities rush people back to work and, like the Spanish flu in 1918, there is a bigger second (and third) wave of the virus.

The passage of the virus across the world, even at what might be an early stage, has revealed and exacerbated a number of changes in the system of globalisation.

The first relates to trust. There is widespread suspicion inside and beyond China that the authorities there have not been upfront about the true extent of the virus. Some, like US Senator Tom Cotton, even believe that the virus is man-made. To that end, while China’s handling of the crisis will, on one hand, reinforce the sense that it can marshal huge swathes of its population, on the other the trust of outsiders in the Chinese authorities will diminish.

The Belt and Road Initiative may be a casualty here. Mistrust will also channel itself in other ways within the financial system. If in the future, China has a debt crisis, investors are more likely to sell first than wait for a true picture to emerge.

Within China, this episode has clearly damaged the Communist Party, though it is very hard to see how this will play out in public life, or even through social media discourse. My sense is that the Chinese authorities will react in at least two ways. One is a fiscal stimulus made up of tax breaks, support for small businesses and an acceleration of infrastructure programmes.

The other more interesting possibility, is the application of Chinese social control and social credit scoring and the application of these new technologies to healthcare. It is plausible that Chinese citizens will be incentivised to share health data with the state. To some extent this is already starting to happen, however insidious many in the West consider it. The power of fear to cause acquiescence cannot be underestimated.

The second effect of the coronavirus crisis is that it shows up the weaknesses of globalisation. That there has been little to no coordination between nations speaks to a sense of a fractured world, and the performance of the World Health Organisation reinforces the view that, like the World Trade Organisation, its time has come.

There will be a sharp, short-term hit to world trade from the coronavirus. Hotels and airlines are the obvious “victim” industries, though “elite” forms of travel and healthcare will continue to thrive. In the longer-term it will also reinforce the sense in governments and multinationals that security of production is increasingly important.

To that end, the rise of national champions and the relocation of production to home countries will continue — the pharmaceutical industry is a likely early adopter of such a trend. In many different ways, the coronavirus, like the 2019 trade war, will force a rethinking of globalisation by corporates.

Other megatrends may also start to be rethought in the virus’s wake. India and many parts of Africa are the only parts of the world where urbanisation rates are still relatively low, but where the rate of urbanisation is now increasing. The coronavirus crisis is a very clear reminder of the potential of “smart” urbanisation is terms of the health, data gathering and communication benefits that it can bring, and in this way the lessons for Wuhan are yet to be learnt. For example, it is only just emerging that 40 per cent of the coronavirus cases in Wuhan were transmitted in hospitals — the same may be true of both Italy and Iran.

As this adjustment process happens, there will likely be one constant —  the vogue of central banks to meet any threat to growth, and the attendant dip in markets, with more liquidity. Liquidity provision and rate cuts will not solve the process of adjustment away from globalisation and, in the long run, they may channel this process down the wrong path because cheap money increases the risk that investment decisions are badly made.