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Will global connectedness bounce back?

Though COVID-19 proved a setback to globalisation in 2020, global connectedness will recover, according to a DHL study
The world map laid out showing interconnected trade flows

We live in an uncertain world. The approvals of several vaccines have somewhat raised the hopes of a better tomorrow, but it is too soon to say anything as newer strains of virus crop up around the world, and the pace of the vaccine roll-out differs from country to country. 

Some experts opine we may never get back to pre-pandemic levels of globalisation, meanwhile others are more hopeful. A recent report by DHL explores the state of global connectedness in the backdrop of the pandemic. Global connectedness declined in 2020 due to COVID-19, but was still better off than the levels witnessed during the 2008-09 Global Financial Crisis.

Exhibit 1: DHL Global Connectedness Index, 2001–2020*

Four pillars of global connectedness

The pandemic has caused widespread disruption to international flows of trade, capital, information and people. While the first three flows were able to hold their ground amid the pandemic, the international flow of people was and continues to be the worst hit. Just when it did start to stabilise in the wake of news around vaccines being available soon, newer strains of COVID-19 have dashed hopes. While some countries are contemplating another round of lockdowns and border closures, the report expected the international flows of people in 2020 to have declined to its lowest level since 2001.

Exhibit 2: Four pillars of global connectedness, 2001–2020*

The year 2019 was defined by an ongoing US-China trade war and overall slowdown in global economic growth. Global trade was further battered by the sudden disruption of global supply chains due to COVID-19 in 2020. The IMF estimates the value of global trade to have declined by 13.2% in 2020. Meanwhile, the WTO forecasts a 7% spike in merchandise trade in 2021.

According to John Pearson, CEO of DHL Express: “Connected supply chains and logistics networks play an essential role in keeping the world running and stabilising globalisation especially at a time of a crisis that spans our globe.”

The international flow of capital, in the form of FDI and portfolio equity investment, has declined more sharply than trade flows. The decline of FDI is expected to be more subdued in 2021 – it is expected to have fallen by 30%-40% in 2020, and to reduce further by 5-10% in 2021, before starting to recover in 2022. The reduction in earnings and looming uncertainty around business in general are reasons for this drop. Meanwhile, portfolio equity investors withdrew large sums from emerging markets in the peak of the pandemic, but these numbers were quickly back to positive levels.

Among other flows, the international flow of information remained unchanged in 2020. Amid the pandemic, global international call minutes were up by 20%. Meanwhile, internet traffic boomed due to people being grounded in their homes during the prolonged lockdowns and amid strict social distancing measures. According to research by an independent agency, “international internet traffic soared 48% from mid-2019 to mid-2020”. Scientific research collaborations have grown quite remarkably as well, but is now under heavy scrutiny due to growing geopolitical tensions.

At the top

The Netherlands, Singapore and Belgium take the top three spots in the global connectedness index 2020 – with Singapore the only country from Asia to feature in the top 10. Interestingly, 8 of the top 10 countries in the index are from Europe. This is due to the region recording the most international trade and people flows in 2019 than any other region. Europe controlled as much as 28% of all international flows worldwide in 2019.

Exhibit 3: Top 10 most connected countries globally

However, developing economies made large gains too, with countries such as Uzbekistan, Sudan, Trinidad & Tobago and Niger gaining most between 2017-2019.

Future of globalisation

The report is quick to refute that the pandemic could usher in the “end of globalisation”—as feared by many—as the world becomes more domestic than international. The wheels of reshoring supply chains much closer to home had started even before the pandemic had kicked in. COVID-19 only acted as the catalyst.

“Stronger global connectedness could accelerate the world’s recovery from the COVID-19 pandemic”, says Steven A. Altman, Senior Research Scholar and Director of the DHL Initiative on Globalization.

Exhibit 4: The world is far less globalised than many people think

The report has recommended five key drivers for the future of globalisation for policymakers and businesses:

  • Companies should actively trade in domestic markets to remain in business and then grow internationally post the pandemic. Policymakers should focus on monitoring the virus spread while continuing to vaccinate their populations.
  • International relations between the superpowers remain frayed. As such businesses should plan their next course of action based on how relationships play out between the US, China and the EU.
  • The unexpected disruption in supply chains will warrant a mix of responses from both policymakers and organisations. Many will continue to diversify their supply chains further, while others may reshore, relying on more domestic production.
  • Technology will be the gamechanger and may singlehandedly spur globalisation. Its countervailing force of reducing transaction costs will further pave the way for international flows.
  • Lastly, contrary to popular belief, COVID-19 has made people rethink their relationships with other countries as they believe the COVID-19 impacts would have been much lesser had there been greater international cooperation. People are aggressively demanding the larger powers to find ways to work together.
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