Reference no: EM133261269

Why the world needs Globalisation 2.0, rather than a retreat into protectionism

Historically, China was a trading nation, and it continues to be one today. China is now the world's largest trading nation, accounting for 13.2 per cent of global goods exports and nearly 11 per cent of global imports. And that upward trend shows no sign of abating, especially in the Covid-19 era when China's economy has recovered quickly while many other parts of the world are still battling waves of coronavirus outbreaks. The first half of 2021 saw China's total trade volume increase by 27.1 per cent, with exports expanding 28.1 per cent and imports by 25.9 per cent.

China is also rapidly becoming a major provider of outbound investment funds, as the world's industrial manufacturing clusters begin to move to countries with lower labour costs. In 2019, China's outward foreign direct investment amounted to US$137 billion, which was ranked the second largest in the world. Its outward investment has grown significantly in recent years in light of the Belt and Road Initiative in many developing countries.

Without doubt, China's astonishing achievement in international trade and investment over the past three decades has been one of the resounding success stories of globalisation. But this rewarding global trade environment is beginning to come under assault, posing unprecedented challenges to corporate China's expanding trade networks.

Former US president Donald Trump summed up the antagonism when he declared at the United Nations General Assembly in September 2019: "The future does not belong to globalists. The future belongs to patriots."

When the coronavirus pandemic hit, the naysayers of globalisation finally found the excuse they needed, holding up Covid-19 as solid proof of the inherent pitfalls of globalisation, as if the pandemic would not have affected them if their country were untouched by globalisation. The opponents of globalisation say it has resulted in a supply chain network that is too concentrated in China, making the supply chain susceptible to shocks such as a pandemic or a natural disaster.

Even though globalisation has brought immense benefits to many countries, especially developing countries that are not resource-rich or do not have extensive manufacturing, the deglobalisation school of thought appears to be gaining momentum among many politicians in these countries.

If left unaddressed, the envy, animosity, malice and feelings of sour grapes that are brewing in the minds of some influential people among China's trading partners will fester. Ultimately, it may coalesce into a vast global wave of anti-China sentiment, especially against the backdrop of China's growing trade surplus and foreign exchange reserves.

While US President Joe Biden's campaign for "extreme competition" with China may include some of the US' staunchest allies in the West, the anti-globalisation campaign targeting China may win over some poor developing countries as well. This could develop into a major headache for Chinese diplomats. Like any game, there will be winners and losers. In globalisation, while the winners are the majority, especially in emerging-market economies, the few losers are mostly those in the developed world whose jobs have gone because they cannot compete. That doesn't mean that these people do not need help; they do.

Globalisation in its current stage is far from perfect; there is plenty of room for improvement. The pandemic has thrown up a list of issues that we should address. This includes the need for a robust and resilient global supply network, a timely global virus mitigation and containment response through the coordination of the World Health Organization, and support for countries with inadequate and fragile medical infrastructure.

Deglobalisation is not just a vain attempt to turn the clock back. Rather, it will also pit the liberal global economic order that the US itself established after World War II against its domestic partisan politics, based on protectionism and localism.
From the developing world's perspective, deglobalisation is not an experiment that regions already suffering religious strife and political instability can afford to dabble in, given the risk of further instability.

While a retreat into protectionism may improve income equality in some countries, it will reduce the income of both rich and poor, and poverty will worsen. The Chinese stance is an honest admission that globalisation has its problems, but these are problems we can and should address. The world needs to move into phase two of the globalisation process, which I call "reglobalisation", in which we work on mitigating inequality and strengthening supply chain resilience. A liberal world order needs to be open and inclusive to trade.

Question 1:

1.1 Defend the claim that "the world needs globalisation 2.0 rather than retreat into protectionism". Discuss the extent with which you agree with this statement.

1.2 Highlight some of the main tools that can be implemented by a country that opts for protectionism.

Question 2:

2.1 Discuss the main theories underlying mercantilism and justify its relevance in current times by providing examples of countries that are implementing mercantilist policies. (20)

2.2 Critically discuss the importance of regional integration for developing countries and justify its role in assisting Africa during the pandemic times. (20)

Read the extract below and answer the questions that follow:

COVID-19 impacts on foreign direct investments in sub-Saharan Africa

In June of this year, the United Nations Conference on Trade and Development (UNCTAD) released its 2021 World Investment Report, in which it focuses on investing in a sustainable recovery from the pandemic. The report itself looks at how the COVID-19 pandemic impacted foreign direct investment globally and investment priorities for the recovery phase. The complex health and economic challenges created by the pandemic throughout the African continent have significant impacts on the foreign direct investment (FDI) both to and from the region. In fact, Africa's share of total global FDI inflows for developing economies fell from 6.3 percent to 5.9 percent between 2019 and 2020 (Figure 1). Although FDI inflows were already on a decline, COVID-19 continued to have a negative impact on investment globally and regionally.

Overall, FDI inflows to sub-Saharan Africa decreased by 12 percent between 2019 and 2020, but a few countries did see investments grow. In fact, Central Africa registered a consistent increase in FDI with inflows increasing to $9.2 billion from $8.9 billion. East Africa and southern Africa, on the other hand, saw 16 percent drops in inflows each since 2019. Notably, even within regions the impacts of the pandemic varied. For example, in West Africa, Ghana saw a 52 percent decline in FDI inflows in the year 2020-a drop from $3.9 billion to $1.9 billion; meanwhile, inflows to Nigeria slightly increased from $2.3 billion in 2019 to $2.4 billion in 2020.

FDI outflows were also impacted by the COVID-19 pandemic, but, again, varied across and within regions (Figure 2): According to the report, FDI outflows from Africa fell by two-thirds from $4.9 billion in 2019 to $1.6 billion in 2020. Notably, the highest outflows came from Togo, which, according to the report, were mostly to other African countries. For example, Togolese company Afrik Assurances opened financial services operations in Benin and Côte d'Ivoire during the pandemic. While Ghana saw a decrease in outflows, it still made up a significant percentage of total outflows from the continent. Another notable trend was the significant drop in outflow investment for southern Africa, which, according to the authors, is due to South African multinational enterprises repatriating capital from foreign countries.

The report authors, overall, remain optimistic despite these drops. In fact, UNCTAD suggests that Africa will see a rise in both FDI inflows and outflows in the year 2021 with potential to reach pre-COVID levels in 2022. Notably, the report also suggests that the African Continental Free Trade Area and the Sustainable Investment Protocol (phase II of the AfCFTA) could boost FDI flows in the long term as well. In the long run, for a successful recovery, the authors stress increasing vaccine availability and call for international financial support, among other country-focused policies.

Question 3:

3.1 Taking the article into consideration, formulate policies that would allow Africa to "see a rise in both FDI inflows and outflows in the year 2021 with potential to reach pre-COVID levels in 2022".

3.2 Critically evaluate the role of exchange rate systems in influencing FDI and trade levels.