COVID-19 Will Expedite the Reversal of Globalisation

COVID-19 Will Expedite the Reversal of Globalisation

Who doesn’t love a good conspiracy theory?

COVID-19 is bringing conspiracy theories out of the shadows. As I write this, there are plenty of them out there making the rounds. Vaccine…lab accident…5G…you can’t escape them.

With all that uncertainty out there, conspiracy theories are a way for people to try to make sense of this crazy world around us.

And, speaking of conspiracy theories…there’s one I heard a while back. It has nothing to do with the virus, but with Argentina.

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Why does Argentina have so much economic trouble?

Much like Australia, Argentina is a large country with vast resources and important agriculture and mining industries. You can find every climate in its territory.

At the beginning of the 20th century, Argentina was one of the richest countries in the world. Ever since then though, the country can’t seem to shake off frequent economic crises.

Over the years, Argentina has had almost every single economic phenomenon you can think of: hyperinflation, bank runs, multiple debt defaults…you name it.

In a scenario like this, it’s challenging to build wealth or plan for the long term.

So, why does a country with so many resources have so much economic trouble?

As the conspiracy theory goes, it’s because Argentina has become a laboratory for economic experiments. They are tried out there before they go out to the rest of the world.

Whether this resonates or it’s far-fetched, it’s true that Argentina has applied quite a number of economic experiments over the years.

One of those was import substitution, which took hold around the 1930s.

The idea of import substitution was basically to increase local manufacturing so that the country would diminish its dependency on foreign imports but also create more jobs.

Argentina was then mainly a producer of raw materials. What was happening was that Argentina was selling those raw materials to developed countries, they would manufacture products, and then these would get sold back at higher prices.

The way Argentina encouraged import substitution was through tariffs and quotas. The state subsidised certain budding industries in economic sectors and protected them from foreign competitors.

Let me cut to the chase…it didn’t work out very well.

For one, it takes a very long time to build a manufacturing base, it costs more money to produce goods at home, and the products struggled to compete in the international market.

It also created inflation and slowed growth — one of the worst possible combinations.

Import substitution was quite the opposite of globalisation

Now, we’ve seen the trend of globalisation reversing for a while. Bringing back manufacturing into the US is something that US President Trump based his presidential campaign on.

And, it’s one trend I expect that COVID-19 will expedite…and it already is.

The pandemic has highlighted just how fragile and dependent our supply chains are. There is already a push to change where products are manufactured, and Australia could start producing more of its own stuff.

China is our largest export trading partner and it’s the destination of $153 billion or 33% of Australia’s total exports.

Australia’s main exports to China are iron ore, gas, and coal. On the other hand, Australia’s main imports from China are manufactured goods, like telecommunication equipment, IT products furniture, and homewares.

A reversal of globalisation and more protectionism is some of what I think is behind our recent riff-raff with China on barley and beef.

The Australian Financial Review reported yesterday:

Australian barley growers are set to become collateral damage in a broader dispute with China over the government’s aggressive use of anti-dumping measures against its steel and aluminium producers.

Confidential documents seen by The Australian Financial Review indicate that China will claim a lack of co-operation from barley growers to justify imposing a 73.6 per cent duty on Australian imports. […]

Beijing is set to impose the duties despite its own beer producers warning the levies would “hurt” the industry, push up prices and “increase trade uncertainty”.

Trade experts said the action is less about local market conditions and more about Beijing punishing Australia for levying duties of between 15 per cent and 102 per cent on Chinese makers of steel and aluminium.

Decades of globalisation brought us deflation as products were produced cheaper abroad.

My point is, that so far, we are looking at deflation as people cut spending and oil prices drop.

But much like globalisation brought us deflation, it’s reversal along with disruptions in supply from COVID-19 could bring back inflation, along with a period of slow growth as we try to pay off all that debt.

Inflation is something that many aren’t expecting.

The world could look a lot different once COVID-19 is over. Our editor Shae Russell has some ideas to help you prepare.


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Selva Freigedo,
For The Daily Reckoning Australia

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