Two-Faced FDIs & COVID-19’s Role in Accelerated Deglobalisation

By Affan Ahmad

The Financial Times (“The modern era of globalisation is in danger”, May 24) is right to argue “the current era of globalisation is not dead but looks in ill health”. With the rise of populist nationalism such as UK’s Brexit vote and the US election of Donald Trump in 2016, the COVID-19 risks deliver the knockout blow. Every country will have to pay the price for increasing protectionism resulting in frailer domestic production.

We have found ourselves in a predicament. Investment from overseas (FDI) helps stimulate our economy’s growth by creating local jobs and driving our modernisation, which accompanies the rise of globalisation. According to Austrade, 1 in 10 jobs in Australia are supported by FDI and it contributes to two fifths of Australia’s goods and services exports. Yet now, the Australian government has announced it will be tightening regulations for FDIs. Let’s try to understand why the government would be ‘closing borders’ on foreign investment during this crisis and the potential results if world governments continue to go down such a path.

The deadly pandemic has now encouraged more nationalist policies. In the last few years, some of the most influential economies have reformed their foreign investment review frameworks to allow the government more leeway to block deals or impose conditions on their completion. With the crisis already wiping off trillions of dollars off companies’ valuations, it may well be in a country’s best interest to put up temporary barriers on investment as a protective measure.

Foreign acquisition bids may also be possible at bargain-floor price in key industries that need to remain in domestic hands. The European Commission has called on European Union members to adopt or strenuously enforce foreign investment screening mechanisms to protect sensitive assets from foreign takeover, notably in areas such as health, medical research, biotechnology, and infrastructure.

France, Germany, Italy, and Spain have responded to this call, which continues a trend of rising protectionism that started with withdrawals from trade agreements in recent years. In 2019, restrictions on FDI reached the highest level in 20 years. All foreign investments are now subject to further approvals by the Treasurer, yet screening decisions can be unclear in many cases and discourage foreign investment. While such measures make sense in the short-term, the tricky part is not to make them stick once the health emergency subsides. The optimal outcome would be to collaborate and open borders as quickly as possible. The “first mover” to lift restrictions may get the short end of the stick if its initial openness isn’t reciprocated.

Some governments are now also conditioning state support on shifting production back home. Examples of this can be found in the American microchip manufacturers and in the French automotive industry – these interventions often go against economic rationale. Supply chain risk will not be reduced by reshoring, while the increased production costs could undermine national competitiveness and lower long-term growth across the world.

“In the face of a deadly pandemic, nationalist policies may appear rational. But they are not built on economic fundamentals. It is far more effective to leverage global supply chains to ramp up production quickly and efficiently. It’s smarter to increase international cooperation to stockpile essential goods and build resilience to future shocks—especially in developing countries.”

Caroline Freud (Director of Trade at World Bank)

More worrisome is the rise in political attempts to interfere with free trade in essential goods. One such example is the unsuccessful attempt to block the flow of protective masks made by 3M to Canada by Donald Trump’s administration, whilst invoking a law dating back to the Korean war — the Defence Production Act — to order for 3M to produce more of its sought-after N95 respirators.

As a result, the current crisis appears to be a catalyst for deglobalization. UNCTAD, the main United Nations body dealing with trade, investment and development issues, reports that global FDI flows may fall by 40 per cent in 2020-21, and cross-border mergers and acquisitions will continue to decline. Those losses are potentially more dramatic than at any time in modern history.

The global economy as a whole will suffer from deglobalisation and the decoupling of the world’s largest economies if the flow of capital, investment and trade becomes less dynamic. Before the outbreak, the rising strategic competition and escalating trade war between the US and China was fostering the deglobalisation trend and COVID-19 is only likely to accelerate the decoupling, which may well prove to be a historic turning point.

The authors of this publication are not qualified to provide financial or investment advice and as such the content provided should not be construed in this manner. All information is intended purely for educational purposes and is provided for the personal interest of UNIT members. The opinions expressed within the article do not reflect those of UNIT as an organisation, its partners or its sponsors.