IMA Analysis

Saturday May 2, 2020

A Less Liberal World

Speaker:  Adit Jain,Editorial Director, IMA India

A less liberal world

The liberal democracies of the European Union, in the wake of the pandemic, have totally reversed their approach on the freedom of movement of people and goods. National borders, by most European countries, were quickly sealed and restrictions levied on the export of medical supplies, food and other essentials. America, under the Trump administration, in resonance with its stated ‘America First’ policy, ordered its companies to divert what it considers essential supplies to the domestic market. Previously, the White House had banned the sale of critical electronic components to Chinese manufacturers including Huawei and encouraged its allies across the world not to place orders, for the new generation 5G telecom network, with the Chinese company.

Knee jerk reactions usually happen in a crisis where liberal values give way to survival. Some believe that this time, however, national policies will change more permanently. Dependence on imports would reduce through a greater thrust towards domestic manufacturing and self-reliance. A liberal order may give way to nationalism. The global supply chain is currently China-centric but this may possibly change. Japanese industry is working on a longer-term plan to relocate some manufacturing out of China and back to Japan. In a post Covid 19 world, it is possible that many countries will encourage this, perhaps even enforce it, through the imposition of higher tariffs, compelling industry to conform. As a start, many countries have tweaked foreign investment rules to stop the takeover of their companies by foreign buyers. Such clamp-downs may continue even after the pandemic has been arrested and some form of normality returns.

Multinational companies will be forced to re-examine their manufacturing strategies and set up operations in what they consider important markets. Effectively, protectionist government policies will determine strategy, as opposed to costs and logistics. Unwinding global supply chains is bound to be cumbersome and pricy, but companies may find themselves limited for choice. Governments may force them to do so. The current jostle for drugs, masks, medical gowns and other supplies has created an appalling distrust between nations and acrimonious brawls have followed. As larger nations such as America enforce domestic interests and local manufacturing, others are bound to follow.

The European ideals of a borderless region that combats social exclusion and discrimination and promotes economic and territorial cohesion, has been abruptly discarded in favour of national interest, at the first sign of trouble. Smaller member countries of the European Union, with limited clout or leverage, will surely remember this. In any case, the battle lines appear to be drawn between the Southern European countries that desperately need money and the Northern ones, in the Hanseatic League, that effectively provide it. Economies like Italy, Spain and Greece are in serious trouble and unless they are bailed out, may have no option but to pull out of the single currency mechanism. Public opinion in Italy has always been anti-Europe and would only strengthen in the months ahead.

Over the past few years, the post-war liberal order has slowly been eroded with nationalism gaining momentum across the world. Political parties that were previously in the fringes are now more centre stage. They are either in a position to persuasively influence policy or, in some countries, actually form it. This applies to much of Europe, Latin America and Asia Pacific. A less liberal world will change the rules of business. Manages must start thinking about this, once the present crisis is out of the way.