More or Less Globalization? Thinking about the Real Lessons of Covid-19

Dr. Hwy-Chang Moon's picture

Many contend the lesson of Covid-19 is the need to reduce global business activities, particularly the United States (US)’s dependence on China for imports of manufactured goods. They further assert American multinational corporations (MNCs) operating overseas, particularly in China, should return to the US, undertaking a so-called a “reshoring strategy.” The wisdom of such propositions, however, is open to debate.

First, the US is not well suited to receive large amounts of returning foreign direct investment (FDI) across the board because its manufacturing base is not as competitive as China’s or many others. In some sectors, labor costs are too high and regulations too burdensome. This is why not only labor-intensive manufacturing firms, but also higher valued-added firms such as pharmaceutical companies operate in less expensive and/or less regulated countries such as China and India. Second, the real lesson of Covid-19 is not to reshore business, but rather to diversify operations into more than one country. MNCs should not concentrate their manufacturing in only one country, whether China or the US, but, instead, diversify it to diverse economies such as the US, China, India, Vietnam, and other Asian countries like South Korea which have a strong manufacturing base. With this diversification strategy, there will, of course, be redundancies across international operations, but risks will be reduced. Therefore, the appropriate business response to Covid-19 is not less globalization or national isolationism, but more globalization with flexible connections across countries. To manage risks, smaller countries need to contemplate even more globalization given that their manufacturing base is relatively weaker. In other words, they need to spread out business risk across more countries. In the final analysis, the pandemic has not just raised threats. It has created opportunities for MNCs to reorganize their business operations and for host countries to attract more FDI.