Globalization or de-globalization - what will it mean for Vietnam
/I don’t believe that COVID-19 will change everything. It just doesn’t seem like people or systems change all that much, even after massive dislocations. And while COVID-19 has locked everyone at home, physical assets (ships, factories, etc) have been completely untouched. There is a good chance everyone just goes back to what it was like before. Looking at SARS in China and Hong Kong, we really didn’t see much change happen. This is significantly worse, but I am just not sure that the effect will be so different.
Source: Ravillon (2016) updated with World Bank (2019) via OurWorldinData.org
However, I talked about a few things that will be true: lower debt holdings by companies (and probably individuals) as they try to become a bit more resilient, and a move to online or at least better data on customers for those companies that have sophisticated tools.
Another thing that is likely is that there will be more shifts to supply chains, including the redomestication of some industries. The US is learning that it would be helpful to have the ability to manufacture things like ventilators and PPE.
Quick caveat here. There was an equal push to order more supplies domestically during the Swine Flu epidemic, but this happened…
In the panic of the swine flu epidemic, HHS contacted Prestige Ameritech to ask how many more masks it could produce, Bowen said. That was around the same time the company moved into a larger factory and hired 150 people. But after the pandemic, demand declined, and it took months for hospitals and distributors to go through the surplus of masks they had ordered but never used. Prestige Ameritech had to let most of its new workers go.
But let’s go back and talk about globalization, which has really changed the post-WWII world Look at exports as a share of world GDP. It was basically nothing for millennium until 1950 when it shot up, helped by things like refrigeration and communication.
Time series of value of world exports at constant prices, relative to 1913. Source: Frederico & Tena-Junguito (2016) via OurWorldInNumbers.org
Source: Fouquin and Hugot (CEPII 2016) via OurWorldInNumbers.org
If you look at those charts above, you see a few things.
Trade has gone up 50x from 1913.
1913 was the peak of a trend that had been very strong. From around 1860 to 1930, trade increased 5x, and it appeared to be accelerating, but then World War I happened.
There was a plateau around the 2008, and post-financial crisis it has been all over the map. The data ends in 2014, but I would suspect there was a bit of a pick up.
What happened after the financial crisis? There are a few interpretations. This could be the trend going forward. Maybe merchandise exports have reached their limit? Part of this is that China, which drove a lot of this, was an exporter, not a consumer. It is slowly shifting into greater consumption, which means the Chinese economy consumes some of the goods it would have exported abroad. And another part is that merchandise exports are no longer as important at driving trends as service exports. Think of recent WTO negotiations. Among developed countries, much of the discussion has been on services, such as intellectual property, not goods. Most tariffs on goods are fairly low, with some exceptions now. That could reverse, but it seems mostly unlikely (especially if Trump doesn’t win his reelection).
Or it could be that the global financial crisis was just a pause in the ever-upward trend. If so, then it looks like COVID-19 will enforce another break. But that once things normalize, we will see the lines move up and to the right in 2021 or 2022.
What does this mean for Vietnam? Well, it sure seems like globalization has been a driver of economic growth. Looking at economic papers…
Source: Michel Fouquin & Jules Hugot , 2016 via OurWorldInData.org
For Vietnam, the data is quite interesting. Look at this scatterplot of GDP per capita with trade. Except for the grouping at the bottom, it generally looks like higher GDP per capita is associated with greater trade. Of course, both of these could have been driven by an underlying factor (that’s why we say correlation doesn’t equal causation). In Vietnam, the doi moi reforms were about opening up, but also allowing more “capitalism” for want of a better term. Maybe just having more private property and a private sector drove these.
It’s hard to debate this here, so let’s assume the economists are right: Trade has caused economic growth in the past and that it probably will in the future. In that case, Vietnam may be in trouble if globalization retreats. I would say there are some mitigating factors:
China is the biggest bogeyman here, and companies may see shifting manufacturing out of China as the only thing they need to do. US companies don’t need to bring the supply chain all the way back, but rather distribute it across multiple countries, so diversification decreases risk.
Vietnamese labor, while getting more expensive, is still relatively cheap for manufacturers.
Vietnam has good relations with the US and the EU, and is not seen as a threat, like China.
There is still lots of urbanization and reform of agriculture to happen in Vietnam that isn’t exclusively dependent on globalization/exports.
Consumption is starting to increase with the increase in income - maybe this can start to drive economic growth, like we have seen in other developed countries.
So I think Vietnam is well positioned, but the risk is there that less globalization, meaning less trade, will hurt Vietnam. And we didn’t talk about capital flows, which are even more likely to decline in the short term, as people try to shore up balance sheets. But that’s a talk for another day.