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OCTOBER 10TH–16TH 2020

America’s other election drama

Defending Taiwan: harder and costlier

Ant Group and the rise of digital finance

Learning the right lessons from Sweden

How covid-19 is reordering the global economy


Winners and losers

Page 2

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Page 49

The Economist October 10th 2020 Special report The world economy 7



stopped crossing borders; Davos 2021 was postponed. However,
the supply-chain panic has left a lasting impression. For business,
it is further evidence of the risks of distant disruption. For govern-
ments it offers more reasons to turn inward. The result is to accel-
erate changes to globalisation that were already in train.

Global supply chains were forged in the period from the
mid-1980s until the financial crisis 25 years later. Trade surged in
volume and changed in nature. It grew nearly twice as fast as global
output, as emerging markets in Asia were bedded in to the world
economy. After China joined the World Trade Organisation in 2001,
its share of world exports of many parts and capital goods grew
from under 10% to over 30%. Countries often specialised not in
specific goods, but in bits of them. Taiwan, South Korea and Japan
made semiconductors for the consumer-electronics industry.
China supplied parts to German carmakers. The rise of computing
made such complexity manageable. Globalisation brought cheap-
er goods to the rich world and, thanks to what Ben Bernanke, then
Fed chairman, called a “global saving glut”, low interest rates. It
also displaced many workers. Perhaps a million Americans lost
their jobs to Chinese competition.

The 2010s slammed on the brakes. Trade stagnated as a share of
gdp; foreign direct investment fell. As China’s middle class grew, it
consumed domestically more of what it produced. Its share of
world exports stopped rising in 2015, but its share of world imports
continued to grow. As manufacturing became more automated,
savings from locating production where workers were cheapest
shrank. The rise of social media made consumer fads more vola-
tile, necessitating faster production and shipment to satisfy impa-
tient buyers. “Just in time” delivery of parts worked better with
closer suppliers. And disasters highlighted the risk of a specialised
economy. The tsunami that hit Japan in 2011 cut Toyota’s produc-
tion in America by nearly a third because of a shortage of parts,
while flooding in Thailand inundated factories producing a quar-
ter of the world’s hard drives. Firms began to see long supply
chains as unwieldy and risky. Trade started to concentrate in re-
gional blocks. Globalisation became slowbalisation.

Then Donald Trump was elected in November 2016, and a trade

war began between America and China. Companies realised they
were exposed to political risk from economic nationalism, as
much as from distant disruption. In 2019, as average American ta-
riffs on Chinese imports rose from 12% to 21%, and tariffs in the
other direction rose from 17% to 21%, America’s share of Chinese
imports and exports fell to its lowest in 27 years, before China’s
wto entry. America circumvented and then sabotaged the wto,
stopping the nomination of judges to its appeal board and thus its
ability to adjudicate trade disputes. In Europe Britain voted for
Brexit in June 2016. Many European leaders grew frustrated with
unfettered markets, wishing to have national champions that
could compete with China’s state-backed giants.

The blow struck by covid-19 has made supply chains a “ceo and
board level topic,” says Susan Lund of McKinsey, a consultancy.
Until this year, she says, many firms did not realise how much
their supply chains depended on China. In a survey conducted by
McKinsey in May, some 93% of firms reported plans to make sup-
ply chains more resilient. The firm finds 180 products for which a
single country accounts for over 70% of exports and reckons the
production of 16-26% of goods exports could change location in
the next five years. Firms are worried not just about trade wars and
other shocks, but about their environmental footprint and labour
standards. These are easier to monitor closer to home.

Covid-19 has also given politicians a chance to indulge their
protectionist instincts. The origin of the virus in Wuhan gave Mr
Trump a stick with which to beat China, and another multilateral
institution, the World Health Organisation, on which to pour
scorn (and, in this case, begin withdrawing from). There has been
an upsurge in government intervention to protect jobs and rescue
firms; by the end of April the eu had approved more than €2.2trn
($2.6trn) in state aid. Even before the pandemic France and Ger-
many wanted Europe’s state-aid and competition rules loosened
in the name of promoting national champions.

Interdependence days
Politicians have also come to realise how much health-care sys-
tems depend on trade. Shortages of personal protective equipment
(ppe) spurred many to limit or block exports of these and similar
goods. The imf counts 120 new export restrictions this year. For
many medical goods production is highly concentrated: China ac-
counts for 60% or more of exports of antibiotics, sedatives, ibu-
profen and paracetamol. Britain has launched “Project Defend”,
which will try to reduce reliance on Chinese production of critical
products with a mix of reshoring and guarantees that supplies
pass through friendly countries.

Unhappily, the political appeal of protectionism grows during
slumps. When economies lack demand, governments covet
spending that leaks overseas on imports. This is what led to a dev-
astating round of protectionism in the 1930s. Protection also rose
after the financial crisis. It does not help that China’s stimulus has
tried to keep production going, whereas rich-world governments
have supported household incomes. Brad Setser of the Council on
Foreign Relations, a think-tank, notes that China’s current-account

surplus, which was shrinking, has explod-
ed this year. Its exports have recovered
strongly, outward flows of tourists have all
but stopped and commodity prices have
fallen, making imports cheaper. Were Chi-
na’s trade surplus in July sustained for a
year it would add up to $700bn, surely
enough to worsen the trade war with Amer-
ica even if Joe Biden replaces Mr Trump.

Such is the confluence of forces bearing
down on global trade—organic slowbalisa-
tion, trade wars, suspicion of supply

Unhappily, the
political appeal
of protectionism
grows during

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8 Special report The world economy The Economist October 10th 2020

2 chains—that some draw comparisons be-
tween today and the early 20th century.
Then, a peak in globalisation collapsed un-
der the weight of the first world war, Span-
ish flu and then the 1930s depression.

The comparison is too pessimistic.
Trade has not done as badly as feared. In
April the wto forecast that goods trade
would fall by 13-32% this year; today it
seems more likely to be just 10%. The imf
says the decline in trade will be commen-
surate with the slump in demand from the
recession. That is in contrast to the after-
math of the financial crisis, when trade fell
by more than its usual relationship with
gdp suggested. It also shows that supply
chains have not been wholly wrecked. They
were crucial for the response to ppe short-
ages, argues Sébastien Miroudot of the
oecd club of mostly rich countries. South Korea, which has been
exporting millions of test kits to America and Europe, was unique-
ly placed to ramp up production using existing supply chains and

The logic of turning inward in response to the pandemic is
shaky. A recent working paper by Barthélémy Bonadio of the Uni-
versity of Michigan and three co-authors studies 64 countries and
finds that one-quarter of the drop in gdp this year was transmitted
along supply chains, but that reshoring production would not
have reduced the damage. Mr Miroudot distinguishes a supply
chain’s robustness (the ability to keep working through a crisis),
from its resilience (the ability to bounce back from one). The his-
tory of supply chains is that they are not robust but they are resil-
ient, because companies are quick to find workarounds. Their ro-
bustness could be improved, but not by repatriating production,
since disaster can strike at home as well. Had New York been the
centre of mask production when covid-19 struck, the result would
have been a “real big mess”, argues Shannon O’Neil of the Council
on Foreign Relations.

Governments might choose to ignore all this in favour of pro-
tection. But most firms are not about to abandon their cross-bor-
der investments. A survey by the us-China Business Council
shows little change in the number of American firms saying they
have moved or plan to move out of China. The survival of the
“phase one” trade deal struck in 2019 suggests that even the Trump
administration knows there are limits to the desirability of decou-
pling from China. Rather than a wholesale break, covid-19 is likely
to cause an acceleration of forces already in motion. Firms will
trade off a bit of efficiency for more robustness, realising that in
the long run the robotisation of manufacturing may lead to more
local production anyway. Governments will shorten and diversify
supply chains for medical equipment. But America and China will
trade under a darker cloud of mutual suspicion, balancing com-
mercial and geopolitical interests.

Further ahead the future of globalisation will be determined
less by goods than by services. Before covid-19 services trade was
not suffering from slowbalisation: it was growing faster than gdp.
Exports of services account for around a fifth of all trade, according
to the wto (although what exactly counts as services trade is a mat-
ter of some debate). Like trade in goods, trade in services has suf-
fered this year as tourist flows have collapsed. But consumers are
unlikely to have suddenly lost their taste for travel, and countries
have little long-term incentive to close borders to tourists. It seems
likely that tourism will eventually rebound.

Meanwhile, the surge of investment in remote working during
2020 might open the door to more trade in digital services. When

work is carried out remotely, it does not
matter where it is done. On the more futur-
istic end, this involves remote presence.
Whereas the export of repair services previ-
ously required high-skilled engineers to
cross borders, virtual- and augmented-re-
ality technologies now allow experts in one
country to help lower-skilled workers fix
machines in another, says Ms Lund. Rich-
ard Baldwin of the Graduate Institute in Ge-
neva points to the potential for remote
workers in poor countries to carry out basic
office tasks for firms in the rich world. Be-
fore the pandemic the wto was already
talking up the potential for more trade in
digital services, predicting that if develop-
ing countries adopted digital technologies,
they could reap the rewards of a higher
share of international services trade.

Services trade is hard to liberalise because it often means har-
monising regulations. Fields such as education, health care, ac-
counting and finance are littered with barriers to entry and re-
quirements for local credentials. The most successful model for
remotely provided services is India’s it sector, which faces few reg-
ulatory hurdles. But disputes over cross-border data flows and the
taxation of internet giants augur badly for faster digital integra-
tion. Digital trading, just like trade in goods, is increasingly con-
centrated in regional regulatory blocks. Yet Mr Baldwin argues that
the rise of online services trade will bypass tensions between East
and West, because it will take place within time zones: South
America will supply cheap digital services to North America, Afri-
ca to Europe, and South-East Asia to North-East Asia.

The increased digitisation brought on by covid-19 can only help
services trade, even as goods trade continues to slowbalise. But the
extent of that help depends on how much the pandemic reshapes
labour markets, the subject of the next chapter. 7

Bumping along

Sources: IMF; OECD *Value of imported parts as a share of output






Trade as % of GDP







Import intensity of
production*, %

In 1973 the Eldfell volcano, long-dormant, erupted on Heimaey,an island off Iceland. The eruption destroyed about 400 homes, a
third of the total (Heimaey’s seaport was saved by pumping seawa-
ter into the lava). The Icelandic government compensated the un-
lucky people who lost their homes, many of whom never returned.
But when Emi Nakamura and Jon Steinsson of the University of
California at Berkeley and Josef Sigurdsson of the Norwegian
School of Economics studied how they fared later, they discovered
a reversal of fortunes. Among people less than 25 years old at the
time of the eruption, those who had moved averaged four more
years of schooling and earnings $27,000 greater per year than
those from families who had kept their home. Being forced to
move had its advantages.

The covid-19 pandemic is a disaster orders of magnitude worse
than a volcanic eruption. Yet it too has created an experiment. In a
matter of weeks professional workers abandoned their offices en
masse in favour of working from home. Meetings were replaced

Zoom and gloom

The transition to remote work is welcome. But it will cause pain

Labour markets


Page 98

82 The Economist October 10th 2020

The hindu life-stage of sanyasa, or renunciation, is tradition-ally the last. The elderly lay aside their material possessions
and take up a spiritual existence, perhaps in some remote ashram
in the forest or the hills. Vepa Shyam Rao, as he was then, was only
30 when he took the title of Swami, or monk, put on saffron robes
and travelled to Haryana, in northern India. His mission was still
not quite in focus, but his philosophy was. He had gladly re-
nounced his life as a lawyer and lecturer in management studies in
Kolkata, reducing what he owned to his robes and a bagful of
books. His career and his things he could lightly put aside. But the
world and its problems, no.

His life from that moment was focused on some of the hardest
parts of that world. The stone quarries outside Delhi, for example,
where men, women and children were paid five rupees a day to dig
out, shift and break great blocks of stone, as though they were
beasts of burden. The unventilated, deafening carpet workshops
where labourers were sometimes chained to the looms and locked
in at night. Silk factories where hands already white with blisters
plunged repeatedly into scalding water to reel the fibres from the
cocoons, and tanneries where arms were burned with toxic chemi-
cals. Outside his penetrating gaze, but mentioned in whispers,
were the punishments for working slowly: a blow on the head from
a brick, a beating while tied to a neem tree, or simply non-payment
of the pitiful few coins that were supposed to have been earned.

Almost all this labour, he discovered in Haryana—which was a
hotbed of it—was indentured servitude. The workers were land-
less Dalits or their children, forced to borrow to pay for medicines
or dowries from a local, higher-caste moneylender. The average
loan was around 2,000 rupees, or $27, but at interest rates of 40%
or more it could seldom be paid back. Payment was made in the
form of labour from which workers could not escape, and the debt
was passed down the generations.

Many of these enslaved workers were therefore children, some
as young as four or five. By his own estimates, of perhaps 60m
bonded workers, 15m were under 14. Once he was on the watch for
them he saw them everywhere: bending all day over tobacco bas-
kets to hand-roll beedis, gathering broken cups outside teashops,
picking rags. Their small, soft hands were thought ideal for deli-
cate jobs such as knotting threads, dozens to each square centi-
metre, in carpet-making. But their bodies were deformed by it, and
their lives shortened. There were laws against this, as against
bonded labour in general. They were rarely enforced, because ser-
vitude was accepted as part of the natural order.

He did not accept it. In 1981 he set up the Bonded Labour Libera-
tion Front, raising money to buy the freedom of as many workers
as possible and to teach the rest what their rights were. Almost
recklessly, because his bright robes advertised him everywhere, he
and his helpers slipped into the wretched shanty-villages to en-
courage the labourers to organise. Eventually unions were created
for stone-cutters, builders and brick-kiln workers; meanwhile, he
battled employers in the courts. Those workers he managed to res-
cue—around 178,000 in all, roughly 26,000 of them children—
were trained for new jobs or sent, for the first time, to school.

Much of this, especially the shouts of “Revolution!” after some
of his worker meetings, seemed more political than priestly. But he
did not see a distinction. He had decided early, under the influence
of the Arya Samaj movement and the works of Gandhi and Marx,
that his dharma or spiritual duty was to go among the poor, serving
them. He called this “Vedic socialism”; and though completely
guided by the Vedas, the most sacred texts of Hinduism, it had to
involve political action. When followers treated him as a monk,
bending to touch his feet in respect, he would tell them to stop; he
might recite a verse from an Upanishad one moment, but the next
he would be quoting, by paragraph number, an article of national
law. In the late 1970s he actually became a politician in Haryana,
and briefly education minister. But he fell out with the govern-
ment when police fired on protesting bonded workers, and after
that he was a one-man political party.

As such, he cast his interests wide. He took up the cause of tribal
peoples without land rights and of farmers who could not get fair
prices. He campaigned for better treatment of Dalits overall and
pushed for laws empowering women, leading marches across In-
dia to protest against sati and female foeticide. In the villages,
where he explained that God had created the Sun and Moon for
men and women alike, he was feted as a celebrity, garlanded with
marigolds and led round on elephants. The attention embarrassed
him, but the publicity was good: the same reasoning that led him
to appear in 2011 on the reality-tv show “Bigg Boss”, where he
hoped he could bring peace to the other contestants in the house.

In that role of peacemaker, he also trekked in 2011 into the for-
ests of Chhattisgarh to oversee the handover by Maoist rebels of
five abducted policemen. (In general, he thought the Maoists had
been driven to violence by injustice, and urged the Indian govern-
ment to talk to them.) He called often for dialogue with Muslims,
too. This sort of thing got him regularly beaten up as anti-Hindu, a
suggestion with which he had no patience. Certainly he rejected
barbarisms such as sati, or the superstitious worship of stone
idols. But the true enemies of Hinduism were elsewhere, in the
Hindutva movement championed by the prime minister, Naren-
dra Modi: fundamentalists who had perverted the sacred, inclu-
sive power of Hinduism for partisan and nationalist ends. He saw
nothing but calamity in the growth of that ideology in India.

His work with bonded labourers also caused him disappoint-
ment. Relatively speaking, he had rescued few, and the practice
went boldly on. He might have taken heart, though, from the num-
ber who came to his funeral, shyly recounting to reporters the hor-
ror of their work before, and their hopes now. They, in particular,
were glad he had not made his sanyasa in some remote mountain
or forest but with them, in the weariness and pain and dust. 7

Swami Agnivesh (Vepa Shyam Rao), champion of India’s
indentured labourers, died on September 11th, aged 80

Of human bondage

Swami AgniveshObituary

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