COVID-19: the geopolitical implications of a global pandemic

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COVID-19: the geopolitical implications of a global pandemic

Nations and organisations across the world are getting to grips with their responses to COVID-19. While lockdowns, contingency plans, supply chain disruption and market volatility continue to make headlines, a novel coronavirus (COVID-19) pandemic would also be likely to have significant implications for geopolitics.

Control Risks sees four key areas for consideration:

1. Economic damage from a pandemic is likely to prolong political instability in some countries, including a longer-term threat of civil unrest linked to public spending cuts.

2. A pandemic reinforces the likelihood that US-China tensions will re-escalate before the US election.

3. A pandemic is likely to undermine EU cohesion by destabilising Italy, empowering populist movements and threatening freedom of movement.

4. However, a coordinated and successful global containment response would be likely to help reinvigorate international institutions and multilateral dialogue.

The state of play

COVID-19 was swiftly genetically sequenced, but much about the virus remains unknown. It is clearly highly infectious, with each infected person spreading the virus to at least two other people, according to the World Health Organization (WHO). The death rate is currently around 3.4% among confirmed cases (rising to over 10% among the elderly or those with underlying health conditions), making it more severe than seasonal flu but less severe than MERS or SARS.

Yet COVID-19 may also be relatively mild for most of those infected, with multiple cases linked to people exhibiting few – if any – symptoms. Confirmed cases among children, in particular, are so far rare. Asymptomatic cases could be skewing perceptions of both infectiousness and lethality. The 2009 H1N1 pandemic, for example, ultimately had a death rate of only around 0.02% – a rate lower than seasonal influenza.

The epidemic remains concentrated in China. As of early March, more than 90% of confirmed cases and 96% of deaths were in mainland China, according to the WHO. However, the daily number of new confirmed infections has been declining since late February under stringent containment measures. Many of those measures remain in place but the country is cautiously looking to revive its economy.

Conversely, new infections are rising in South Korea (largely in and around the city of Daegu), Europe (mainly Italy) and the Middle East (mainly Iran), each surpassing China’s daily total by early March. The WHO has identified local transmission of the virus in around two dozen other countries, including the US, Japan, Germany, France, Japan, Australia, Thailand, the UAE, and the UK.

Outlook for an evolving situation

COVID-19’s geopolitical impacts are likely to accumulate and intensify as it spreads worldwide. They depend heavily on the nature of the public response and the effectiveness of international cooperation.

Economically, COVID-19 has largely been a supply shock disrupting global supply chains (mainly from China) but could become a more significant demand shock as consumers and businesses defer expenditures. Many governments remain in debt from the global financial crisis ten years ago and have limited fiscal capacity to compensate for a loss of consumer demand. Hence the rising likelihood of a global recession.

In broad strokes, a severe global pandemic that outpaces international response capacity would be likely to further undermine global governance as individual countries take disjointed and disruptive steps to contain COVID-19. However, a more moderate pandemic could reinvigorate international cooperation – à la the G20 in 2009 in response to the global financial crisis – by allowing collective action to succeed.

Geopolitical implications of a COVID-19 pandemic

US election: Our partner Oxford Economics estimates that COVID-19 will cut already slowing US economic growth in 2020 to around 1.3%. A pandemic triggering lockdowns of major population centres could drive the US into recession. The slowdown will undermine President Donald Trump’s re-election pitch; a recession in 2020 – accompanied by widespread social disruption – would probably lose him the White House.

US-China trade war: Rather than encouraging cooperation, COVID-19 has fuelled mutual criticism between the US and China. Many in Washington have criticised Beijing’s handling of the outbreak while Chinese media and officials have accused the US of politicising the crisis and offering little support. The sharp slowdown in China’s economy also makes it unlikely that China this year will meet its commitment, under the trade agreement it signed with the US in January, to dramatically increase imports from the US.

Washington has so far tolerated a delay in purchases, and some Chinese media have called for Beijing to invoke an article in the agreement that refers to “unforeseeable events” preventing compliance with some obligations. However, as China’s economy recovers – and especially as the US economy slows – the US will increasingly insist that China meet its obligations. This is one of many issues over which bilateral tensions could escalate and the interim trade deal collapse.

China in the world: COVID-19 has consumed China’s political establishment for two months. Attempting to get the economy back on track while preventing any resurgence of the outbreak could dominate leadership thinking until well into the second half of the year. The need to direct political and financial capital towards domestic recovery may temporarily sap momentum from global ambitions such as the Belt and Road Initiative (BRI), which has already suffered from a backlash in many countries.

For many companies, China’s COVID-19 crisis has amplified questions about possible over-reliance on the country in their global supply chains – a concern already heightened by the US-China trade war. COVID-19 is not the existential threat to China’s political regime that many suggest, and the effects above will not stop the long-term rise of China’s global influence and assertiveness, but they could slow the trend significantly in 2020.

EU cohesion: COVID-19 will cut European growth in 2020 (by around 0.2%), potentially scuppering an incipient economic revival (particularly in German manufacturing) after years of stagnation. Italy – currently bearing the economic and medical brunt of the regional epidemic – is likely to insist on economic support from the bloc. Meanwhile, nativist political movements – primed by the possibility of a renewed irregular migrant crisis – may view COVID-19 as a populist argument against immigration and for stronger borders. A pandemic triggering national containment measures would disrupt freedom of movement.

Iranian isolation: COVID-19 is likely to further isolate Iran within the Middle East, even if it is unlikely to seriously threaten regime stability. Iran’s failure to effectively contain COVID-19 prompted neighbours to close their borders, suspend travel links and view Shia Muslim populations with suspicion. This will further damage Iran’s economy, pulling scarce resources away from its support of regional proxies. A weakened regime in Tehran could seek to provoke an external crisis to maintain popular support.

Global Britain: COVID-19 is a major test of the new Conservative government, at pains to demonstrate that leaving the EU has not left the UK – with its renowned public health system, premier medical academic establishment, and leading pharmaceutical sector – more isolated.

Oil exporters: COVID-19 has tanked global oil markets, largely a consequence of falling demand in China. The failure of OPEC and Russia to agree on continuation of production cuts has compounded downward pressure on oil prices. On March 9 the oil price fell by 20% to $31 triggering turbulence on global markets. The Russia/Saudi Arabia price war is likely to be temporary and OPEC+ will probably reach agreement in the coming months. However, the oil price is likely to stabilise between $40 and $50 until the global economy starts to recovery from COVID-19 shock. Low oil prices will pose financial challenges for a number of oil producing economies such as Iran, Kazakhstan, Azerbaijan and even Saudi Arabia which require significantly higher oil prices to balance their current budgetary expenditures. Russia has sufficient reserves to withstand a lower price, but it is likely to face significant currency devaluation, increase in capital flight and declining real incomes.

Global governance: Global governance remains fraught as a result of trade wars, intractable conflicts and inaction on climate change. However, a coordinated response to COVID-19 – if it holds – could replenish trust in international institutions (like the WHO) as well as temper tensions between geopolitical rivals (such as plaudits for China’s aggressive containment efforts).

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