Impact of COVID-19

Tea Danilov: Coronavirus crisis amplifies several long-term trends

The Coronavirus epidemic is a catalyst that amplifies several long-term trends. About a year ago, I called attention to the fact that global economy is regionalising: in the future, an increasing part of international trade will take place within regional blocks, not between them. Long supply chains that stretch across the world, and the concentration of certain stages of production into certain countries – most notably, of course, China – do indeed help to enhance efficiency, but also increase the risks.

The 2011 flood in Thailand led to massive disruptions in the computer industry because the country was producing 40% of all the hard disks. The Coronavirus crisis has caused huge disruptions in production and transport, forcing businesses to reshape and shorten their supply chains. In combination with other developments that drive regionalisation, such as increasing trade barriers and countries increasingly regulating the internet, as well as the price drop of industrial robots and the proliferation of green consumers, this accelerates the process towards more self-sufficiency and smaller international dependency.

Since trade relations represent a transmission channel between countries, larger independence also leads to smaller spill-over effects. This can rouse many great powers to oportunistic trade policy actions because the possibility of setbacks falls out of the equation. This in turn increases the likelihood of conflicts between countries.

However, as the Coronavirus is democratic by nature and takes its toll on every economic power in the world, this can create a brief window of opportunities to bury the disagreements between USA and China, and join forces. Allegedly, The White House has been pondering that if this is not the time to release tensions with China – then when? Yet it would be too optimistic to believe that such a release of tensions could last for long.

The Coronavirus crisis is accelerating automation and use of digital solutions in the industry, and transferral to digital channels in the service sector, because it turned out that the presence of people in factories, warehouses, or bank offices constitutes a risk factor.

Every crisis opens a door to something – against the background of the falling stock market, the stocks of companies that offer video conference and remote work solutions are on an upward curve. Timbeter, which offers a digital solution for measuring timber loads, has unexpectedly discovered that their software download numbers have increased seven times in Italy.

In Estonia, remote working has until now been mostly the privilege of executives and specialists who have had sufficient market power to secure this option for themselves. The current rapid and extensive spreading of telework offers a new experience to numerous entrepreneurs and employees who have never used it before. This probably accelerates the changes that have been happening in the labour market for some time: a move towards project-based work and self-employment. If the employer/employee relationship moves to remote channels, it is no longer all that different from outsourced contractual services, which are taxed much more advantageously than contractual employment relations.

Global outbreak of Coronavirus in combination with the low price of oil can take us one huge step forward towards achieving climate goals (admittedly with a very painful price tag for economies and societies). It is likely that the virus outbreak will reduce the greenhouse gas emissions this year, mainly because of reduced volumes of the aviation sector and international trade.

The experience with the virus can cause long term changes in our behaviour, because people will fear flying or taking a cruise even after the end of the outbreak; in addition, virtual meetings and conferences are here to stay, reducing the future need for transport. Low oil prices make the energy businesses give more serious consideration to clean energy, and lead them faster to the turning point which our national energy company Eesti Energia already reached last year – making more money off wind power than oil shale generated electricity.

But not all winds propel us forward. Financing difficulties and Chinese production and supply problems can halt many ongoing solar and wind energy as well as energy storage projects. The drop in the price of oil also complicates the sale of the already relatively expensive electric vehicles. We should also not ignore the fact that people’s growing concern for their health and livelihood directs attention away from the climate problem.

People’s attitudes are bound to change on other topics as well; it only remains to be seen whether this would be temporary or long-term. The Coronavirus experience is similar to the exposure to terrorism in the sense that it makes people accept less freedom. After all, it is reasonable and necessary to accept measures such as government supervision of (risk group) individuals and mobility restrictions. However, if the temporary situation lasts long enough, the society can get used to the extended mandate of the government. This can increase fear and hatred of foreigners, considering how much public attention is given to border control and countries at risk. Although, as can be expected, main focus of the authorities is currently on human health and the economy, we would do well to also be aware of these risks and keep them in mind.

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