The day after #8 - Deglobalation could improve diversification but also exacerbate financial contagion

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A compelling example of this reversal in the globalisation trend is shown in Figure 1: the evolution of foreign direct investments since 1970. Foreign direct investments have decreased by 60% since their peak in 2007. Cross-border financial flows have experienced a similar trend (Bordo, 2017).

In 2020, the unexpected advent of the Covid-19 pandemic has simply added momentum to a trend that began a decade ago. In response to the current health and economic crisis, countries are redefining their strategies on economic integration, autonomy in strategic sectors, and domestic economic sovereignty, reinforcing the deglobalisation trend. For most countries, the Covid-19 crisis may push them to rethink their dependency in key sectors such as technology (data protection, privacy, and national security). As a matter of fact, US and Chinese companies are dominating this sector and the lack of a leading European company at the global level could push Europe to become more defensive and to increase regulations vis a vis foreign companies and countries. One of the most sensitive sectors, exposed during the pandemic crisis, has been healthcare: several countries have become aware of their overwhelming dependence on foreign companies and felt an urgency to develop sufficient domestic production of medical equipment and pharmaceuticals. Among the several fronts of confrontation with China, the US has lately intensified its efforts to restore the health sector. Some initiatives have been launched to increase domestic capacity, such as a larger budget under the CARES Act and specific company loans. 

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In recent years world trade dynamics have definitely shown an accentuated inversion of the globalisation trend and its robust contribution to global economic performance. The Great Financial Crisis (GFC) marked a historic turning point in the degree of global economic integration. Since 2007/08 global trade has entered a period of increasingly protectionist policies (trade barriers, national subsidies, national champions), decelerating growth in trade-intensive sectors, rising policy uncertainty and more recently, trade tensions.

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