The 2020 outbreak of the novel coronavirus, or Covid-19 (the “pandemic”), left a wake of death, economic calamity and social unrest. Countries responded by taking drastic measures like purchasing medical equipment and drugs to ensure medical care, injecting billions into suffering businesses and expanding the social safety net. Most countries facing the pandemic opted for unilateral policies rather than cooperation, riding a wave of nationalist sentiment that had been gathering steam prior to the pandemic. For international transactions, these nationalist policies only poured salt on the wounds left from such widespread, pre-pandemic protectionist measures.
2. Pandemic and Nationalism
The pandemic created national emergencies worldwide, where countries triaged not only health and medical crises, but also economic breakdown and social discontent. Countries enlisted extraordinary measures to control these multidimensional crises. Governments locked down the movement of people and, in doing so, halted economic activity, particularly in international trade and investment. In fact, the United Nations Conference on Trade and Development forecasted international trade to drop 30% and international investment to plunge 40% in 2020.
But it wasn’t just the retraction of economic activity that has stymied cross-border investment. International migration, trade and investment were already under scrutiny by protectionist regimes. Prior to the pandemic, the United States and certain European countries restricted or, in some cases, completely blocked visas; governments around the world enacted widespread tariffs, leading to trade retaliation and prolonged disputes; and oversight bodies of foreign investment were upgraded and expanded, further putting pressure on dealmakers in cross-border transactions. These pre-pandemic actions were mostly made in the name of protecting nationalist interests.
3. The Mantra of National Self-Sufficiency Stifles Cross-Border M&A
The pandemic has only accelerated protectionism across the spectrum of globalization. Borders are highly restricted and governments have utilized the national security exemption under international trade laws to prevent exports of certain products, most notably medical supplies but also foodstuffs and household goods.
Along with people and goods and services, capital is also being restricted at borders worldwide. During the pandemic, politicians seized on nationalist messaging and protectionist measures, insisting global supply chains made countries less secure in supplying much-needed medical supplies, ensuring food security and protecting domestic markets. They claimed that relying on domestic production of key industries was much safer than the established globalized regime. Under the guise of fighting the pandemic, government leaders enacted policies to promote national self-sufficiency at the cost of international investment growth.
Governments adopted offensive, nationalistic policies in an attempt to bolster domestic firms. Such measures included reshoring enterprises or enticing strategic, multinational companies to relocate to a new country. The overture to CureVac – a German biopharmaceutical company working on a Covid-19 vaccine – by the US government was the most high-profile example of such policies. Here, some analysts believe that President Trump and other US officials attempted to persuade CureVac to relocate to the United States in an effort to secure a vaccine for the United States. In fact, some reports suggest that Trump officials offered hundreds of millions of dollars to CureVac for exclusive rights to the vaccine. The backlash was immediate and severe. German officials responded with retaliatory threats; CureVac replaced its CEO; and the company denied all reports of company relocation. As this example shows, offensive measures to bolster domestic growth only fuel further protectionist attempts and inject additional risk into the cross-border investment regime.
Governments also pushed defensive, nationalistic policies to prevent predatory takeovers of weakened, domestic firms by foreign entities. Such policies included strengthening oversight and selection criteria of transactions involving a foreign investor or buyer in certain industries. At the initial stages of the pandemic, these measures focused around medical- and healthcare-related enterprises, but governments quickly expanded these regulations to include a wide variety of industries under the pretext of protecting critical technology. They claimed that such measures not only protected national security (i.e., medical devices and equipment) but also consumers (i.e., foodstuff and household goods) and the greater social security system (i.e., jobs). This enhanced scrutiny of international transactions shows how the pandemic has expanded the meaning of a predatory acquirer to include any foreign entity, regardless of the proposed terms or valuation of the target.
The economic fallout from the pandemic significantly depressed cross-border transactions. To make matters worse, governments around the world enacted offensive and defensive protectionist measures aimed at shoring up domestic enterprises. Nationalist sentiments, already running high before the pandemic, fueled these measures, as the pandemic accelerated nationalist and protectionist policies. Although travel will likely rebound once the pandemic subsides, it is unlikely that these policies will be rolled back with any urgency. There are signs of growing activity in cross-border transactions. However, a new normal with enhanced nationalist scrutiny awaits these dealmakers.