A new era for globalisation

Wednesday 1 February, 2023

In summary

• The 20^th century phenomenon of globalisation now appears to be under pressure

• Catalysts for this trend have been Brexit, US-China trade wars, and the ongoing war in Ukraine

• Supply chains will be deeply impacted by these government disputes

Globalisation characterised the second half of the 20^th century, and much of the 21^st century, driving economic growth and creating many jobs. The free flow of ideas, people, goods, services and capital across countries led to greater economic integration, however the phenomenon now appears to be under pressure. In the last decade or so, we have had Brexit, US-China trade wars and an actual war in Europe. The pandemic was perhaps the most significant event, highlighting the fragility of supply chains across the world. However, it is clear that increased scepticism in globalisation has been growing for a while now. 

The reversal of this trend, or deglobalisation, will ultimately lead to countries and companies re-evaluating global supply chains amid disruptions. This can be implemented by bringing supply chains back into the domestic market, dubbed as ‘onshoring’. Ideas that have been gaining traction are ‘fringeshoring’ or ‘nearshoring’ which entails moving supply chains to nearby countries, and even ‘friendshoring’ which refers to moving supply chains to countries with better diplomatic ties. The latter acts as a further cushioning to geopolitical risks, with Apple being a prime example as it is seeking to assemble some of their products in India as well as China to mitigate risk. The pandemic, and more recently the war in Ukraine, have resulted in a huge spike of companies mentioning these key terms. 

Mentions of key terms in corporate presentations

Source: 2022, IMF, Regional Economic Outlook: Asia and Pacific

Government policy

Governments are also becoming increasingly concerned about this shift and last Friday, the US, Japan and the Netherlands agreed to reduce the sales of advanced semiconductor equipment to China. The equipment used in the production of semiconductors is one dominated by ASML of the Netherlands and Nikon of Japan. President Biden is endeavouring to cosy up to his allies and ensure that China has limited access to these advanced technologies to produce semiconductors. By hindering China’s semiconductor industry, it will impede the development of supercomputers and artificial intelligence, as well as military weapons. This will likely see China ramping up its supply chains of these important elements ‘in-house’ and, in turn, Western economies could be cutting themselves out of the growth in emerging markets. However, the production of these elements and semiconductors is incredibly complex, hence it is likely that it will take China the best of part of a decade to catch up, maybe even longer. 

History of globalisation

The benefits of globalisation have been felt far and wide: lower costs, lower prices, greater economies of scale through specialisation and ultimately improving living standards in many countries. Globalisation was also a major driver of low inflation for the best part of four decades; owing to much cheaper production and China emerging as the workshop of the world. However, in recent times, policymakers have been much more receptive to erecting barriers between nations, fuelled by the rise of populism politics. National security, trade and migration were all huge factors in the UK’s decision to leave the European Union and this is a prime example of a broader trend. The main phases of globalisation can be illustrated below using the metric of ‘trade openness’ – the sum of exports and imports of all countries relative to global GDP. 

Trade openness, 1870-2021

Source: 2023, IMF, Geo-economic Fragmentation and the Future of Multilateralism  

The industrialisation phase was driven by advances in transportation, whereas the interwar era led to a rise of protectionism due to international conflict. The two post-war phases highlight a sharp recovery, with trade liberalisation and the gradual removal of trade barriers, especially in China. However, the period since the Great Financial Crisis has seen globalisation plateau. Globalisation was primarily driven by the fact that the West would become partners with Asia, but China has become a much larger beast during this time and has emerged as a rival to the US, rather than an ally. In 2023, the US views China as a ‘strategic competitor’ and one way to prevent the rise of China is to cut off its access to strategically important sectors like semiconductors. 

What this means

Deglobalisation could result in the creation of two main trading-blocks: the West (Europe, US and UK) and the East (China and the rest of Asia), with countries like Japan and India pivoting between the two. This would have major implications for trade, inflation and currencies, however, it may provide opportunities for other countries. Vietnam, Malaysia, Thailand, Mexico, Argentina and India have access to cheap energy, spare capacity in the labour force and free trade with large parts of the global economy. As such, they could become secondary winners of deglobalisation. What the below graphic shows is that the economies aligned with China are much smaller than the allies of the US, and so as it stands, the US is seemingly best placed. This could all change though.  

Economic size of US-China blocs (US $, GDP 2019)

Sources: IMF, Capital Economics

Reconfigured supply chains may make it more difficult for developing nations to sell to the world and build wealth. Whereas, developed nations would likely have less access to cheaper imported goods, meaning inflation may become stickier. Neither of these outcomes are hugely desirable and the reversal of globalisation, exacerbated by the sanctions levied on Russia as a result of its war in Ukraine, has already fuelled inflation figures we have not seen for a long time.

Governments are looking to protect goods they deem ‘strategically important’ and decoupling semiconductors, batteries and energy will be a lengthy process. However, supply chains will be deeply impacted by these disputes and countries will need to be alert to these disruption risks. While deglobalisation carries inherent risks, we are looking carefully at how we could exploit the theme in the portfolios to harness the opportunities that it could present.

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