The end of globalisation?

1970 to 2008 was a golden era for globalisation with world trade accelerating as firms sought to lower their costs by developing global supply chains.

However, looking at the graph below, the Global Financial Crisis (GFC) marked the end of rapid globalisation. Global trade ─ a measure of globalisation ─ fell by 10% as the world economy entered a deep and protracted recession. While global trade recovered to its pre-GFC levels in subsequent years, it hasn’t managed to resume the strong upward trend seen since 1970.

It’s not just trade that has stagnated. Other measures of global integration show a similar trend. For example, world foreign direct investment as a share of global GDP has fallen since it peaked just prior to the GFC [1]. Likewise, the percentage of sales by S&P 500 companies to foreign countries has also been in decline since 2008 [2].

2020 saw another major shock. As the Covid-19 virus infiltrated communities across the world, governments placed export bans on critical medical goods, such as personal protective equipment (PPE). Global lockdowns resulted in factory closures and significant congestion in transport hubs. This highlighted the inherent risks associated with highly integrated global supply chains and just-in-time inventory management. Globalisation was dealt another blow.

Now it looks like we’re stuck with some disruption for the foreseeable future as businesses adapt and restructure their supply chains. Global trade, investment, and integration are all set to shrink or stagnate even as the global economy grows. There is even a new word to describe this – slowbalisation.

We believe it is, primarily because politicians are constrained by the median voter. In other words, an election win is more likely for a party whose policy choices are closer to those of the central view. And recent evidence suggests that, in many countries, voters are increasingly losing confidence in globalisation.

The chart below shows how widespread this view is. Between 2019 and 2021, the number of people who believed globalisation was good for their country fell by around 10 percentage points [3], and now less than half of people surveyed think that globalisation is a good thing.

Voters in France, Italy, Poland, and the US have some of the most negative views on globalisation, which is reflected in the growing share of votes for protectionist parties in those countries. This data suggests a continuation of the anti-globalisation policies and rhetoric we’ve seen in recent years.

A key driver of slowbalisation is rising US-China tensions. This ─ and the resulting trade war ─ looks set to continue regardless of which US political party is in power. In fact, this is one of the few areas that the two main parties agree on.

The tariffs imposed by the Trump government on Chinese goods have had a marked impact on the flow of goods into the US ─ between 2018 and 2021, China’s exports of electronics and computers to the US fell by $40 billion, while the domestic output of US producers rose by a similar amount [4]. Other exporting nations have been the real winners as they increased exports by around $80 billion [4], with Vietnam and South Korea picking up market share.

The Biden administration has shown little appetite to roll back President Trump’s aggressive China policy. Indeed, despite discussion on reducing certain tariffs to alleviate US inflationary pressures, there seems to be cross-party support to maintain the combative approach towards China to uphold the US role as the world’s dominant superpower.

The centre piece of this policy is the recently passed CHIPS and Science Act, which aims to boost key strategic industries and shore up domestic supply chains. Specifically, the bill assigns $52 billion to support the US semiconductor sector [5] to build up domestic production and reduce reliance on Asian companies.

China is also looking to reduce its dependence on international markets and build up its domestic high-value technology industry. Meanwhile, the ‘no limits’ relationship between China and Russia has clearly alarmed US policymakers, which is likely to increase the impetus behind the decoupling.

We expect the US to reduce its trade with China and continue to diversify its trade partners. There will be some reshoring of manufacturing back to the US, but this will be primarily focused on strategic sectors, such as semiconductors. US firms are likely to recognise the opportunity this brings and reorientate towards these sectors to take advantage.

However, we expect broader reshoring, from China to the US, to be limited, mainly because it is complex and expensive. According to a 2021 survey by the American Chamber of Commerce in Shanghai, 70% of US companies that manufacture in China have no plans to move out over the next three years ─ and none intend to relocate to the US [6]. The remaining 30% intend to relocate a share of their manufacturing, but not to the US.

We expect these companies to relocate their production to other East Asian economies. Foxconn, a major supplier to Apple, has moved some manufacturing to Vietnam; Samsung has made similar arrangements.

We believe the real losers will be China’s tech and high value sectors, which will miss out on Western expertise and intellectual property.

In our view, there are two main ways that investors can take advantage of this slowbalisation trend. First, by investing in US companies that are well placed to benefit from the step change in US investment in strategic sectors over the coming decade. While the US semiconductor sector has not escaped this year’s tech sell-off, we think that the long-term outlook for the sector remains positive. Moreover, there is now the opportunity to purchase these companies from a more attractive entry point. We favour those companies that are set to benefit from the Government’s mission to ramp up US production, as well as domestic firms that are crucial cogs in the supply chains.

The second route to take advantage of this theme is via companies in the Asia-Pacific region that will benefit from supply chain diversification. Vietnam, for example, is well positioned to pick up some of this production given its cheap labour costs and growing expertise in manufacturing. But remember this is not a recommendation to invest in either of these areas and advice should be sought.

Ultimately the face of globalisation is changing, but not in the way many people expect. We do not envisage a wholesale retreat to domestic production, but instead we predict a diversification of global supply chains and a renewed focus on domestic industries of strategic importance. It is a new environment that companies ─ and investors ─ must adjust to. With change comes opportunity.

Sources:

[1] World Bank

[2] Standard and Poors

[3] Ipsos

[4] Oxford Economics

[5] Bloomberg

[6] American Chamber of Commerce in Shanghai