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Close Look: April 2022

24 days ago

CLOSE LOOK
Deglobalisation - what’s the big story?

It’s been heralded as the end of an era, and it seems the tide has now turned on the globalisation of trade. Recent geopolitical events, as well as the Covid-19 pandemic, have fractured the carefully constructed networks of production and supply across the globe. But will their dismantling drive inflation higher? We take a look at a new era, projected to be the age of deglobalisation.

Firstly, let’s examine what was meant by globalisation. As the world opened up new trading links in the 1970s, with notable trade deals between the US and China, manufacturers in the developed markets realised they could source components more cheaply abroad. Supply chains became longer and more complex, but overall manufacturing costs were driven down. And that kept a lid on the price of finished goods for several decades.

At its best this arrangement brought benefits to all, keeping a check on prices in the developed world, while boosting economic growth in the emerging economies. But sometimes the relationship between client and supplier would break down. An obvious example being the growing distrust of Chinese suppliers of complex electronic components. This led former President Trump to make accusations of intellectual property theft, and to ban certain suppliers from trading with the US.

So what is the alternative to the system of globalisation? A preferred plan appears to be ‘local for local’ supply. New buzz words have popped up, such as ‘onshoring’, or ‘reshoring’. The intention is clear- shorten supply chains and limit the risk of delivery failure. What’s more, US Treasury Secretary Janet Yellen has recommended ‘friend-shoring’, ensuring that third country suppliers are not potentially hostile regimes. The new supply chains might not be so efficient, but they should be more secure.

As long-established links in supply chains break down, manufacturers are certain to find new sources. Although in-costs could be less favourable or some efficiencies lost, meaning margins get squeezed or consumer prices get hiked. A new world trade order is predicted. In place of an interconnected network, future trade is likely to be either ‘bipolar’, with the historical poles of East and West reforming. Or even ‘tripolar’, with major trading blocs building around the US, Europe and Asia.

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