Jack Colreavy
- Aug 18, 2022
- 6 min read
ABSI - The Deglobalisation Landscape
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Globalisation is a term popularised by German-American economist Theodore Levitt in the 1980s, but it’s a concept that first started to gain traction in the 19th century. Continually, due to advances in transportation and communication, globalisation growth has exploded in the past 50 years. However, a global pandemic exposed the flaws in the system and now there is a growing movement towards reversing course. ABSI this week looks at the deglobalisation trend to see if it’s a passing fad or indicative of where the future of commerce lies.
In a nutshell, globalisation refers to the growing interdependence of different nations in the flow of goods and services. It can be argued that it began with the advent of international trade but the modern interpretation refers to companies going “global” in the pursuit of raw materials, manufacturing capabilities, and customers. While trading between nations has been taking place for thousands of years, the outsourcing or development of mass manufacturing in centralised emerging economies is a more recent phenomenon. Today, almost every major consumer brand exclusively manufactures its products in an emerging economy with a study conducted by US News finding that the top 10 cheapest manufacturing hubs include China, India, Vietnam, and Indonesia.
Source:Statista
Historically, globalisation has been a net-positive with lower prices for consumers, better profit margins for corporations, and more work/higher standard of living for emerging markets. It should be noted that, geopolitically, the last 50 years have been relatively benign in comparison to the rest of human history. This extended period of relative peace was the perfect nursery for globalisation to thrive. However, this was all turned upside down with the emergence of the Covid-19 virus in 2020, which effectively shut down the world economy. In the blink of an eye, supply chains disintegrated and businesses experienced an exogenous economic supply shock not seen since the oil crisis in the early 1970s.
Source:Statista
The pandemic was a black swan event that exposed the flaws of globalisation and has since given pause to governments and businesses to think more critically about their supply chain management. Moreover, the war in Ukraine and the continued tensions with China are also contributing to the supply chain reassessment. This has resulted in the rise of an emerging trend aptly named deglobalisation.
Deglobalisation was at the top of the agenda at the recent World Economic Forum in Davos, and for good reason, with corporate mentions of deglobalisation hitting historical highs. Businesses are entering a phase of de-risking their supply chain by diversifying material sources, and de- re- or on-shoring production back to primary customer markets. Governments too are conducting major reassessments of the origin of essential products and are looking at ways to stimulate private sector investments in the nationalisation of manufacturing. Unsurprisingly, their priorities are health and defence with moves being made to sure up production of “essential” products and raw materials in case of emergency. A prime example is the Chips & Sciences Act in the US which is offering US$70b in support for the American semiconductor industry and up to US$200b for R&D. This of course comes off the back of Chinese tensions with Taiwan who control over 50% of the semiconductor market.
It is important to appreciate that the inevitable outcome of globalisation will be inflation. If manufacturing is renationalised or reconfigured into a diversified hub, this is going to push the cost curve higher which will mean higher prices at checkout. Likewise, a decoupling of the global supply chain will incentivise the reversal of the free trade movement and instead promote protectionist policies that will result in import tariffs. In the end though, the globalisation movement and a capitalist’s desire to maximise profits will limit the extent of deglobalisation in the long-run but it is likely in the short term to have a meaningful impact on pricing as the world reconfigures itself for the current economic and geopolitical climate.
Read the Conversation:
Jack Colreavy:
“Globalization has been a powerful force in supply chains for the past 50 years or so, especially for brands looking to outsource their manufacturing and taking advantage of the cheaper labor in emerging markets. That's why the de-globalization movement in recent years is so interesting. This movement's coming off the back of the global pandemic, but also as a result of geopolitical risks in the market at the moment.
You got war in Ukraine, tensions with China and Taiwan, and it's really causing governments in corporations to reassess their supply chains and really de-risk it. And so what we're seeing is a diversification of their manufacturing and a desire to. Introduce local manufacturing, and so at the end of the day, whether this is a long-term trend or not, we are going to see further stoking of the inflation fire as a result of this movement.
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