Business leaders and politicians at the World Economic Forum (WEF) are meeting in person for the first time in two years. It is no surprise, given the backdrop of crisis in Ukraine and the continued fallout of the Covid-19 pandemic, that the main talking point in Davos is the future of globalisation.
For the past thirty years, the world has enjoyed a period of relative prosperity and growth as politicians have sought to remove barriers to international trade and manufacturers have ventured further afield in search of increased efficiency and better margins.
But the COVID-19 pandemic exposed the vulnerabilities of an interconnected global economy, with successive lockdowns leading to supply chain bottlenecks and contributing to a drop in global trade.
Geopolitics has also emerged as a central consideration for all businesses and investors. The crisis in Ukraine and the subsequent increase in energy and food prices show that everything in markets is tied to the events unfolding on the world stage.
A Trend or a Blip?
The theme at the WEF this year is History at a Turning Point: Government Policies and Business Strategies. But not everyone at the forum agreed that globalisation has reached a turning point.
The consensus among panellists at an event entitled The Future of Globalisation was that the combined benefit of technological hyperconnectivity and the growing economic clout of emerging economies would outweigh and outlast the supply chain scares caused by COVID.
Following this logic, globalisation has not reached an inevitable structural peak. Instead, slowing economic growth and trade downturns can be explained as the temporary consequences of hiccups and cyclical drivers.
“We see the pressures on globalisation continuing and accelerating,” conceded Tarek Sultan, Vice Chairman of supply chain services company Agility. He added, however that the geopolitical forces constraining globalisation are outweighed by the technological advances and demographic shifts which drive it.
“Over time, the law of economics and the changing nature of demographics and technology will continue the path of globalisation,” Sultan said.
Pamela Coke Hamilton, Executive Director of the International Trade Centre, shared this optimistic assessment. “There’s a misconception I think which is driving this narrative, which is a focus on goods. ‘The shipments aren’t moving’ etc.,” she said in relation to the belief that the era of globalisation is coming to a close. “But in 2022, global trade of goods was $28.5 trillion, which is a record high. So if globalisation is dying, I don’t know what’s causing that number,” she added.
Re-Thinking Supply Chains
Not all the economic data reflect positively on globalisation, though. The World Trade Organisation (WTO) recently revised down its forecast for global merchandise trade growth from 4.7% to just 3%, warning that problems on the supply side are not set to disappear any time soon.
Meanwhile, many businesses are reconfiguring their supply chain models to prioritise reliability and sustainability over economies of scale. This means moving away from the Global Value Chains (GVC) which have allowed the various components of a product to be manufactured in different locations at ever cheaper prices. Instead, companies are aiming to manufacture components as close as possible to the market where they are sold.
The Financial Times notes that companies have been talking about deglobalisation more in recent months, with mentions of onshoring, nearshoring, and reshoring in corporate calls currently at the highest level since 2005.
“We were previously looking at the transfer between where the goods were produced and where they are consumed in a simple reliable transport. We are now bringing into the equation the cost and the resilience of the supply chain, which is a very new notion. That was not in our minds three years ago,” said Loic Tassel, President of Procter & Gamble for Europe.
“The simple outcome is that we are now looking at a more regional supply chain setup than the one which we previously had. The price to pay and the time to wait to get some of our products from China to Europe is not compatible with our industry – Fast Moving Consumer Goods. If your container is stuck in Shanghai, it is not fast moving any more,” he added.
Tassel announced that Procter & Gamble intends to produce in Europe 90% of goods which it sells in Europe. He said that this trend of localisation will extend beyond the COVID-19 crisis, and may even last until the end of the decade.
In late 2021, Bank of America said that mentions of “supply chain” in Fortune 500 company earnings calls had risen by 412% year-on-year. In a McKinsey study, 59% of companies said that they have already adopted new supply-chain risk management practices in the last year. Diversifying away from China was a key example.
Security of supply plays a big role in the apparent shift away from globalisation. Onshoring is an increasingly popular method for ensuring a national supply of any given product. With tensions between America and China rising once more, economic protectionism and data protection are also significant drivers.
“It’s fair and logical that countries want to take into account national security in a lot of areas, and a lot of countries say ‘I don’t want to rely fully on products that are manufactured in China or in other countries’, and that will continue,” said Nicolas Aguzin, CEO of Hong Kong Exchange and Clearing Ltd (HKEX).
The good news for proponents of globalisation, however, is that the ascent of emerging markets as a new economic force is likely to provide cross-border trade with a renewed impetus. Emerging markets are now consuming 66% of manufactured goods, according to the World Trade Organisation. As long as this is the case, and with business leaders keen to increase flows and interactions, globalisation may be at a crossroads, but it is not at a turning point.