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Goodbye, globalisation?

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How recent trends may impact global trade.

The COVID-19 pandemic and Russia’s invasion of Ukraine have rocked global supply chains, highlighting how reliant consumers and businesses are on the free flow of goods across borders. Many companies are seeking to build resilience into their supply chains, including by moving production closer to home.

This has led some to ask whether the next few years could spell the end for globalisation as we know it. In this complex and nuanced area, it’s worth looking at the issue from a number of angles.

First, for all the talk, the rush to reshore in the wake of the pandemic has not quite materialised. According to 2021 business surveys, 72 per cent of US companies that manufacture in China have no plans to move production elsewhere in the next three years, while just 9 per cent of European companies in China are considering moving investment out of the country.

This does not mean that there won’t be further rejigging to come. Prior to COVID-19, some companies had sought to diversify markets amid US-China trade tensions, including by relocating some of their China operations to ASEAN countries. We may see similar moves post-pandemic, with companies moving certain activities to nearby economies, rather than fully reshoring, in order to de-risk their supply chains.

The latest push to shorten some value chains could also lead to a rise in regionalisation. Over 50 per cent of global trade already takes place between economies in the same region and intra-regional tariffs are relatively low. A new crop of regionally focused trade deals, such as the Regional Comprehensive Economic Partnership in Asia and the African Continental Free Trade Area in Africa, could support this shift.

It’s also instructive to look at the past few years in the broader historical context. Trade openness, measured by the ratio of world trade to GDP, has been in retreat since the Global Financial Crisis. With no new big trade deals in the pipeline, the days of “hyperglobalisation” are clearly behind us.

Yet if we look at international flows, tariffs are very low and global trade is already back to pre-pandemic levels, with China playing a more important role than ever. When it comes to policy, of the nearly 400 trade-related measures introduced by governments since the start of the pandemic, around two-thirds aim to liberalise trade, as opposed to restricting it. And for the bulk of businesses, maintaining global supply still makes sense for cost reasons. There are other strategies they can adopt – such as looking to diversify suppliers, dual-source key inputs, and build stocks – to mitigate future disruptions.

Supply chains may continue to evolve, but efforts to reshore production will likely be concentrated in a few critical sectors such as semiconductors and pharmaceuticals. Therefore, we don’t think it’s a case of goodbye, globalisation just yet.

 

First published 21st April 2022.

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