The reversal of globalisation will cause global trade, investment and integration to shrink or stagnate even if the economy grows, according to Rob Clarry, investment strategist at Evelyn Partners.
The Covid pandemic in 2020 led governments to ban exports of critical medical goods such as personal protective equipment (PPE), while the associated lockdowns caused the breakdown of global supply chains, highlighting the risks associated with offshoring and ‘just-in-time’ inventory management.
However, Clarry said that globalisation had begun to level off long before the outbreak of the coronavirus.
“The financial crisis marked the end of rapid globalisation,” he said. “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-financial crisis levels in subsequent years, it hasn’t managed to resume the strong upward trend seen since 1970.”
He pointed out it is not just trade that has stagnated, with other measures of global integration also falling: for example, world foreign direct investment as a share of global GDP peaked just prior to the financial crisis. Likewise, the percentage of sales by S&P 500 companies to foreign countries has also been in decline since 2008.
Clarry said that while the pandemic brought problems associated with globalisation to the fore, there are other, more embedded, headwinds that will continue to disrupt this trend for the foreseeable future.
“Politicians are constrained by the median voter,” he explained. “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 losing confidence in globalisation.”
The chart below highlights the prevalence of this view. Between 2019 and 2021, the number of people who believed globalisation was good for their country fell by around 10 percentage points, and less than half of respondents now view the trend positively.
Clarry noted that voters in France, Italy, Poland and the US have some of the most negative views on globalisation, reflected in the growing share of votes for protectionist parties in these countries.
“This data suggests a continuation of the anti-globalisation policies and rhetoric we’ve seen in recent years,” he added.
A key driver of the reversal in globalisation has been rising US-China tensions. Clarry said this trend – 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,” he added, noting that despite discussions over reducing certain tariffs to alleviate inflationary pressures, there seems to be cross-party support to maintain the combative approach towards China.
“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,” he continued. “Specifically, the bill assigns $52bn to support the US semiconductor sector 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.”
However, Clarry said that while the US will continue to reduce trade with China, high costs mean reshoring will likely be limited to strategic sectors, such as semiconductors.
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. 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,” Clarry continued.
“Other exporting nations have been the real winners as they increased exports by around $80bn, with Vietnam and South Korea picking up market share. 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.”
So how can investors take advantage of the reversal of globalisation? Clarry highlighted two methods: first, by investing in US companies that are well placed to benefit from government investment in strategic sectors over the coming decade.
“While the US semiconductor sector has not escaped this year’s tech sell-off, we think the long-term outlook for the sector remains positive,” he explained.
“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 chain.”
The second is via companies based in the Asia-Pacific region that will benefit from supply-chain diversification. For example, Clarry said those in Vietnam are well positioned to pick up more market share in production given the country’s cheap labour costs and growing expertise in manufacturing.
“Ultimately the face of globalisation is changing, but not in the way many people expect,” he added.
“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.”