Deglobalisation has been hot on investors’ minds since COVID-19 broke out a few years ago. The virus exposed the fragility of over-extended supply chains, and thus the difficulty in manufacturing when ordering and delivering parts became so complex and convoluted. The trapped Ever Given in the Suez, ships building up on the coasts of Shanghai & LA (fig 1&2), and freight costs going through the roof are all classic examples of this, so it’s no surprise that it got people worried. And it’s not only because people and businesses had to wait longer for goods or parts, but because supply chain disruption is also inherently inflationary and when inflation in places like the US & UK hits nearly 10%, understandably, people begin to want to point the finger at something. The narrative has, however, moved on from what was initially just supply chain pressure and now represents something more ideological. That said, economic integration will typically overcome protectionism through time and thus, the current geopolitical condition is not, in my mind, a proxy for the future condition.
Figure 1: IHS Markit. November 2021
Figure 2: Bloomberg, August 2022
Importantly, it wasn’t just COVID that got us into this situation. These supply chain pressures collided at a time when geopolitical tension & populism was notably heightened – weaving in a whole other dimension of complexity. Russia invading Ukraine, US & China tensions and domestic rife in Sri Lanka are just a few examples of how countries are being ideologically exposed and are under global pressure to maintain their development and living standards. As such, onshoring production lines and insourcing manufacturing and production has been a natural response as countries close themselves off to future shocks. The result has been quite the trade rollercoaster and the election of US president Donald Trump in 2016, who inflamed a trade war against China and put tariffs on allies in Europe in the name of national security, threatened to unwind years of integration:
Figure 3: FT
In theory, better-integrated economies and trade terms make things cheaper and more efficient to produce. However, that doesn’t seem to be how nations are thinking. Only a few weeks ago, Maersk released a statement showing that shipping demand has fallen by 7% this year and is likely to do so further until the year is out. [1] You might say well that’s just a function of consumer demand weakness in the face of higher inflation or that inventory levels are so high that companies don’t need to make so many orders so stop making this something it’s not. However, let’s look at corporate spending habits – most companies in the S&P 500 index have reported first-quarter results with capex across its members increasing 20% year on year, according to the Bank of America. The proportion of companies providing guidance for higher future spending than analysts had expected also rose. The trend was importantly also very broad-based, with every sector except real estate increasing spending. So whilst I think inflation and inventory are somewhat to blame, it’s clear that companies must redesign their production lines and supply chains to navigate the environment we now find ourselves. This trend, however, is not something to throw the proverbial baby out of the bath water over and yet again; history is the answer!
Figure 4: FT
Ok ok ok, so it’s clear that deglobalisation is real to some extent, so what am I trying to prove? Well, pure and simple that it’s nothing to be overly concerned about. Whilst I find comparing historical events to one another problematic and inherently flawed, looking to history will tell you that protectionism/onshoring is only natural during times of protracted ideological & economic divide; the world war period acts as a good example:
Figure 5: Source: BlackRock Investment Institute and U.S. Bureau of Economic Analysis, with data from Haver Analytics, July 2022. The chart shows the sum of world exports plus imports, divided by world GDP.
Whilst this is by no means a like-for-like comparison and that terms of trade where very different back then, it shows how prolonged periods of deglobalisation is not an endemic in perpetuity and can in fact lead to powerful rebounds assuming there are technological and political tailwinds supporting it.
This leads me to bring in some economic theory. Aside from the currency volatility such onshoring habits will create, deglobalisation goes against the economic theory known as The Heckscher-Ohlin model; the theory that countries export what they can most efficiently and plentifully produce. In other words, if countries have certain factors of production that allow them to abundantly produce or procure goods over and above another country (e.g. natural resources) then it makes sense for them to produce that good at scale and thus at lower cost and export it in higher quantities than those countries who otherwise lack the resource. Why am I bashing you with economic theory you ask? Well, the point I am making is that globalising and integrating supply chains is an efficient way to reduce costs and mutually achieve better scale in manufacturing and production; thus inherently disinflationary. Therefore, countries in resource abundant regions will look to use this theory to not only support their currency but also their terms of trade and thus domestic economy. For example, the Netherlands exported almost $577 million in U.S. dollars in 2019, compared to imports that year of approximately $515 million. Its top import-export partner was Germany. Importing on a close to equal basis allowed it to more efficiently and economically manufacture and provide its exports. Whilst this is an oversimplified interpretation of laissez-faire trade politics that even David Ricardo himself wouldn’t fully accept, the underlying point is that mutual trade is, by and large, mutually beneficial.
So, to conclude, it’s clear that there has been some degree of change in the mindset set of governments in how they trade with their partners and thus integrate themselves with other economies. However, this alteration is not omnidirectional and instead will lead nations to simply be more prudent in how they construct their supply chains and political affiliations to ensure that they can better weather future storms. As the old Darwinian adage goes, we must evolve or die, and so to not learn form the hardships of the last few years would be a grave mistake but that doesn’t mean globalisation has or will cease to exist with any less potency.
[1] https://www.cnbc.com/2022/08/03/shipping-firm-maersk-warns-of-weak-demand-and-warehouses-filling-up.html
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