Globalization has dominated the world economy for years. But recent trends are indicating that many major economies are turning their backs on being drawn deeper together. The signs are that there’s a growing desire to be less inter-connected through global networks of capital flows, trade, and technology.
Global trade is becoming less advantageous. There are even cases where it is also on the way to being less feasible.
This is a major turnaround for what in the last half a century had been seen as the prevailing trend that would inexorably move in the same direction.
What is conspiring to slow globalization? The combination of geopolitical shifts, secular trends and trade tensions are just aspects of this story.
Tariffs are a very visible barrier to global trade, but other hurdles, including the US’s foreign investment review, are also diluting any business incentive to globalize, according to senior bankers.
In addition, changes in consumer preferences along with greater purchasing power in emerging markets are boosting regional trade over global trade. Technology is exacerbating these trends by enabling leaner manufacturing methods. The highly acclaimed Dutch trend watcher Adjiedj Bakas calls it “slow-balization”.
When it comes to investment, there are advantages and disadvantages. Barriers to global trade threaten to disrupt major businesses that rely on smooth flows including capital goods, semiconductors, telecoms, and automobiles – indeed any industries where technologies are sensitive and whose supply chains are globally diffuse.
However, increased localization may turn out to be a bonus for those businesses that don’t rely so heavily on foreign markets, and whose products have a critical economic or national security interest. Good examples of these “emerging regional champions” are China’s internet firms, and local payment processors as well as some smaller US internet operators.
Globalization Goes Into Reverse
Even before trade tensions began to reassert themselves, secular winds of change were already blowing.
About 20 years ago, transportation and communication costs were decreasing and long-haul trade across the world’s oceans became prevalent. McKinsey Global Institute research shows that between 2000 and 2012 the share of goods traded between the same region’s countries dropped from 51% to 45%. This trend is now reversing and regional trade is again gaining traction.
Underpinning this are two things. Goods trade is now growing less fast than service trade. And the success of globalization has led to emerging market countries growing rich enough to be consuming more of the very goods that they have been selling.
In hindsight, it’s a natural evolution of globalization, and, according to McKinsey, the consequence is that between 2007 and 2017 the share of output moving across the world’s borders has dropped from 28.1% to 22.5%.
Trade Patterns Change Shape
Trade patterns are also being encouraged to change. McKinsey reports that the old lean manufacturing approach emphasizing low inventory levels -“just-in-time” logistics – is no longer as popular as it once was.
Now just 18% of the world’s goods trade is founded on labor-cost arbitrage. Indeed, McKinsey expects this share to shrink further as companies streamline their supply chains and adopt more automation.
This is very different from the turn of the century when a large number of businesses based decisions about supply-chains on the ability to source low-cost labor, even when it meant shipping supplies, components and finished goods all over the world.
A final aspect that is also making globalization less attractive is technology. Countries are now thinking differently about the link between economic interests and their national security. The US, for example, is now defining its sensitivity in a much broader manner.
So, taking automobiles as an example, the technology on which driverless cars depend is highly likely to have military applications, and the US doesn’t want foreign powers – least of all China – having any knowledge or influence in this field.
Taking Advantage of Slow-balization
Shifting tides create complex dynamics, but investors can still start thinking about the broad implications by seeking answers to a couple of key questions:
- How sensitive is a business’s product to a particular country’s economic or national security?
- What is the reliance on global supply chains, and does this make sense anymore?
Those businesses that are most vulnerable to the effects of “slow-balization” are the ones dealing in economic and security sensitive technologies and still depending on a supply chain that is globally diffuse. Think European capital goods, autos, telecoms, IT hardware, and semiconductors.
It’s less easy to assess internet companies. While the biggest consumer internet businesses are facing higher costs of doing business because platform health and data security are playing bigger roles, smaller rivals could find they benefit for similar reasons.
It’s highly likely companies dealing in sensitive areas, but not closely entwined with the rest of the world, will be better placed. China’s internet firms, for example, are vital for that country’s economic security and outlook but their business has been focused almost exclusively on China itself.
Another area that is worth considering from an investment perspective is payments. Payment firms could be net beneficiaries because they are tuned into issues of tax collection and banking functions as well as national security, while digital payments is unstoppable irrespective of global trade. As a result, payment schemes that are domestically developed could get the edge.