As globalisation enters a new phase, companies and consumers will pay the price

In addition to electoral pressure in developed countries for jobs to be brought back home, supply chain disruptions and geopolitical risks mean globalisation is evolving
As companies seek to diversify supply chains, profits may well decline while consumers can expect to pay higher prices

Tai Hui

Published: 1:30am, 14 May 2022

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Decades of globalisation have brought more affordable products to Western consumers, while leading to rapid earnings growth for multinational companies. Globalisation has also helped lift hundreds of millions of people in developing economies out of poverty, and narrowed the income gap between developed and emerging markets.

However, there is growing concern that this trend will come to an end soon, or even reverse. Perhaps, expecting the world to “deglobalise” is too simplistic; instead, globalisation may take a different turn that could impact economic development around the world and influence the long-term inflation environment.

There are multiple factors challenging the progress of globalisation. Growing income inequality in developed economies, such as the United States and Europe, has prompted voters to call on their elected officials to protect domestic jobs, and encourage companies to bring back jobs that have been outsourced. The US-China trade war, started during the Trump administration, is a good example of such a response.

Then there are concerns around supply chains. Decades of development meant that global supply chains, whether in electronics, automobiles or other consumer products, have become very efficient, but also rigid and fragile. This has again been brought into focus with the significant disruptions during the Covid-19 pandemic.

For example, car manufacturers have had to exclude certain electronic features in new vehicles because of the semiconductor shortage. Manufacturers have to reconsider their manufacturing processes and production locations, moving from “just-in-time” to “just-in-case”.

The conflict between Russia and Ukraine has also reinforced the link between geopolitical relationships and economic ties. The sanctions against Russia suggest that businesses will need to consider geopolitical risks when planning expansions, whether to set up a new production line or enter a new market. The rivalry between the US and China is very much part of this conversation.

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Despite these challenges, there are signs that globalisation is not retreating, but evolving. First, the traditional thinking of low-income countries producing for high-income economies is outdated.

Take automobiles as an example. In 2021, China’s total vehicle sales, at 26 million, were higher than the US and Japan combined. Of the top 10 economies in car sales, four were in emerging markets: China, India, Brazil and Russia.

This shows that the global supply chain is no longer just meeting demand from the West, but increasingly serving emerging-market consumers.

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When it comes to bringing jobs back to the US or Europe, the cost and availability of labour in these economies means their factories would need to be automated, requiring significant investment rather than creating new jobs.

Hence, it is more likely that companies will diversify their manufacturing processes across emerging markets, where there is ample lower-cost labour and growing local demand.

As labour costs have risen in China, some manufacturing processes have already migrated to other Asian countries, such as Vietnam and Indonesia. This will eventually extend to other emerging regions such as Latin America, sub-Saharan Africa and Central and Eastern Europe.

Workers sew garments at a factory in Vietnam’s Hung Yen province. Photo: Reuters

We have focused on the manufacturing aspect of globalisation, but there are other areas such as services, financial market integration and population mobility, which deserve their own in-depth discussion.

In general, we have seen a surge in cross-border services over the past two decades as global consumers shift from consumption of goods to consumption of services.

The World Bank estimates that global internet traffic is expected to reach 150,000 GB per second, compared with 16,800 GB per second just 10 years ago. Although policy and politics have had an impact on direct investment and financial flows, the overall direction is still positive.

National politics around the world is expected to influence globalisation trends in the coming years. That said, there should be sufficient incentives and innovation to keep going a revolution that has benefited consumers and the corporate sector around the world.

Moreover, globalisation is like a plate of fried rice – undoing it is going to be messy, expensive and almost impossible. The cost of doing business is likely to rise as companies diversify their supply chains to reduce disruption risks and comply with government regulations.

Consumers may have to pay more or companies’ profits may decline. We are already experiencing such pain with higher inflation and weaker profit growth.

Tai Hui is chief market strategist for the Asia-Pacific at JP Morgan Asset Management