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Close Look: September 2023

8 months ago

Re-globalisation: what’s the big story?

The last few years, marked by the global pandemic and geopolitical tensions, have brought a period of de-globalisation of world trade. However, despite disruption to the established trading order, with its extended supply chains, new patterns of trade continue to emerge. This is leading to the formation of different global supply relationships. We track the development of these trends, described by the World Trade Organisation (WTO) in its annual report as

Firstly, let’s look back to the age of globalisation. This era began in the early 1990s, when developed market economies started to outsource the production of components to the world’s lower cost economies. Their target was greater efficiency, leading ultimately to the reduction of costs. The method was simply to break down the production process into different stages. These could then be carried out in other widely spread economies around the world, taking advantage of regional specialisations. The Chinese economy was so well suited to this trend, that China soon became known as the ‘factory of the world’.

The arrival of the Covid-19 pandemic in early 2020 sounded the death knell of trade globalisation. The disruption caused to well-oiled supply chains resulted in inefficiencies, bottle necks and rising costs, which would ultimately feed inflation. The Russian invasion of Ukraine in 2022 caused further fractures in global trade patterns, as global alliances were reset. Multinational manufacturers scrambled to establish re-shoring or friend-shoring alliances, to ensure supplies of their components. These new alliances might take time to establish, but will eventually result in more diversified global supply chains.

This new global integration of trade is described as re-globalisation. It involves companies switching their supply chains to countries who are allies, although they might not yet be the most efficient suppliers. Despite the difficulties outlined above, the WTO notes that global trade continues to thrive, driven in part by the expansion of digital services and trade in environmental goods. In 2022, the value of world merchandise trade rose 12% to $25.3 trillion. New trading relationships are replacing the supply chains disrupted by geopolitical forces. For multinational companies the emphasis is now firmly on their resilience and reliability.

The WTO is encouraging greater co-operation between previously unfamiliar trading partners, faced with the challenges of national security, wealth inequality and climate change. Research has shown that emerging economies such as India, Vietnam and Indonesia will likely benefit, given their production cost and demographic profiles. Developed market beneficiaries will include economies such as Germany, which enjoys high levels of productivity and business freedom. While China might lose its place as the factory of the world, re-globalisation is unlikely to signal a peak in Chinese economic growth, rather the need to adapt and take advantage of new trading alliances.

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