Deglobalisation?

Deloitte Access Economics’ latest Business Outlook will be released next week – and it will focus on Australia’s economic recovery, noting the stunning rebound to date which sees unemployment at 4% (and set to go lower). However the path ahead will still be a tricky one – with unemployment to  reach a floor soon, and commodity prices can’t go much higher.

Inflation, driven by supply chain disruption, is also top of mind for business. Does that mean we are seeing the death knell of globalisation? The report explores this issue, noting that we have already seen considerable disruption of supply chains that run through Russia and Ukraine, thereby alarming global companies about vulnerabilities they didn’t realise existed.

Recent years have seen some new impediments to trade, including for Australia with higher tariffs on some goods to China. Yet supply chains based on high speed and low cost continued to thrive, even in the face of higher tariffs and restrictions on cross-border investment. Instead, it has been the pandemic, and now the war in Ukraine, that has accelerated moves to reduce concentration in supply chains. 

China remains the most critically important country in global supply chains – and China is clearly being careful not to run afoul of Western sanctions on Russia. Chinese companies recognise their massive dependence on the US and Europe.

Yet the flipside is that many global companies are wary of excessive dependence on China. They see a risk China could also become subject to new sanctions by the West, either through its interaction with Russia, or because of its own geopolitical actions. And China’s continuing aspiration of zero COVID transmission, and the accompanying hard lockdowns that policy is currently creating, are also delivering significant disruption to global supply chains. Accordingly, a kind of deglobalisation, at least relative to China, is already underway.

On the other hand, the benefits of globalisation have not begun to disappear. In a competitive global economy, companies absolutely still have an incentive to seek the lowest costs and greatest speed. It could be that the shift toward diversification is merely a bump in the road, meant to address risks previously not seen. It could be that diversification is limited to areas of ‘national security’, albeit potentially broadly defined.

Indeed, the volume of global trade in early 2022 was still roughly 9% higher than just prior to the pandemic, despite the recent challenges.

In any event, if deglobalisation takes hold, or even if globalisation decelerates, there will be some consequences, including higher production costs that lead to higher prices for consumers and lower real purchasing power. This shift away from efficiency could also be inflationary, especially if there are serious efforts to replace products produced in Russia and Ukraine. The current turmoil in global food markets, due to an expected shortage of Ukraine/Russia grain and fertiliser, is a good example. 

Finally, some countries might benefit if companies seek to diversify away from China. Regionalisation of supply chains could mean, for example, more investment in Mexico to service the US market, more investment in south east Asia to service Japan and other affluent countries in Asia, and more investment in eastern Europe to service western Europe. That says deglobalisation could shift, rather than end, and entail a redistribution of the benefits of globalisation.