If you measure trade, global GDP and international financial flows, the so-called period of ‘hyper globalisation’ peaked just before the global financial crisis in 2007. If the global financial crisis was the first systemic shock that caused dislocation, the COVID 19 pandemic and the conflict in Ukraine have also done their part to put pressure on globalisation.
In my view, although globalisation is facing significant headwinds, we’re likely to see it reshape in the years to come. The pandemic and the Ukraine conflict have made countries reconsider the durability of their supply chains. Now, there is a growing push towards localisation or regionalisation that lessens some of the risks associated with being reliant on one country or one geography as a source of production.
Guarding against external shocks
COVID-19 caused severe disruptions to supply chains across the globe. These disruptions continue to persist today, with many politicians and policymakers questioning the limits of a globally integrated supply chain model optimised for efficiency over durability.
Policymakers also want to build more self-reliance and resilience in areas like minerals and materials (eg. semiconductors), defence, security, digital and health. In many countries, efforts are being to create a more favourable policy backdrop to encourage companies to bring production lines onshore. I believe this will be a strategic priority for a lot of governments going forward.
Onshoring likely to be inflationary
Globalisation affects inflation through various channels. For instance, we’ve seen cheaper imports, increased labour supply, increased competition and generally more integrated global supply chains have a positive one-off effect on managing inflation.
On the flip side, bringing production onshore or nearshore will likely increase inflation. However, production facilities previously based in emerging economies may have relied on cheap labour, once brought onshore, is likely to see greater automation and thus increased productivity. It remains to be seen where these factors balance out over time. But in the short term, onshoring is going to be inflationary.