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Has globalisation peaked?

After decades of increasing global trade, the globalisation trend appears to have slowed. The coronavirus pandemic may accelerate the trend of peaking globalisation, but even prior to the current crisis, a number of factors had started to lead us towards a less globalised world. Download the Investment Guide to learn more.




Covid-19 has wreaked havoc across the globe. As borders were closed, flights cancelled, exports restricted and supply chains disrupted, the interconnected world that we once knew was very soon barely recognisable. The coronavirus pandemic will likely accelerate the trend of peaking globalisation, but even prior to the current crisis, a number of factors had started to drive world economies towards being less integrated.

For a long time there was a clear trend of increasing global trade but this dropped off significantly in the Great Financial Crisis in 2008. It subsequently recovered but never returned to the rate of growth seen in the decades preceding the crisis.

Here we consider four factors that may cause global trade to stagnate, or even fall in the future.

1. Nationalism

The re-emergence of nationalism, as exemplified by President Trump’s “America First” rhetoric and the UK’s referendum vote in favour of Brexit, to name just a couple of examples, had already put the brakes on globalisation. Nationalism has been fuelled over the years by the failure of governments to adequately support the economic losers of global integration in their home countries.

If we continue to move towards a more protectionist world, companies may reduce their operations in countries where they fear that tariffs will be implemented or customs delays may slow down their supply chains. This is in fact already visible in the data – global trade growth slowed significantly in 2019 and with the added impact of the coronavirus pandemic, a huge fall is expected in 2020.


2. Risk of supply chain disruption
The pandemic has served to remind businesses about the vulnerability of global supply chains. This has only added to supply chain concerns which were raised by the still ongoing trade disputes, in particular between the US and China. As a result, many companies are reassessing their supply chains and may start leaning towards domestic sourcing and production, and thus become less dependent on trading partners abroad.

In addition, with the very competitive environment in many industries, firms are usually looking for ways to differentiate their offering and in terms of the service offered, the speed to market is becoming key. As a result, many companies are localising their supply chains.

Self-sufficiency and reshoring will probably reappear on political agendas and many governments will likely want to reduce dependencies on other countries, particularly when it comes to critical supplies.

Supply chain disruption

3. Developments in emerging markets
Emerging markets’ share of global consumption has risen by around 50% over the last decade driven by the growing middle class in these countries. By 2030, developing countries, led by China and emerging Asia, are projected to account for more than half of overall global consumption according to McKinsey Global Institute.

China is leading the way but the rising middle class is also evident in other developing countries including India, Indonesia, Thailand, Malaysia, and the Philippines.

Nations who were once heavily dependent on exporting what they made are now consuming more of what they produce domestically and exporting a smaller share. Moreover, emerging economies are gradually moving towards the next stage of economic development - they are building more comprehensive domestic supply chains, and thereby becoming less reliant on imported intermediate inputs.

4. Technological advancements
One of the key forces behind the momentum of the globalisation trend was the search for lower costs of production by companies in nations where incomes were higher. However, we have seen that with the constant technological advancements has come more and more automation, which has reduced production costs, and in so doing reduced the advantage that low-income countries once had.

Considerations other than low wages, such as access to skilled labour or natural resources, proximity to consumers, and the quality of infrastructure, are now much bigger factors in companies’ decisions about where to base production.

In other words, new technologies are reshaping global value chains. These are becoming more knowledge-intensive and reliant on high-skill labour, while low-skill labour is becoming less important as a factor of production. Contrary to popular belief, labour arbitrage (defined as exports from countries whose GDP per capita is one-fifth or less than that of the importing country) now only drives around 18% of global goods trade.

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The crisis has revealed some of the conceptual shortcomings in politics and economics and shown our vulnerability to such shocks. For investors, it is important to learn from what we have seen and prepare for the future.

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