Global unwinding

The investment perspective on deglobalisation

Aryaman Talukdar

Investment Analyst

Ancient trade routes, such as the Silk Road, created a connection between the East and West, long before globalisation had a name. The 1970s ushered in an era of rapid globalisation, driven by soaring bilateral trade volumes, trade liberalisation, and advancements in technology.

Recently, the discourse has shifted towards deglobalisation, where nations consider reducing their interdependencies. Global trade as a percentage of world GDP surged for decades until the financial crisis, after which it plateaued. Countries are increasingly prioritising self-sufficiency over unrestricted trade. Economists have coined the term 'slowbalisation' to describe this gradual shift, attributed to subdued international growth of trade in recent years.

International trade as % of World GDP

Source: WTO

Why are countries moving away from globalisation?

Not everyone benefitted equally. It could be argued that the developed world has not benefited as greatly from increased trade as cheaper alternatives have eaten away at jobs and industries.

A pertinent example would be the UK’s ship building industry. The north-east of England was a ship manufacturing powerhouse decades ago, however, competition from South Korea and China has left the industry on a far smaller scale than what it was.

Tensions between the US and China since the 2010s have had significant impacts on world trade. This was exacerbated in the Trump administration, where several new tariffs hurt the volume of Chinese imports. The Chinese retaliated with their own tariffs on US goods and services. This combination has led to a steady decline in trade between 2018 and 2020.

Covid-19 and Russia

Covid-19 and subsequent supply chain disruptions brought about new concerns, prompting countries and corporations to re-evaluate their reliance on global supply chains and improve their security. Recent events, like the conflict in Ukraine, have intensified these fears, underlining the risks associated with over-dependence on specific sources, such as Russian oil and gas. As a result, wholesale energy prices skyrocketed and within a brief period, the eurozone and the UK experienced record levels of inflation leading to a cost of living and energy crisis. As such, countries may increasingly begin ‘friendshoring’, which is when supply chains are reconfigured to include friendly countries, thus strengthening the chain. A recent example being the Indo-Pacific Supply Chain Resilience Initiative.

CHIPS Act

In 2022, the US implemented the CHIPS Act, providing funding to domestic semiconductor manufacturers to reduce the reliance on Chinese semiconductors, and this has only added fuel to the fire. Such circumstances have reduced the benefits of offshoring and if anything, has only highlighted the benefits of friendshoring. While it is hard to say whether globalisation had increased global GDP growth, it has certainly helped boost growth for less developed nations such as India and China. The Indian economy owes its exponential growth in GDP to globalisation. The country opened the economy to foreign companies and investors in the early 90s as part of its trade liberalisation policy, and over three decades GDP has grown more than tenfold, from $270bn to $2,870bn.

What are the pros and cons of deglobalisation?

Domestic jobs

It could create more domestic jobs and foster growth in industries that have lagged their international counterparts, such as manufacturing in the UK. The UK has long been a services powerhouse while other sectors have struggled to grow. However, products from these less competitive domestic industries might suffer in terms of quality and price due to the lack of economies of scale. Consumers could find themselves with costlier, lower-quality goods ‘a dead weight loss’ until domestic producers catch up.

Capital markets

Deglobalisation could also have a profound negative impact on the UK investment industry. In a future characterised by greater isolation among nations, capital flows could diminish, posing challenges for UK capital markets in raising funds. This could hinder the development of domestic companies striving to compete globally.

Environmental benefits

The environment may benefit from a deglobalised world. With fewer shipments and flights, carbon emissions and resource mining may reduce dramatically. Estimates say 20-30% of global carbon emissions originate from trading activity. Reducing the number of imports and exports would most certainly have a significant impact on reducing carbon emissions.

What it means for the global economy and investors

Since merchandise trading is 50% of global GDP, deglobalisation would lead to lower growth worldwide, as trade volumes and foreign investment reduce. The rise in domestic investments may not entirely offset this for each nation, as the size and availability of domestic capital plays a big part.

As risk becomes less interdependent between regions in a less connected world, it would be wise for investors to focus on the geographic diversification of their portfolios. Political and regional crises would be more localised, allowing for greater benefits in diversifying.

While most passive funds have large weightings in global companies, domestic companies may perform better in the future if deglobalisation is prominent, requiring a move away from those funds. Currency hedging could also be more useful than ever since currency risk would magnify. But most important of all, investors might want to shift their focus towards companies and opportunities that are well-positioned in friendshoring blocs, as they could benefit from robust supply chains and minimal trade barriers.