Is Globalisation on the Decline? Let’s Dig Deeper
After decades of being both hero and villain, globalisation is said to be on the retreat. There is a common perception that companies are diversifying supply chains and relocating business closer to home. So, are we heading towards deglobalisation? We dig deeper and find that the data tell a different story.
The Tipping Point of Globalisation
The increasing integration of more and more economies into international trade and production has shaped the modern world – both as a driver of growth and sometimes as a source of instability. This globalisation now appears to be at a tipping point. Its vulnerabilities and disadvantages have triggered a rethink. Many companies that used to source their inputs from around the world now face tough times and are being forced to adapt.
The Realities of Deglobalisation
Are we merely seeing a reshuffling of supply and production chains? Or is this a paradigm shift and the start of a new trend towards deglobalisation?
Let’s take a step back and look at the ways firms can make their production and supply chains secure and resilient. They can establish stockpiles of resources that can serve as buffers in the face of unexpected disruptions. They can broaden the range of countries from which they acquire the resources they need to produce goods and services. They can also go even further and relocate production back home or to neighboring countries – known as reshoring and nearshoring respectively. All of these options have distinct implications for the integration of global trade.
The Pros and Cons of Reshoring
For instance, reshoring, which can prompt deglobalisation, entails benefits and costs. It can benefit firms and consumers if it provides better control of production processes. Reshoring can also reduce the negative effects that disruption in one country can have in others.
But reshoring is also likely to have drawbacks. Less geographical diversification leaves a country more vulnerable to domestic shocks. The deglobalizing effects of reshoring can also reduce international trade and cross-border investment, while making it harder to transfer productivity gains from one country to another. All this can reduce prosperity, especially in the small, open economies that benefit most from international trade. Transferring production back from overseas can eliminate previous gains from international comparative advantages and increase domestic production costs.
The Reality of Nearshoring
The past decade has been characterized by a trend towards nearshoring. Yet, trade data provide no clear evidence that recent events – e.g. pandemic and war – have accelerated this trend. The data also do not indicate reshoring of production chains to Europe.
Chart 1 shows that in the past decade the share of intermediate goods imported from within the EU increased. This mirrors the long-term global trend of producing goods closer to their final markets, which has benefited central and eastern European countries. This shift has reversed in the wake of the pandemic as the share of both intermediate and strategic goods imported from the EU decreased. And it is the result of comparatively smooth global supply chain conditions and cheaper input costs outside the EU.
The Role of Trade Data
Overall trade in intermediate goods (a reliable indicator of global production chains) has remained high. The share of trading partners from outside the EU accounted for about 40% of total imports of intermediate goods (including those between euro area countries) in 2022. The figure for strategic goods was even higher, at 65%, with Asia as the major sourcing region owing to its leading role as an exporter of electronics. Analysis shows that there is no change in the pattern of euro area imports of intermediate goods from within the EU compared to those from outside the EU.
These data support survey and anecdotal evidence that there has been no strong response in terms of reshoring within the EU. Companies are instead pursuing other strategies, including diversifying suppliers (e.g. via the increase of sourcing countries) and building up strategic inventories.
The Forces at Play
This limited empirical evidence for deglobalisation may reflect the fact that there are a number of forces that are still actively pushing for globalisation. Technological progress may make it easier to reshore the production of strategic goods and technologies, such as semiconductors. But doing so still requires large investments and time.
Factors such as labor shortages resulting from emigration, population aging, and skills shortfalls may make EU countries less attractive for reshoring. While other cost considerations, such as rising labor or energy costs, and regulatory differences, such as stricter environmental standards, might have encouraged firms to locate production abroad. Advancements in digital technologies also make it easier to trade services across borders, making relocating business processes internationally (offshoring) even simpler.
The Time Factor
Another explanation for the absence of reshoring in euro area trade data is that the effects of reshoring may take longer to reveal themselves.
While trade data do not yet show deglobalisation of production chains, policies in many parts of the world now prioritize domestic or geopolitical objectives over efficiency. Strategic industries such as semiconductors or pharmaceuticals, for example, may see a reshoring of supply chains as a result of government policies. This analysis, relying on past aggregate data and trade behavior, is by definition backward-looking. While there may already be changes at the company level, structural changes in trade patterns may take time to unfold, since relocating production is costly and complex. This will require further analysis and the use of firm-level data or surveys of firms’ future plans.
The Risk of Fragmentation
To conclude, recent geopolitical changes raise questions about whether we are witnessing structural changes in the global economy that may shift towards deglobalisation. Even though there is no strong evidence from recent euro area trade patterns, the risk of global trade fragmentation is real and its consequences could be severe for both producers and consumers. If firms restructure their production chains to source inputs from countries that are geographically closer, rather than those that are more efficient, their production costs could experience an increase that would eventually be reflected in the final prices charged to consumers. However, the impact on import prices would depend on the actual scale of the shift towards closer sourcing countries. We must watch this closely to understand its implications for Europe.
Photo: Freepik.com
