Deglobalisation ahead? The pros and cons of reshoring

Recent geopolitical events have kickstarted a shift toward more self-sufficiency. Headlines about the end of globalisation are making the rounds. But is deglobalisation really the answer to current supply chain problems? We don’t think so. Trade has adapted to shock after shock Things haven’t been easy in the world of trade for some time now. Former US president Donald Trump’s trade war introduced tariffs on one of the world’s major trade flows, between the US and China, as well as destabilising the rules of world trade. Then came the disruptions to production and shipping due to the Covid-19 pandemic, which resulted in shortages and inflation around the world. Around these shocks, trade flows have adapted. While China-US trade is down, both countries have increased trade with partners across the rest of Asia to source inputs and as markets for their goods. During the pandemic, global production started to shift to keep exports flowing even as Asia, Europe and the US were locked down. The pattern of demand during the pandemic was drastically different to normal years, with a jump in demand for protective equipment, food, and products for the home, including electronics. World trade responded, changing the pattern of goods exports to match. But struggling terminals at ports and a lack of availability of containers led to delays for these products and others as the pandemic progressed, as well as much higher shipping costs. The extreme congestion in container shipping has prevented goods from getting where they need to be during the pandemic and into the recovery phase, with delivery delays and higher costs for shippers and consumers leading to a renewed focus on whether their globalised supply chains entail too much risk. Continuous supply uncertainty keeps the focus on reshoring Research has consistently found that, as a way of reducing risks, offshoring beats the alternative of reshoring supply; for countries, and for firms, it is better to diversify suppliers. The experience of the pandemic showed how this can be true, with different regions going into lockdown at different times. Asia, which opened earlier, became an important destination for exports from all countries. While China continues to pursue a zero-Covid policy, sourcing from outside China and using ports in the rest of Asia can help to reduce unexpected delays. But the risks of sourcing overseas are a less immediate concern than higher shipping costs, which might tip the balance in favour of sourcing from nearby. And shipping costs are not the only trade costs which are rising. Increasingly, policy is adding to trade costs. The EU’s new Carbon Border Adjustment Mechanism will add the equivalent of a trade tariff to reflect the emissions embodied in imports from outside the EU. And, less visibly, public subsidies to firms and industries which were widely used during the pandemic have changed the relative costs of production at home and abroad. The wind has changed from one which was blowing globalisation along at an ever-faster rate, to a headwind, making short-term costs a big part of sourcing decisions. Some of the higher costs are temporary. In shipping, a significant number of new container ships are being built, new port capacity being built is coming onstream weighing on freight rates, and pandemic subsidies are being unwound. On the other hand, some of the headwinds are here to stay. The policy uncertainty which spiked during the trade war is subsiding in favour of a new era of more defensive trade policy that may make tariffs and sanctions more readily used. Reviews in the EU and US of ‘strategic’ supply chains, such as for protective equipment, may lead to domestic productive capacity and inventories being increased, and in the longer term, less trade in these goods. Shipping rates have seen major and sustained increases Macrobond When one door closes, another one opens – more diversification ahead However, due to the multiple crises that we’ve seen over the last couple of years – trade wars, the pandemic, the war in Ukraine – completely new trade opportunities have opened up which in turn could boost global trade again. Despite headlines about reshoring increasing, there is not yet much evidence of companies bringing production back home. Instead, there is evidence of more diversification. In the US, for example, companies increased their import share of manufactured goods from Asian countries in 2021 for the second year in a row, reversing the dip in 2019 following the US-China trade dispute, according to Kearney’s Reshoring Index. Although the war in Ukraine is […]

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