But don’t expect the end of globalisation
While globalisation is receding from extremely elevated levels, a complete reversal of the last 30 years is highly unlikely. The reasons why include the following:
1. Increased pressure on profit margins
The lower labour costs and tariffs seen in recent decades have contributed to a structural improvement in profit margins. Other elements, such as increased automation and technological developments, also contributed to higher margins, but globalisation cannot be ignored.
The on-shoring of all production is highly unlikely as it would create unsurmountable organisational challenges. And while in certain cases resilience will be preferred over lower costs, for some companies with already low margins, the on-shoring of supply chains is not financially viable.
2. More diversified supply chains
The most likely short-term effect is more diversified supply sources. For sectors relying heavily on low-skill labour, this seems the most likely outcome. With most of the initial factors which triggered the rise in globalisation in the last 30 years still in place, a full reversal is unlikely.
As a matter of fact, large cooperation treaties are still being signed. For instance, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, a trade agreement between 11 countries representing around 13% of global gross domestic product, which came into force in December 2018.
3. The rise of local champions
“Globalisation reversion” is likely to be more visible in sectors deemed strategically important, such as where the intellectual property is a significant element. For those sectors, which are likely to influence the balance of power over the next decade, policy actions could drive some on-shoring.
Measures such as subsidies, tax incentives, government contracts and foreign investment controls when technology transfer could be involved are all potential incentives states could use to trigger on-shoring. In turn, this could lead to the development of “local champions” in key technologies such as artificial intelligence or 5G.