While global trade dates back many centuries, the late 19th and early 20th centuries saw rapid developments in the links between the world’s economies and cultures thanks to the development of railways and shipping across the world.
But globalization as we know it today really took off following a number of seminal developments in more recent memory – in particular, the end of Cold War following the collapse of the Soviet Union in 1991 and China’s accession to the World Trade Organisation (WTO) in 2001. As a result, international trade flourished: expressed as a percentage of global GDP, it rose from 37% in 1990 to 61% in 2008, before edging down to 52% in 2020.
Thanks to the establishment of highly integrated supply chains and just-in-time manufacturing systems, multinationals were able to produce and assemble components across multiple markets and time zones. For instance, Apple Inc, the California-based technology giant, produces its best-selling devices by relying on a complex network involving suppliers in more than 50 jurisdictions.
This operating model improves production efficiency by allowing industries to capitalize on the intrinsic strengths of a certain locality. It also offers the advantage of lower costs by tapping into the vast pools of cheap labour available in markets like China and Mexico. As a result, consumers around the world have reaped the twin benefits of lower prices and higher product standards over the past decades.
But while globalization has delivered many benefits, it has also come under increasing scrutiny amid concerns over perceived downsides such as widening inequality, impact on the environment, and deteriorating labour standards. The pushback against globalization has been exacerbated by Covid-19 and geopolitical developments that include the war in Ukraine, which have triggered a major rethink of the global supply chain as we know it.
From a national security perspective, governments have become increasingly drawn to the idea of “onshoring” to enhance self-sufficiency, particularly in the production of strategic and critical supplies. More recently, and as a result of growing geopolitical tensions, the notion of “friend-shoring,” which is defined as moving production lines away from markets with different ideologies to like-minded jurisdictions, has begun to gain currency.
Although there is some justification for friend-shoring, the costs of doing so far outweigh the benefits. As a matter of fact, markets with deeply integrated global value chains (GVCs) have recovered more quickly from Covid-19, according to a World Bank report published recently.
This is due to the effect of a recovering economy in one part of the world ‘spreading’ to other markets through such GVCs. In that regard, well-functioning GVCs foster resilience as opposed to being a source of vulnerability.
For proponents of onshoring, nearshoring and friend-shoring, the key premise is to minimise or eradicate production hiccups, a consideration that trumps other mundane but important factors such as a market’s comparative advantages. But, as we noted earlier, such assertions are flawed, based on the findings of the previously mentioned World Bank report.
In addition, the idea of “reshoring” and “friend-shoring” is regressive and risks intensifying geopolitical tensions, and could lead to a fragmentation of the global economy. A WTO study published shortly after the Russia-Ukraine conflict began estimated that if the global economy were to decouple into “Western” and “Eastern” blocs, nearly 5% in output, the equivalent of more than US$4 trillion, would be lost.
Instead of inward-looking measures, governments should address supply chain vulnerabilities by further easing impediments to trade flows by improving border procedures to expedite the release of goods.
Enhancements to the existing rules-based trading system are also needed to ensure that the trade in critical supplies can continue uninterrupted even in times of crisis like the Covid pandemic. Only then will the desired outcomes of resilience, efficiency, affordability and security be achieved.
Over the past 20 years, more than one billion people have been lifted out of extreme poverty due to the practice of open trade and international cooperation. Although globalization is not without its shortcomings, policymakers should resist populism and protectionism, in the name of promoting resilience, by upholding trade linkages that have been carefully constructed over the past decades.
Failure to do so would translate into less competition, reduced efficiency, higher costs, diminished innovation and ultimately a lower standard of living for all.
Wilson Chong, [email protected]