Globalisation: Same, same but different

Globalisation is not going backwards. Figure 1 is a case in point. The chart illustrates the remarkable growth in global exports. By the end of 2023, global exports had increased 459-fold compared to 1948, reaching an impressive $24 trn. The global financial crisis (GFC), the US led trade war, the pandemic, the cost-of-living crisis, China’s economic malaise and conflicts have disrupted rather changed the trend. Again while global trade-openness, calculated as the sum of global exports and imports expressed as a percentage of world GDP, has been volatile, there is no sign of trade openness reversing decisively. Global trade openness has averaged, 46% since the GFC compared with 41% in the decade prior to GFC.

Figure 1 reinforces two points. First, countries can de-risk but not decouple. Economic interdependence, the powerful idea on which the post-World War II international economic architecture was built, has been executed so efficiently that today economic interdependence is unavoidable, even if some global leaders and policy makers think otherwise. Second, companies are motivated by profits, which means they will gravitate to places with comparative advantages to exploit and markets for their goods and services.

Changing global trading patterns

Trading patterns shift continuously. As illustrated in Figures 2 and 3, these changes have unfolded over decades, rather than years. The U.S., Japan, and Europe have seen their share of global exports steadily decline. This erosion of dominance reflects the maturation of their economies, aging and more expensive workforces, and a gradual loss of competitiveness. Rising labour costs and structural changes have increased reliance on imports from cheaper manufacturing hubs while steering these economies toward services-oriented structures, reducing their dependence on exports and manufacturing.

America’s share of global exports has been declining since 1949. Then the US accounted for almost 26% of global shipments, compared with 8.6% in 2023. Europe’s share today is 30% down from a peak of over 43% in 1972 and Japan’s 3% compared with over 10% in 1986. As manufacturing moved offshore to cheaper production cost bases, advanced economies share of world exports in aggregate has fallen from 83% in 1971 to 57%.

Asia has been the biggest beneficiary of structurally driven world trading pattern shifts and remains at the heart of the horizontally integrate global manufacturing supply chain. (Figure 3).

Asia’s domestic market is growing. Figure 4 which shows shares of global imports across select countries and regions is illustrative. The EU not the US remains the largest export destination market among advanced economies, accounting for 29.2% of global imports in 2023 compared with America’s 12.8%. Granted the EU has a larger population, 449m compared with America’s 333m but per capita incomes are notably lower. More pertinently, Asia’s was already by the end of 2023 importing as many goods from the rest of the world as Europe.

Asia is expected to drive incremental growth in global import demand. This is despite sharp disparities in affordability, a crucial factor in determining market size. The region has a lot of catching up to do. US per capita income at US$82715 in 2023 was well above peer and emerging market levels. In 2023 per capita incomes in Europe were 52% of American, Asia 30%, China 15% and India 3%. However Asia’s middle class and purchasing power are growing rapidly. Since the GFC, per capita incomes in Asia have risen cumulatively by 94%, with China experiencing a 230% increase and India 128%.

The changing nature of globalisation

Profit-seeking entrepreneurs will continue to seize opportunities wherever they arise, undeterred by geographical boundaries or political regimes. Globalisation is not reversing, but it is evolving. Geopolitics and protectionist trade and investment policies are reshaping its nature. Businesses and investors are adapting creatively, transforming the landscape of globalisation itself. While horizontal integration has defined globalisation up to now, the future points toward vertical integration as the dominant strategy. This shift reflects efforts by non-financial corporates to mitigate the risks posed by geopolitical tensions by reconfiguring operations.

For example, Tesla has fully vertically integrated its Shanghai electric car manufacturing plant to bypass U.S. sanctions. Similarly, AstraZeneca, the Anglo-Swedish pharmaceutical giant, has devised plans to carve out its China operations and list them separately in Hong Kong to shield the company from geopolitical risks. These examples highlight a broader trend: firms are beginning to dismantle horizontal supply chains and create location-specific, vertically integrated manufacturing and service units. The pandemic was a catalyst, geopolitics and competition are the accelerators. Expect more companies to adopt this model, replacing traditional global supply chains with localised and self-contained operations tailored to specific regions.

Localisation will have costs, which will be borne by everyone. For companies it will probably mean higher production costs and slower scaling up and specialisation which in turn carries the risk of weaker innovation. For consumers, especially in aging and mature countries it means more expensive goods and services, a negative for socio-economic disparity and economic growth.