Globalization at the Crossroads

Globalization at the Crossroads

The Ukraine war turns globalization into ‘slowbalization’, splitting the world into two camps

The Ukraine war has sparked another round of debate around globalization, splitting the world into two camps – one that believes that globalization is over, while another which argues that it is entering a different phase. Some are terming it as ‘slowbalization’. The fact that Russia has been heavily sanctioned, and nearly 500 global companies have pulled out of the country, raises questions about the future of globalization. US-China geopolitical tensions and supply chain disruptions following China’s zero-COVID lockdowns of its commercial hubs have added to the refrain of sounding the end of globalization.

Many Western CEOs are rethinking their operations in China as the regime gets more hostile to the West and as supply chains are threatened by political uncertainty. In 2014 the United States barred the Chinese tech company Huawei from bidding on government contracts. Joe Biden has strengthened “Buy American” rules so that the US government buys more stuff domestically.

Trade routes dislocated

Trade routes, the lifeline of global trade, have been abruptly cut off following the Russian attack. The 27 nations of the European Union, the United States, and Canada have closed their airspace to Russian planes. Russia in return has closed its airspace to 36 nations. The war also has consequences for China’s new “Silk Road” to Europe, the world’s longest freight rail line, on which the nation has spent US$900 billion.

While China’s exports by rail are still tiny compared to shipping, they have been growing quickly. Rail routes helped alleviate the pressure on Chinese ports during the pandemic. These pressures have been building again with COVID outbreaks and hard lockdowns in port cities such as Tianjin, Shenzhen, and Shanghai (the world’s largest port).

End of globalization?

Larry Fink, the chief executive of BlackRock, the world’s largest asset management company, issued a striking warning about a shift he perceived in the global economic order. Vladimir Putin’s invasion of Ukraine had compelled governments and private companies like his own to retaliate by severing business ties with Russia. This response was justified, he wrote, but it had come at a cost: “an end to the globalization we have experienced over the last three decades.”

Re-shoring manufacturing

The pandemic is accelerating digital transformation in manufacturing, and enabling a movement that at first blush seems counter-intuitive – reshoring manufacturing jobs. It’s a critical point in time for the industry and for people who want to see these jobs re-shored. And digitalization, including automation, can help manufacturers capture some of the efficiencies that have driven offshoring in recent years, along with helping make the supply chain more resilient to potential future disruptions.

Nevertheless, trade saw a rebound as the pandemic waned in most parts of the world. The rebound of world trade has surpassed even the most optimistic early forecasts. Trade-in goods dropped faster in March and April 2020 than during the Great Depression and the global financial crisis. But it started growing again in June and rocketed all the way back to its pre-pandemic level by November.

Despite early disruptions, the trade turned out to be a lifeline for economies and health care systems. Trade-in medical products and electronics (for working from home) soared, as social distancing shifted spending from local services (e.g., restaurants) to imported goods. But then came the Ukraine war shock on 24 February 2022, as Russia invaded its neighbor.

The new phase of services globalization

Conventional wisdom says that globalization has stalled. But although the global goods trade has flattened and cross-border capital flows have declined sharply since 2008, globalization is not heading into reverse. Rather, it is entering a new phase defined by soaring flows of data and information.

Remarkably, digital flows–which were practically non-existent just 15 years ago–now exert a larger impact on GDP growth than the centuries-old trade in goods, according to a new McKinsey Global Institute (MGI) report, Digital globalization: The new era of global flows. And although this shift makes it possible for companies to reach international markets with less capital-intensive business models, it poses new risks and policy challenges as well.

The world is more connected than ever, but the nature of its connections has changed in a fundamental way. The amount of cross-border bandwidth that is used has grown 45 times larger since 2005. It is projected to increase by an additional nine times over the next five years as flows of information, searches, communication, video, transactions, and intracompany traffic continues to surge. In addition to transmitting valuable streams of information and ideas in their own right, data flows enable the movement of goods, services, finance, and people. Virtually every type of cross-border transaction now has a digital component. But this too is impacted as the risk of cyber-attacks have increased following the war.

Services play a growing and undervalued role in global value chains. A PwC study remarks that. whilst most of the attention of businesses and policymakers has focused on the global trade in goods which has been experiencing tensions, trade in services has been more dynamic as it has been growing at a faster rate than goods trade. Businesses are becoming more creative and are selling goods (e.g., jet engines) embedded with services (e.g., maintenance service contracts for jet engines) as a source of additional revenue without the additional costs associated with finding new clients and markets.

The future of globalization

Nevertheless, it is difficult to deny that while global trade and value chains were being revived as the pandemic eased in many countries, the war in Europe has been a huge setback to globalization. It will inevitably lead to a lot of boardroom discussions about the future of globalization. One expects that while some amount of re-shoring will be possible with automation and 5G networks enabling the Fourth Industrial Revolution, CEOs will also look carefully at countries with democratic traditions and rule of law as major factors in architecting the blueprint of future supply chains.

While the networks will be the backbone of the technologies enabling re-shoring, it’s not all about technologies. New skills will be needed for the workforce, being the extension of the digital design process. As heavy industry digitalizes, the idea of what it means to be a “blue-collar” worker will be redefined. AI-involved processes in the factory will require people on the floor who can take data and make sense of it in real-time – a different skill set than an analyst sitting in an office elsewhere. Re-skilling the workers is a critical component of the reshoring movement.

The technology that comes with digitalization will create 2.1 million new jobs, according to the World Economic Forum. But the workers currently in manufacturing will need to upgrade their skills to compete for these new positions. Computer skills will be of particular importance, however, there will not be a need to employ engineers for the factory floor. And here again, robust connectivity can play a role in training, enabling remote training and virtual exercises to prepare workers for the future.

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