First off – what is globalization? It is defined as the process that moves businesses, organizations, workers, technology, products, ideas and inflation beyond national borders. We have all benefited from globalization through access to cheaper goods and services, cultural awareness and the transfer of information and technology. Many would argue on net it makes the world a better place, but critics argue it increases wealth inequality and makes economies more vulnerable. After decades of increasing globalization, due to recent events, we are finally starting to see a real pivot back towards protectionism and nationalism. With the invasion of Ukraine and new lockdowns in China just in the first quarter this year, both governments and businesses alike are making it a priority to rely less on others and become more self-sufficient. Throughout our time ramping up globalization, we have traded the resiliency and redundancy of our global supply chain for efficiency and margin improvement. Fortune 500 companies have increased profits at the expense of increasing their vulnerabilities. These recent “shocks” to the system have us facing the reality that globalization may not be as reliable as we once thought. What may we see as we go down the path of a more de-globalized world?
While deglobalization will not mean complete independence, we will likely begin to see additional budget carved out to incentivize domestic production. Prioritizing energy, food, technology, and medicinal security. We may see a bifurcation in trade relationships. Creating even stronger relationships with other democratic countries while continuing to pull away from reliance on autocracies like China and Russia.
Similar to governments, we will likely see increased investments to begin re-shoring supply chains to withstand more impacts and adapt to market shifts/shocks. We should see a shift towards a preference for inventory overstocking and diversifying suppliers. At the end of the day, each company will have to find the right balance between efficiency and resilience.
De-Globalization Impact on our Economy
Shifting to economic independence has its advantages but it does not come without a cost. The biggest challenge which may be a result of this is the elephant that is already sitting in the room: inflation. The most enticing aspect of globalization was cheap labor in order to manufacture goods. By moving production back to the US our input costs rise significantly likely leading to pricier goods. With inflation already being the biggest problem our country is currently facing we are watching closely how both governments and businesses are reacting and their ultimate inflationary impact.