The conflict in Ukraine and Covid are fuelling supply chain nationalism in a trend that could reverse globalisation.
The rise of populist nationalism in countries such as the UK and US had already put “made at home” policies on the agenda. Now, businesses face geo-political headwinds that threaten to destabilise the supply of essential goods.
For example, the war in Ukraine has put huge pressure on energy prices. As a result, Germany, Brussels and the UK wish to reduce their dependency on Russian oil. To do so, they are seeking help from the US and ramping up national clean energy projects.
Inflation risk
Investment houses warn that such initiatives could reverse globalisation. For instance, Blackrock’s CEO Larry Fink, wrote to investors recently. “The Russian invasion of Ukraine has put an end to the globalisation we have experienced over the last three decades,” he said. “A large-scale reorientation of supply chains will inherently be inflationary.”
Howard Marks of Oaktree Capital Management said local sourcing was back on the agenda. “Offshoring makes countries and companies dependent on their positive relations with foreign nationals,” he wrote in the Financial Times. And it makes them vulnerable to the efficiency of transport systems.
A US-China trade war, the pandemic and now war in Europe have made supply chain disruption more common and more severe.
Back home
Governments in the US and Europe plan to invest more in semiconductor production. The US’s 2021 Chips Act and Europe’s copycat version plan to shift significant production away from China, according to Edge Computing News. Currently, Taiwan’s TMSC and Samsung have three-quarters of the global market.
Technology is also reshaping supply chains. Automation, AI and robotics boost productivity and visibility for supply chains. Such technologies can also reduce costs. But they also increase the need for highly-skilled workers and investment.
“It is too early to tell how this will all work out ten years from now, Dr Martin Kaspar a foreign direct investment specialist, told Investment Monitor magazine.
Opportunity
Thomas Friedberger at asset manager Tikehau Capital told the FT that deglobalisation also represented an opportunity. Short-termism has damaged the climate, biodiversity and social equality. “The fact that those crises force us to try and build a more sustainable economic model is definitely not bad news for the world,” he said.
