Offshoring was all the rage when Treasury Today was launched in 1998. Promoted as a means of reducing production costs while helping developing nations diversify their economies, it became the most obvious manifestation of globalisation.
According to the EU, the number of jobs supported directly or indirectly by exports outside the European single market increased from 21.7 million in 2000 to 38 million in 2019. In 2017 it was estimated that the lower prices and increased choice facilitated by globalisation were worth around €600 to every consumer in the EU.
In a speech to the Scottish Council for Development and Industry in 2017, Ben Broadbent, then Deputy Governor of Monetary Policy at the Bank of England acknowledged some sectors had lost out from globalisation with growth in trade contributing to the decline in industrial employment in the developed world.
But he also observed this hadn’t resulted in lower employment in aggregate and the drop in tradeable prices brought significant benefits for consumers.
For some time, experts talked about a race to the bottom as developing countries battled to offer the lowest cost location for offshored factories that arrived almost ‘ready made’. In a 2011 paper produced for the National Bureau of Economic Research, research associate Richard Baldwin wondered how so-called factory economies could ensure their place in the supply chain was not supplanted by the next low wage country to get its governance problems under control.
However, the most significant factor in the decline of globalisation over the last few years has been Covid. The impact of the pandemic was felt across the supply chain, but particularly in China where the rolling lockdowns shook confidence in the country as a manufacturing location.
“We have seen a number of textile manufacturers moving their operations to Turkey and/or India,” says Julia Minchin, Founder and Joint Managing Director of parenting products company Hippychick. “Uncertainty around when manufacturing in China would recommence was one of a number of factors that made companies think whether they could produce closer to home.”
In some cases factories did not come back online even after lockdown restrictions were lifted and businesses were also faced with rocketing shipping costs. Minchin explains that a 40 foot container which could be had for US$1,500 pre-pandemic was costing US$18,000 in the 18 months following the pandemic. This cost hike was further exacerbated by the weakness of the pound in the latter half of 2022.
The challenge for companies based in the UK (as in many developed economies) is that domestic manufacturing capacity is lower and per unit costs are significantly higher, to the extent it would be very difficult to be competitive on price.
“If we tried to do larger production runs in the UK, the chances are the manufacturer would end up outsourcing production to China anyway,” says Minchin. “We have one line that is produced in Vietnam, but shipping is more expensive than from China or India.”
Aside from India and Vietnam, one of the countries that has benefitted most from companies’ desire to shift manufacturing for North America closer to that market is Mexico, which offers competitive labour rates and reduced shipping costs as well as membership of the United States-Mexico-Canada Agreement free trade deal, a growing internal market, and investment incentives.
A report commissioned earlier this year by DP World (Trade in Transition) underlined how globalisation is changing. The survey of 3,000 company executives found that 96% were making changes to their supply chains due to geopolitical events, while the number of companies shifting their manufacturing and suppliers had doubled over the preceding 12 months.
According to Surya Wijaksana, Economist at Bank Rakyat Indonesia, the global economy is entering a phase of selective deglobalisation as geopolitical tensions spill over to the once secular arena of trade and economic policy. “Western economies – especially the US – are looking to protectionist-leaning industrial policies to reduce reliance on adversaries like China and Russia,” he says.
John Ferguson, Practice Lead for New Globalisation at Economist Impact, notes businesses in previous decades have only had to focus on the economic aspects of trade such as price, quality and delivery. “Now they have to account for other non-economic factors such as resilience and sustainability,” he says.
Minchin acknowledges it is difficult to strike a balance between cost and the environmental impact of having goods moving over longer distances.
“There is no such thing as a ‘normal’ year in terms of cost of materials and shipping, so you have to be adaptable and ready to move,” she says. “Most businesses that manufacture in China would like to have an alternative – no one wants to have all their production eggs in one basket any more.”
Fortunately, businesses looking to expand internationally have access to a range of resources to inform their manufacturing decisions. “Companies share information on potential production facilities and in the UK, the Department of Trade and Industry does a lot to help smaller businesses,” says Minchin. “Otherwise, if you have a good agent in Hong Kong, for example, they will know which factories are available and reliable.”
These developments do not signal the end of globalisation. However, we can expect a shift to a more adaptable global manufacturing footprint as companies move to multisourcing strategies and a more flexible range of suppliers.
