Citi Research analysts say deglobalization has been a powerful narrative used to warn over risks that the world could see greater inflation persistence / volatility and lower long term growth prospects.
In other words, it can stoke fears of more persistent “stagflationary” forces, as firms trade-off “resilience” in lieu of “efficiency”.
It’s not surprising to see why this deglobalization narrative is appealing. US-China tensions show no signs of easing. The pandemic has severely undermined connectivity between nations/people. It’s also caused supply chain insecurities that fueled reshoring initiatives in items like pharmaceuticals and semiconductors. The Russia-Ukraine conflict seems to have hardened the geopolitical divide between China and the West, and also heightened food and energy insecurities, which alone have unleashed protectionist / inward-looking policies to achieve greater self-reliance.
But despite these issues, evidence of deglobalization has been mixed, and in fact, goods trade has surged in recent years.
The most common illustration of deglobalization has often been seen in goods trade relative to GDP, which had peaked in 2008 globally (much earlier in China’s peak) and then moderated. But in reality, the analysts say, goods trade has actually accelerated in recent years, to a point that it has risen to an eight-year high, not too far off from its 2011 peak, and even exceeds pre-GFC ratios back in 2005-07.
They say you could argue this increase may have been distorted by the outsized consumption of goods versus services, which should come off as activity normalizes more towards less tradable services activity. But there is evidence, they say, that despite the initial downturn during the worst of the lockdowns, global value chains (GVC) proved quite resilient and were able to bounce back quickly, as some of the most GVC-intensive goods, e.g. electronics, saw strong demand during the pandemic.[1]
World goods trade intensity has rebounded recently |
Global value chain trade still looks intact up to 2018 |
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© 2022 Citigroup Inc. No redistribution without Citigroup’s written permission. Source: IMF, Haver, CEIC, Citi Research
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© 2022 Citigroup Inc. No redistribution without Citigroup’s written permission. Source: OECD TiVA, Citi Research, Note:* Sum of foreign value added in exports and domestic value added embodied in foreign exports, as a share of gross exports |
Deglobalization or geopolitical fragmentation?
While data so far suggests that international commerce and global production networks centered around China have proved very sticky and resilient, we think challenges to the status quo could continue to mount. There is ongoing distrust and tensions between US / Western allies and China, made worse by the Russia-Ukraine conflict and tensions over Taiwan. China’s policy predictability and pragmatism that has been such a magnet for foreign investment is now being challenged amid its continued pursuit of dynamic zero Covid. There are also important shifts in both consumer preferences (for reputational reasons) and regulations (e.g. Uyghur Forced Labor Prevention Act and the European directive on corporate sustainability reporting) putting greater focus on non-profit/efficiency goals like “governance”/ human rights. Companies face more pressure to be transparent in their supply chains and could raise operational/ compliance risks in China if geopolitical tensions with US / Western allies continue to worsen.
While the number of harmful/ protectionist measures identified by the Global Trade Alert (GTA) have receded from the highs (Figure 13), we’ve seen continued US actions inimical to economic/trade cooperation with China, including continued use of export controls as a strategic tool to maintain technological lead (e.g. recent export controls on chips related to supercomputers & AI, political pressure on Apple to not use China-made YMTC chips), proposals for tighter outbound investment screening, and the pushing for industrial strategy to facilitate reshoring (e.g. CHIPS and Science Act of 2022 and Inflation Reduction Act of 2022).
China’s protracted dynamic zero Covid policy is also testing the resolve of MNCs to continue on with the same level of economic engagement with China, let alone expand it. A recent European Chamber of Commerce China Position Paper 2022/2023 notes that the uncertainties around Covid policies have had a "negative impact" on 75 percent of its members' operations, and a record number of European businesses are looking at shifting current or planned investments to other markets. An earlier American Chamber of Commerce Survey in June noted that 44% of respondents plan to delay or decrease investments, which is down from 52% in May, but is still relatively elevated.
Protectionist trade policies were on the rise up to 2020, remained elevated in 2021 but came off in 2022* |
US companies in China surveyed show 44% plan to delay or decrease investments, down from May high |
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© 2022 Citigroup Inc. No redistribution without Citigroup’s written permission. Source: Global Trade Alert, Citi Research Estimate; Note: *We annualize the figures based on data up to mid-Sep 2022 |
© 2022 Citigroup Inc. No redistribution without Citigroup’s written permission. Source: AmCham China Flash Survey on Covid-19 Business Impact (June 2022), Citi Research |
Not only have geopolitical developments become more hostile to China, but China itself is pursuing a development path that is increasingly characterized by the pursuit of “self-reliance”. The greater focus on state intervention/industrial policy could further fuel external backlash, a copycat shift towards industrial policies in other economies that could undermine the level playing field between local champions and foreign firms on a broader basis.
The shifting patterns of globalization give room for parts of Asia to benefit from China-West strategic competition fueling a “China plus one” or diversification strategy, the analysts say. rather than reshoring or even “near-shoring” away from Asia.
For more information on this subject and if you are a Velocity subscriber, please see the full report here Asia Economic Outlook & Strategy - Globalization and Risks from Geopolitical Fragmentation
Citi Global Insights (CGI) is Citi’s premier non-independent thought leadership curation. It is not investment research; however, it may contain thematic content previously expressed in an Independent Research report. For the full CGI disclosure, click here.
[1] Ch.4 of IMF WEO. “Global Trade & Value Chains During the Pandemic” (Apr 2022)
