Jarden Wealth Weekly: Is it the end of the golden age of globalisation?

China, the world’s factory, is no longer the low-wage economy it once was. Photo / AP

OPINION

Since the fall of the Berlin Wall and end of the Cold War, globalisation has powered the world’s economy.

Outsourcing production – primarily to China – has meant the world’s major economies have experienced strong growth with minimal inflation. Globalisation has enabled the world to produce (and consume) more for less. New Zealand embraced this and was the first developed country to have a free trade agreement with China.

However, China no longer provides low-cost production to the same extent as it once did, and there is generally a more negative sentiment towards globalisation, which can be seen in the likes of Brexit and the introduction of protectionist policies from governments around the world.

We’re observing a trend to move production “home” – or at least closer to the end consumer. Terms like “on-shoring” or “near-shoring” are on the rise, with analysis from Jarden’s research team showing mentions of “reshoring” on S&P500 earnings calls were up 123 per cent in the third quarter of 2023 year-on-year.

This means that it is less likely that we will continue to reap the benefits that global inter-connectedness initially provided. Recently, BlackRock - the world’s largest asset manager – identified geopolitical fragmentation as a mega-force shaping the long-term global growth outlook.

So, why is this?

China

The world’s factory is no longer the low wage economy it once was. The net national annual income per person is up from US$271 in 1990 to over US$7,500 in 2020 (World Bank). While there are developing economies such as Mexico, Vietnam, Indonesia, Bangladesh and Morocco which offer opportunities, and in some cases proximity to the customer, they simply don’t have the scale of China.

China has also been moving away from the free-market approach which enabled it to lift more than 800 million of its people out of poverty since 1978. This has seen a trade war emerge with the US and restrictions on imports from many countries, including Australia.

Conflicts

After several decades of relative peace, Russia’s invasion of Ukraine and the Israel-Hamas war, plus ongoing disputes in the South China Sea, have escalated trade tensions and increased the importance of strategic partnerships. These conflicts have also highlighted the risk of reliance on other markets for critical resources. We saw this with Europe’s dependence on Russian gas, and developing countries’ lack of alternative options for the grain they imported from Ukraine. In the future, trade is likely to be guided by geopolitics more than just economics.

Resilience

Conflicts and the pandemic are sharp reminders of the vulnerabilities of global supply chains and the risk of being reliant on one market for essential commodities.

Kiwis experienced this first-hand during the pandemic, with shortages of goods that came either from production being shut down or supply chain interruptions. Many of these issues have been resolved - however, some companies have had to move from a “just in time” inventory model to “just in case”, which adds cost to business and consumers.

Environmental factors

Global supply chains pollute. As much as you might enjoy a glass of French Champagne, the latest iPhone or some new sneakers, the supply chains needed to get them to you are large emitters of carbon.

Some estimates suggest 60 per cent of all global emissions are generated by supply chains, and consumers are increasingly favouring locally produced goods to reduce carbon footprints.

That said, I don’t think we are seeing the end of an inter-connected world. Global trade will keep improving living standards, but the benefits may be more muted than during the golden era of globalisation.

In a period of instability and increasing conflict, New Zealand’s physical isolation is a blessing, but as a small trading nation, we will need to navigate through the turbulence to prosper.

We are fortunate that we have food security, and our farmers are among the most carbon efficient in in the world, producing commodities the world needs. However, the Government and exporters will need to work strategically to overcome the barriers facing global trade and take advantage of the opportunities that will be presented.

From an investment perspective, the change in globalisation dynamics presents evolving challenges, opportunities and risks. A good financial adviser will recommend a diversified portfolio that takes these into account while considering your specific circumstances.

Jarden Securities Limited is an NZX Firm. A financial advice disclosure statement is available free of charge at https://www.jarden.co.nz/our-services/wealth-management/financial-advice-provider-disclosure-statement/.

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