Global trade’s share of economic output has decreased, while industrial policies focused on bolstering domestic industries are increasing, especially in wealthier countries. This change has since last year been dubbed “slowbalisation“, signalling a slowdown in globalisation. However, rather than indicating a complete reversal, this shift reflects a growing emphasis on the protection of domestic industries, securing critical resources, and reducing reliance on global supply chains. This change has significant economic and political consequences, fundamentally altering the norms of international trade and co-operation. The vulnerabilities exposed by the pandemic and the war in Ukraine have been major drivers of this change.
One of the most notable shifts has been economic decoupling, especially in sectors like technology. The US and China are gradually severing their interdependence with both sides pushing for self-sufficiency, especially in critical industries. This trend has meant that multinational companies need to reconsider their sourcing and manufacturing approaches. Indeed, US companies have, for some time, been looking for alternative suppliers outside of China, while Chinese firms are investing in domestic innovation to replace foreign technologies. China’s approach to grow from within its borders goes some way to explaining why it has been so prolific in its theft of Western intellectual property (IP).
This transformation is also influencing investment flows. Traversing this new terrain involves re-evaluating long-term risks and the potential for market volatility, as protectionism gains ground in both developed and emerging markets.
Global events, including the 2008 financial crisis, the US-China trade conflict, Brexit, the COVID-19 pandemic and the Ukraine war, have all prompted countries to reconsider their dependence on global supply chains and seek greater control over their own economies. Resource nationalism, on the rise in resource-rich countries, involves governments asserting control over vital resources to ensure domestic supply.
Industrial policy has historically supported the development of major economies, including the US and Germany in the 19th century, and Japan and China in the 20th. However, as globalisation expanded in the 1980s, many governments began to see industrial policy as an impediment to free trade and market principles, opting for a laissez-faire approach. In recent years, there has been a noticeable shift back toward industrial policy, especially in the US.
The pandemic-induced border closures forced governments to rethink their dependence on international supply chains, particularly for semiconductors, electric batteries and key minerals. However, Europe’s efforts to reduce its dependency on Russian energy amid the Ukraine conflict have highlighted the real problem of self-sufficiency for countries lacking vital resources.
The US has responded to these challenges with tariffs as part of a broader “great reallocation” of trade away from China, seeking to decouple its economy from China, while also investing in green manufacturing. Experts argue that the green transition is fraught with market failures, making public intervention essential for change. This intervention can be seen in initiatives like the US CHIPS Act – which prohibits funding recipients expanding semiconductor manufacturing in China and countries defined by US law as posing a national security threat to the United States – Europe’s Green Deal, and China’s ‘Made in China’ strategy, all of which aim to protect domestic industries in the face of global instability.
Current landscape
The trade conflict between the US and China, along with Russia’s war in Ukraine, has significantly contributed to the rise of protectionist policies. One example of this type of policy is the COVID-19 pandemic, which prompted many countries to implement trade barriers to protect vital supplies.
Subsidies are particularly attractive to governments because they can be directed toward specific industries, benefiting favoured companies, while disadvantaging foreign and unsupported local business. Both the US and China have placed tariffs on a wide range of goods, from electronics and machinery to agricultural products. This has significantly impacted key sectors like technology, where the US has levied tariffs on Chinese-made electronics, while China has targeted American agricultural exports. These actions not only increase the cost of goods but also disrupt established supply chains.
One sector of the hardest hit is technology. US firms, once dependent on Chinese manufacturing for components and assembly, now face higher production costs, which is ultimately passed on to consumers. In response, many companies are reconsidering their reliance on China, seeking alternatives in Southeast Asia or bringing production back to the US. This reshoring trend, while offering some benefits in terms of reducing reliance on foreign supply chains, also creates higher labour costs and, in the case of selling into the US, the continued threat of tariffs.
The push for self-sufficiency has further fuelled the decoupling process. Both the US and China are now investing heavily in domestic innovation, particularly in high-tech sectors such as semiconductors and artificial intelligence (AI).
Potential long-term effects
As the shift toward regionalisation continues, international trade and investment may be increasingly confined to distinct economic blocs, such as those in Asia, Europe and North America. This fragmentation could hinder cross-border exchanges, diminishing the interconnectedness that has driven globalisation for decades, and force countries lacking in resources to develop their own bilateral trade agreements with others to strengthen their domestic industries.
With less international competition, there is the threat that innovation could slow down, reducing the pace of technological progress. The competitive drive that global markets once fuelled may well diminish as business faces less pressure from foreign competitors.
This lack of innovation may have a negative impact on productivity, reducing the potential for economic growth in the long run. Additionally, there is the potential for intensified geopolitical tensions, as countries compete for limited resources like energy, food and critical minerals. Nations are already beginning to prioritise their own economic interests over global co-operation.
Beneficiaries of protectionist policies
This rise in protectionism has also created new opportunities for certain stakeholders, especially within domestic markets and emerging economies.
These measures have enabled several domestic industries to grow due to reduced competition from overseas. In wealthy nations, favoured sectors like low-carbon and tech industries are benefiting. However, consumers and businesses face higher costs due to local production. For example, industries in both the US and China that were previously overwhelmed by cheaper imports are now benefiting from tariffs that create a more favourable competitive environment for local producers. In the US, manufacturers in steel, solar panels and textiles have seen an increase in demand as foreign competition becomes less affordable. Similarly, China’s push for domestic innovation and self-sufficiency has enabled its companies to capture larger shares of the market in technology sectors that were once dominated by foreign firms, particularly in semiconductors and electric vehicles (EVs). As a result, these industries are experiencing increased domestic market advantages, driven by both the tariffs on imported goods and subsidised government support for local development.
Emerging economies are capitalising on the shifts in global supply chains, positioning themselves as alternative manufacturing hubs to China. Countries in Southeast Asia, such as Vietnam, Thailand and Indonesia, have welcomed the rise in foreign direct investment (FDI) as companies look for low-cost alternatives to Chinese manufacturing. Additionally, India, with its large labour pool and growing infrastructure, is becoming an attractive location for tech companies seeking to diversify their operations. These changes create new opportunities for businesses operating in these regions, as they can now take advantage of lower labour costs, improved regulatory environments and trade agreements with countries seeking to reduce dependence on China.
The move towards diversification presents substantial growth opportunities for emerging markets.
Governments are also benefiting from the imposition of tariffs and trade restrictions. The US government, for example, has experienced a significant increase in tariff collections, particularly from Chinese imports. This additional revenue is helping to shore up national budgets, which can be used to fund domestic initiatives, infrastructure projects or even offset the impact of protectionism. Similarly, other nations that implement tariffs may see an uptick in revenue, further incentivising them to maintain or even expand protectionist measures.
Conclusion
While this shift away from globalism creates opportunities for domestic industries and emerging markets, it could very well raise costs for the consumer and slow innovation, certainly over the short to medium term.
Executives must allocate resources to monitor and assess policy developments in major markets, reconsider how they meet customer needs abroad, and evaluate trading partners. Corporations must adapt by diversifying supply chains, advocating balanced trade policies, and investing in innovation. Strategic flexibility and proactive engagement with policymakers are the key to longevity and growth.
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