Not just Tsmc and Lg: here are companies and countries that benefit from the new globalization
The transition from globalization to regionalization is generating a series of chain effects: here are them. Analysis by Magdalena Polan, head of EM macro research at PGIM Fixed Income
The United States and China are reorganizing supply chains, benefiting other economies and introducing a new level of risk to others. The cascading impact will be felt around the world and increase country risk in the portfolio.
The turf war passes through the factory
US subsidies are fueling a global war to build new factories, and there are some early signs that these incentives are attracting foreign investment.
One of the largest examples of foreign direct investment in the United States is the Taiwan Semiconductor Manufacturing Company which said it will build a second plant in Arizona in 2022, for an expected total investment of $40 billion in the state. BMW has broken ground in South Carolina, where the German automaker is building a new battery plant. Hyundai and LG have revealed their plans to build their own battery plant in Georgia. Overall, the United States saw an increase in foreign direct investment from all regions of the world in 2022. Beyond the simple relocation of supply chains, the goal of some US politicians is to promote quasi-relocation, that is, bringing production closer to the national territory, particularly through partnerships with strategic allies and nearby trading partners.
China has made subsidies available for strategic industries since 2015, when it launched the “Made in China 2025” plan to expand its manufacturing base. The plan provides a range of aid, including state funding and tax breaks, for companies operating in emerging high-tech sectors, such as electric vehicles, robotics and artificial intelligence. Additionally, China has focused its attention on boosting domestic chip production to reduce its dependence on rival economies.
Economies benefiting from new supply routes
Quasi-offshoring and efforts to reorganize supply chains may prove to be a boon for economies that can present an alternative for key exports. For example, food consumption is changing with the emergence of the "Western diet".
Meanwhile, the United States is turning to allies such as Canada, South Korea and Australia. In 2022, for the first time in nearly two decades, South Korea's exports to the United States exceeded shipments of Chinese goods. Australian suppliers of minerals and defense products have been labeled “domestic” in the US Inflation Reduction Act. Australia is an example of an economy that has managed to decrease its dependence on China, potentially offering a model for other countries seeking to reduce without completely severing ties. Australia has found new markets for goods that had been subject to Chinese trade sanctions and its partnership with the United States is set to boost the mining and manufacturing sectors.
However, ties with China remain. China continues to be a destination for other Australian resources, including natural gas and iron ore. Despite "de-risking", China remains a fundamental trading partner for other economies as well.
Beneficiaries of new US trade policies, such as Canada, Mexico, South Korea, Vietnam and India, are home to manufacturers who continue to rely on components and materials from China. This makes the overall impact on the Chinese economy less certain. Even as U.S. policy promotes greater self-sufficiency and economic cooperation with allies, China could remain a crucial link in supply chains. Even though fewer goods will travel directly between the United States and China, supply chains for a range of manufactured products are likely to continue to keep the world's two largest economies connected through intermediaries. If you look at reports from the US National Highway Traffic Safety Administration, you will find that some vehicles assembled and sold in the US, particularly electric vehicles, are made with parts from Chinese suppliers. Some vehicles assembled in other countries, such as Mexico and Belgium, and later sold in the United States also contain Chinese-made components.
New challenges and risks for inflation
The disruption to global trade could prove costly for others. Despite the investment in a new chip production plant, Germany is still moving towards a path of deindustrialization, amid uncertainty over energy security, domestic labor shortages and attractive US subsidies. As tax credits and other subsidies attract the manufacturing sector to the US, economies like the UK risk becoming more dependent on imports and therefore more susceptible to increasingly complex supply chains.
With subsidies proving an important consideration for global manufacturers, some companies are rethinking the location of their factories, favoring the United States and Europe over countries with less cash to offer as incentives. The challenge for smaller economies in this context will be to create new trading alliances and capture growth as partners reindustrialise. For emerging markets, trade constraints can lead to capital reallocation and lower growth if supply chains are diverted to mirror geopolitical blocs. A country like Mexico could benefit from “friend-shoring,” given its proximity to the United States and its current position in global supply chains. Investing in developed and emerging markets will require analysis that places greater emphasis on geopolitical factors, regional trade patterns and capital flows.
The regionalization of supply chains and the return of industrial policy also present new risks for inflation . Globalization has brought with it a long period of moderate inflation. After the pandemic began, the combination of supply chain disruptions and government stimulus helped create price pressures that drove inflation to levels not seen since the 1980s. With reindustrialization underway, the prospects for rising inflation in the coming years appear to be strengthening. Indonesia, the world's largest nickel producer, has floated the possibility of creating an OPEC-like group to coordinate exports of the mineral, a key component for electric vehicle batteries and other electronic devices.
Such policies have the potential to keep prices high and increase uncertainty in global supply chains. For developing Asia-Pacific economies, inflationary concerns and high interest rates abroad will likely constrain monetary policy and keep borrowing costs high. The ability of governments to provide fiscal support or respond to unexpected economic developments may therefore be limited. Meanwhile, rising debt increases the risk of distress and threatens to drag down private investment.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/globalizzazione-regionalizzazione-effetti/ on Sun, 26 Nov 2023 06:33:31 +0000.