Is This the End of Globalization?

What a global trend toward nearshoring means for investors.

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Globalization and international trade drove much of the last century's economic growth.

However, economists, politicians, and global companies have recently questioned its benefits to the world economy. In fact, “Is Globalization Dead?” was the subject of a panel discussion at the World Economic Forum’s annual gathering at Davos. 

Is it possible or desirable to turn back the clock on world trade? Will widespread nearshoring shift production from distant continents to nearby countries? Or is globalization a cat that can’t be put back in the bag?

What would the end of globalization mean for consumers and investors worldwide?

Globalization: Driving 20th Century Growth

What is globalization?

After World War II, multinational corporations gained competitive advantages by expanding their supply chain and facilitating cross-border access to goods, capital, and intellectual property. This is globalization: the worldwide exchange of ideas, goods, services, and technology.

According to the International Monetary Fund (IMF), globalization drove much of the 20th century's unparalleled growth, but it also contributed to inequality.

To much of the western world, where globalization's benefits are often concentrated, international trade means goods and services shipped from the developing world. These are just a few examples:

• Toys and mobile phones manufactured in China
• Heavy industry and cargo ships built in South Korea
• Software development and customer service in India

Globalization created millions of jobs worldwide and gave rise to industries in the developing world throughout the last century while powering growth in developed countries. The World Trade Organization argues that open economies that embraced globalization like the European Union tend to grow faster and more steadily than closed ones.

Economic growth hinged on an increasingly integrated global economy, where companies improved their margins and productivity by shifting know-how from their home country to other cultures. 

“Globalization has actually lifted 1 billion people out of poverty — and right now it’s caught in what I call the perfect storm of the three C’s: COVID, climate change, conflict,” Pamela Coke-Hamilton, Executive Director of the International Trade Centre, said in a session at Davos.

Globalization Is Evolving

Historically, global trade networks facilitated the flow of goods and services from the most economical location. Companies secured the best deals from existing suppliers or built their own production facilities through foreign direct investment and transfer of intellectual property. However, the pandemic, geopolitical concerns, and shortages have deepened cracks in the world trade ecosystem.

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COVID-19's Impact on Global Supply Chains

In early 2020, the coronavirus made it clear that no business is an island; neither companies nor countries can survive independently. Global economic integration ensured that lockdowns in one region were felt worldwide. 

“The global pandemic — which I don’t think many of us saw coming — has provided some real lessons on supply chain shocks.” - Paul Knopp, Chief Executive Officer of accounting and consulting firm KPMG

Before the pandemic, national security fears and retaliatory trade policies were already pushing a shift from open doors to isolationism and protectionism, especially between the U.S. and China. Companies in both countries faced additional tariffs and other constraints on global trade.

The pandemic exacerbated these existing tensions, and nearly three years after COVID-19's inception, geopolitical tensions continue to add friction to the global economic system. 

Other Recent Influences on the Global Economy

Beyond the pandemic, other aspects of recent events have also impacted global supply chains. 

War between Russia and Ukraine

Beyond serving as an additional geopolitical disruption, the war in Ukraine has highlighted the global dependence on Ukrainian wheat and Russian oil and gas.

Shortages of wheat, natural gas, and petroleum products create a lack of available goods and drive global prices up. These increases, combined with vast amounts of currency that central banks injected into the global economy to combat COVID-19, contribute to worsening inflation. The World Bank recently indicated global inflation seems to be increasing and will strain much of the world's financial system.

Americans and Europeans are already feeling the pinch from wheat shortages, and the Russian economy needs to find an alternative to Western consumers quickly. Dependence on distant, politically unstable countries for critical products is becoming unsustainable.

Shortages scar the world economy

Lockdowns in China and worker shortages in other countries have caused dozens of container ships to wait to unload and reload over the past two years. Stemming from zero-COVID policies, large sections of the Chinese population were forced into lockdown in the first half of 2022. With no one to load and unload the ships, the flow of goods into and out of China slowed to a trickle at some of the world’s busiest ports, further contributing to worldwide shortages. 

In another example, the supply of automotive microchips, already short from pandemic-related shutdowns, was worsened by a disastrous fire at a major supplier in 2021. Although various chip manufacturers raced to invest in new capacity, the auto industry is still feeling the squeeze. Thousands of nearly finished vehicles sit at manufacturers, waiting for final computer modules. 

Auto production may take years to return to pre-pandemic levels. While the world waits, demand for the available new and used vehicles outpaces the supply, driving prices up and further contributing to inflation.

Shipping capacity affects inflation

The combination of limited shipping capacities and rising energy prices have added additional strain on the logistics networks that link the world's economies. In fact, a 2021 UN report predicted a 1.5 percent increase in global inflation due to last year’s shipping crises alone.

When freight costs increase or make shipping unavailable, companies are forced to invest in their own solutions. Those with resources, like Amazon, are even chartering their own container ships, building more warehouses, and leasing planes. Others simply do their best to manage – ordering early, managing customer expectations, and reducing the links in their supply chain.

How can companies cope?

Globalization seems to be facing a lot of headwinds as the global supply chain we all depend on appears to be squeezed from all directions. 

But with the global economy so intertwined, a significant rollback of globalization won't be easy. Many scholars and economists who support globalization worry that reshuffling production and trade might reverse decades of progress and impede global markets.

“There’s a real danger of globalization being rolled back,” said Beata Javorcik, Chief Economist for the European Bank for Reconstruction and Development. “Businesses, in particular, are worried because it would be straightforward to use the current situation to erect trade barriers to build resilience.”

Existing areas of regional expertise won't simply go away. Although canceling globalization entirely is probably not feasible, a move to more regional supply chains is.

Nearshoring – An Alternative to Globalization

An alternative to globalization is becoming increasingly attractive to companies coping with the ongoing chaos in the global value chain. Instead of sourcing from countries on the other side of the world, there’s a growing opportunity for nearshoring, where companies source goods and services from partners in nearby countries.

What Is Nearshoring?

Offshoring is moving production or services across borders to obtain the best price.

But nearshoring involves moving economic activity closer to consumers than offshoring but still out of the home country. This shift reduces risk, transport costs, and the environmental impact of long and fragile supply chains.

There are benefits to nearshoring for both companies and consumers. The proximity gained through nearshoring can allow for more regular visits to the supplier and reduce language barriers and cultural discrepancies. It also allows companies to move faster. Products spend less time in transit, reducing capital employed and energy used. 

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Government Incentives and Free Trade Agreements Support Nearshoring

Tariffs, incentives, and free trade agreements have always impacted the economy by influencing where global companies source their products and services. 

But when you take a closer look, free trade agreements like the North American Free Trade Agreement (NAFTA) and the European Union enable and effectively encourage nearshoring by granting member countries easy access to nearby foreign markets. For example, in the nineties, NAFTA eliminated most trade barriers between Mexico, Canada, and the U.S. 

Although NAFTA was recently replaced, free trade agreements exist between the U.S. and many Central American countries. President Biden and his administration are working on new economic frameworks to push investment in Latin America.

Even if partly fueled by national security discussions and the desire to limit Chinese influence in the region, trade policies that encourage cross-border trade with nearby countries are essential for the economic activity of all parties. For example, Colombia and Mexico are critical trade partners to the United States, and vice-versa.

Incentives also play a significant role in many corporate investment decisions.

In the name of national security and economic well-being, state and local governments often reduce taxes and improve infrastructure to encourage companies to build new technologies in lower-growth regions. 

These incentives don’t only apply locally but on a regional scale as well, and can drive foreign direct investment from multinational corporations. Relaxing tariffs and import duties can push companies to select suppliers and partners in nearby “friendly” countries. 

Nearshoring driven by trade agreements with other regional countries further benefits consumers and the environment.

How Does Nearshoring Benefit Companies?

Historically, risk management has been ad-hoc and event-based. Companies that can make supply chains more resilient will benefit in the coming years.

Just-in-time delivery is excellent for reducing inventory and improving returns on capital employed. But it causes the global economy to rely on a fragile system, and as we've seen all too well, unforeseen disruptions can bring cross-border trade to a standstill.

World trade will continue, so real-time resilience with the ability to predict and transcend external events will better prepare companies who feel threatened by unstable value chains.

This supply chain resilience can be achieved through domestic sourcing or nearshoring.

Domestic Production

The simplest method for strengthening a supply chain is to source from a company's home country. But this is often impossible due to other constraints. 

The benefits of domestic production are harder to realize if you're trying to produce in an area with other strengths or resources. For example, skilled local labor might be unavailable or unaffordable, facilities and infrastructure may not be adequately built out, or in the case of agriculture, the climate and soil would also need to be compatible with the desired crops. The cost of utilities like water and electricity are further limiting factors for many industries.   

These factors can make domestic production an uphill battle, making nearshoring a welcome alternative.

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Nearshoring

Shorter supply lines mean goods spend less time on a truck or container ship, reducing risk, transportation costs, and a company's carbon footprint. Ideally, the end consumer also pays lower prices because of lower transportation costs, lower tariff charges, and lower operating costs in the nearby country.

For U.S. companies, that typically involves sourcing from Canada and Latin American countries, such as Colombia. 

As an additional incentive to producers considering moving production closer to home, many consumers are willing to pay a premium for products traveling a more sustainable value chain. In fact, some world consumers increasingly demand environmentally-friendly supply chains that promote inclusion and make financial sense. By "buying social," consumers are helping drive supply chains to be more sustainable, closer, and inclusive.

Nearshoring of Agriculture and Food Production

Although many countries localize food production where possible, much is imported.

No matter what happens in the global economy, people need to eat, making food production a great candidate for nearshoring. Americans can benefit from the ideal climates across national borders in nearby Latin America.

Shorter transportation routes mean a lower risk of spoilage and the ability to grow native crops on ideal land. Instead of concentrating food production in one area of the globe and using shipping containers to move food around the world, companies are increasingly taking advantage of nearshoring and finding competitive suppliers closer to home.

How to Position Yourself for the End of Globalization

Crises will regularly threaten to disrupt the global market and strain the financial system. But companies able to deliver despite the difficulties will perform well while others struggle. 

Nearshoring is an attractive, forward-thinking option for companies looking to strengthen their global value chains. Shorter supply chains can increase flexibility, improve sustainability, and reduce risks, helping companies maintain resilience in the face of global headwinds. 

As we move toward an era of increasing suspicion toward global economic integration, nearshoring is the likely evolution following decades of globalization. 

It’s especially critical for agriculture. 

Feeding a growing population depends on rich natural resources, plenty of sunshine, and affordable labor. These advantages and more can be found in nearby Latin America, where Colombia is already a well-known producer of high-demand crops like limes, coconuts, and avocados. Its exceptional climate, easy access to the U.S. through both the Atlantic and Pacific oceans, and sophisticated agricultural infrastructure make Colombia a great candidate for nearshoring food production.

Farmland presents an exciting opportunity, and smart U.S. investors can benefit from the increasingly attractive option of nearshoring America’s agricultural production as a solution to the snowballing trend of declining globalization.

Complete the contact form below to learn more about investing in the growing trend of nearshoring and what it means for the untapped potential of agriculture production from countries like Colombia.