Since the start of the trade war between the USA and China in 2018, and particularly during the COVID-19 pandemic, investors have become increasingly concerned about so-called deglobalisation. This term describes the idea that the global economy is becoming less interconnected, which could have a negative impact on financial markets, gross domestic product (GDP) growth and corporate profits.
The current trade situation
Despite these concerns, the global economy remains highly interconnected. The integration of the global economy and the associated benefits for corporate profits are largely intact. Two significant shocks, namely the US tariffs on many Chinese imports and the unprecedented sanctions against Russia due to the invasion of Ukraine, have had a major impact on trade patterns. Nevertheless, trade data shows that supply chains are flexible and resilient and production is shifting to other locations.
For example, the US has imposed tariffs on around 66% of imports from China, which has led to a significant shift in trade flows. While China's share of US imports has fallen, countries such as Mexico, Vietnam, India and Thailand have increased their exports to the USA. Mexico and Vietnam in particular have benefited greatly from these changes, with Mexico recording the largest gains in US dollar terms.
Sources: JP Morgan Asset Management, Haver Analytics, IMF
National security and critical imports
Although the USA has reduced its trade dependency on China in many areas, there is still considerable dependency on critical imports such as pharmaceuticals and advanced weapons technologies. This dependence is seen as a significant security risk by both political camps. President Joe Biden activated the Defence Production Act in November 2023 to bring the production of such critical goods back to the USA.
The bigger picture of deglobalisation
A closer look at the trade data shows that China has increased its share of the global export market despite the trade war. However, the diversification of supply chains has meant that other countries such as the member states of the Association of Southeast Asian Nations (ASEAN) and Latin America have become more important. This diversification is positive for economic growth in these regions and increases the resilience of the global trading system to future shocks.
Sources: JP Morgan Asset Management, Haver Analytics, IMF, Netherlands Bureau for Economic Policy Analysis
Another aspect of deglobalisation is the USA's attempt to reduce its dependence on China for strategically important imports. These include vital medicines and advanced weapons technologies. This is taking place against a backdrop of considerable national security concerns.
Strategic realignment of trade relations
The USA and other Western countries have begun to strategically reorganise their trade relations. It is not just about economic benefits, but also about national security. The term ‘reshoring’ plays an important role in this context. Companies are moving their production facilities back to the US or neighbouring countries such as Mexico to make supply chains more resilient and reduce dependence on China.
The US Democratic Party supports measures aimed at lowering production costs domestically and with close trading partners and increasing demand for domestic production. Examples include the CHIPS Act of 2022 and the Inflation Reduction Act of 2023, while the Republican Party focuses on increasing the cost of foreign products through tariffs.
Flexibility and resilience of global supply chains
A closer look at the data shows that some countries have benefited significantly from the relocation of production. While US imports from China have fallen sharply in some categories, countries such as Vietnam and Mexico have seen significant gains. For example, exports of tariffed products from Vietnam to the US have increased by 170%, while Mexico has seen the largest gains in absolute terms, particularly in semiconductors and auto parts.
This shift in production demonstrates the flexibility and adaptability of global supply chains. Companies have proven that they can react quickly to new political conditions and adapt to geopolitical risks. This adaptability has contributed to companies' profit margins remaining at the high levels achieved through globalisation.
Conclusion: A flexible global trading system
The flexibility of the global trading system has proven remarkably resilient in recent years. Companies have shown that they can react quickly to new political conditions and adapt to geopolitical risks. This adaptability has helped companies' profit margins to remain at the high levels achieved through globalisation.
At the same time, the US remains dependent on China in strategically important areas. It is likely that US policymakers will continue to take measures to reduce this dependence. This presents opportunities for various countries in emerging markets that could benefit from these trends, depending on their competitiveness and trade infrastructure.
In conclusion, US protectionism and the associated reorganisation of global trade flows present both risks and opportunities. Whilst reducing dependence on China makes sense for security reasons, the challenge remains to find a balance between economic growth and national security.
Sources: Noahpinion, JP Morgan Asset Management, International Monetary Fund, Haver Analytics, Netherlands Bureau for Economic Policy Analysis
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