Euromonitor International: Vulnerabilities in the globalized economy amid geopolitical tensions

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English Section / 27 noiembrie 2023

Euromonitor International: Vulnerabilities in the globalized economy amid geopolitical tensions

Versiunea în limba română

Globalization - the flow of goods, services, people and capital across borders - has stimulated global growth and facilitated the rise of many emerging markets in recent decades, according to a Euromonitor International analysis, which however points out that, following the financial crisis of 2007-2008 , the globalized economy has been affected by major geopolitical tensions, as well as an expansion of trade conflicts and protectionism, as a result of the change in the global economic balance of power.

The Covid-19 pandemic and Russia's invasion of Ukraine ultimately marked a turning point for the global economy, as these events exposed economic vulnerabilities but also exacerbated existing geopolitical tensions. This triggered a reorganization of global trade and investment, focused on security and resilience rather than efficiency. Against the backdrop of this globalization reset, business strategies must take into account new economic and geopolitical realities to mitigate growing risks and take advantage of emerging opportunities, according to the cited source.

Geopolitical rivalries amplify the risk of global economic fragmentation

The rapid acceleration of globalization, fueled by liberal economic policies after the end of the Cold War in 1991, has led to fundamental changes in the global economy, especially with the rise of emerging economies, especially China.

Due to the increase in economic multipolarity, the advanced industrial economies (G7) have reduced their share of global GDP from 66% in 1992 to 44% in 2022. At the same time, the group of large emerging economies (BRICS) has increased from 7% to 26%, according to Euromonitor International.

This shift in the balance of global economic power has put pressure on global economic institutions led by the G7, including the International Monetary Fund and the World Trade Organization, which have supported globalization.

In addition to the growing geopolitical tensions between the US and China, there has also been a broader strategic competition around the global economic order, highlighted by the growing influence of alternative institutions in the BRICS countries and their decision to add new members in 2024, the source noted. .

In addition, the pandemic and Russia's invasion of Ukraine have exposed vulnerabilities in the globalized economy. The war in Ukraine has not only led to an unprecedented economic decoupling between the G7 and Russia, but has further exacerbated existing tensions between the US and China, thereby significantly increasing the risk to global supply chains and manufacturing networks.

As a result of these growing geopolitical tensions, countries and companies are stepping up their efforts to reduce economic dependencies and supply chain risk. This reset of globalization, which focuses on security and resilience rather than efficiency, comes with significant risks of a fragmented global economy, according to Euromonitor International. Moreover, it signals a shift from liberal economic policies to increased government intervention, which could weaken global growth.

Global trade flows are regrouping

With intensifying geopolitical rivalries creating the need for increased supply chain resilience, both global trade and investment are expected to undergo accelerated changes based on new realities. The evolving dynamics in US foreign trade highlight the transformation of the global trade landscape. Between 2018 and 2022, the share of US imports from China fell from 21% to 16%, according to Euromonitor International.

Increasing diversification outside of China, through proximity to Canada and Mexico, has led Mexico to overtake China as the US's top import partner in 2023, notes Euromonitor International.

The Asia-Pacific region, excluding China, also saw notable changes in trade and investment as global supply chains diversify away from the latter, notably reflected in US imports from Vietnam, which increased by 161 % in the period 2018-2022.

The regrouping of global trade flows shows increasing regionalization around the main free trade areas, including the US-Mexico-Canada Agreement, which entered into force in 2020, and the Regional Economic Partnership Agreement, which entered into force in 2022 and covers large parts of Asia Pacific and Australasia.

Production relocation opportunities

Global companies looking to diversify face a critical question: where to go next? The Future Manufacturing Hubs Index measured by Euromonitor International, which assesses workforce, competitiveness and openness, helps identify the main manufacturing destinations and possible winners in today's globalization reset.

The workforce is crucial for companies when considering investment decisions, especially amid a rapidly aging global population. An abundant, skilled and young workforce helps meet companies' demand for skilled workers while supporting the domestic consumer market, according to Euromonitor International.

At the same time, production costs are a major factor in investment decisions. Competitive markets in terms of labor costs, infrastructure quality and productivity growth will continue to do well in the race for foreign investment, the quoted source notes.

Market openness, including the level of global trade integration and freedom to do business and trade, is also important when making investment and production relocation decisions, and countries with business-friendly economic and trade policies are preferred destinations for investors/exporters.

Asia-Pacific countries are well positioned as new production and export hubs

In the context presented above, many countries in the Asia-Pacific, especially Vietnam, India and Indonesia, are particularly well positioned to become new production and export hubs as globalization resets.

While international trade and investment have been hit by increasing restrictions and disincentives in recent years, full deglobalization remains unlikely. This is because firms continue to seek growth, efficiency gains and access to supply through global production networks and overseas markets, including reallocation of trade and investment, Euromonitor International concludes.

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