Disclaimer:
Any views or opinions expressed are solely those of the author and do not necessarily represent those of any companies that the author has been and is working for.
Most of us are accustomed to the global nature of goods and services we consume. The workforce has been much more mobile than the last century thanks to technological advances and the ease of travel. At the same time there is the government desire to support and protect homegrown industries and domestic resources. The protective measures contribute to deglobalisation. International companies face the pressure to balance these two conflicting business features while maintaining a viable operation to generate value on the investment from stakeholders. Through the pandemic, this undercurrent of deglobalisation is brought to the spotlight. The latest WTO forecasts indicates that world merchandise trade is likely to decline between 13% to 32% in 2020 due to the pandemic, though this is and early projection. However, this trend is not a new or emerging phenomenon. There has be a slowdown in the value of exported goods as a share of GDP from 26.23% in 2008 to 24.24% in 2014 according to WTO data.
This article takes a brief look at market forces, regulatory and economic policies that drive deglobalisation. We also take a look at the impact of the recent pandemic has on this trend.
Regulatory and economic measures on trade, investment and mobility
The emergence of the European Union in early 1990s created a trade separation between much of continent Europe and the rest of world. The European Union enables fluid movement of people, goods and services among European countries – essentially free trade within the European Union. However, there are restrictions to those wanting to trade with the block. This has inadvertently created a trade barrier through regulatory as well as economic measures. Regulatory measures inhibit free flow of foreign workforce (those outside the Union), goods and services from entering the market while trying to promote and protect homegrown resources and industries. Economic measures such as import tariffs discourages demand as the additional costs are passed down from the supply chain to the consumers. These measures sowed the foundation for reduced globalisation.
More recently, the escalation of trade wars between the United States of America and China has also pushed deglobalisation to the forefront.
A closer look to home – Brexit
As United Kingdom leaves the European Union on 31st December 2020 with trade deals yet to be finalised at the time of writing, the United Kingdom may need to look more inwards. The loss of free trade with much of its European partners is expected to have a negative impact on the supply chain. This is two-fold:
(1) the actual supply of goods and services can be limited;
1 Trade set to plunge as COVID-19 pandemic upends global economy, World Trade Organisation, 8th April 2020, https://www.wto.org/english/news_e/pres20_e/pr855_e.htm
2 Michel Fouquin & Jules Hugot , 2016. “Two Centuries of Bilateral Trade and Gravity Data: 1827-2014,” CEPII Working Paper 2016- 14 , May 2016 , CEPII; IMF Direction of Trade Statistics data set http://www.cepii.fr/cepii/en/bdd_modele/presentation.asp?id=32; Value of exported goods as share of DGP, 2000 to 2014, Our World in Data, https://ourworldindata.org/grapher/merchandise-exports-gdp-cepii?time=2000..&country=~OWID_WRL
(2) the cost of supplies can potentially increase due to scarcity and additional import costs.
Both can trigger a slow inflation. There may be a need to promote “consume British” to help combat this unfavourable outcome while trade deals are being agreed. This is not limited to just goods and services but also workforce. The United Kingdom workforce is a mixture of domestic and foreign resources. With free flow of people being restricted, a gap has yet to be filled in terms of both quantity and quality.
Market forces – the Consumer
Consumers can influence organisations to change the way they operate through their buying decisions. We have seen how the drive against animal test has promoted the rise of companies such as the BodyShop. We have more eco-friendly packaging versus plastic as manufacturers respond to consumer concerns of the negative impact of plastic has on the environment. Another influence is the desire to support local producers and reduced commute for both environmental and wellbeing reasons. Over the past twenty years, the UK food industry together with the culinary sector has been promoting British. This is not just about patriotism. There are also economic and operational benefits. The drive to use “local” means reducing carbon footprint and reliance on overseas production and building a more sustainable domestic supply chain. This trend is not evident in just the UK but also in Europe. Only sparkling wine produced in the Champagne region can be called champagne – this is a bid to protect not just the quality and brand of the product but also its locality of origin. In the long run, this move fuels lower imports and thus reduces global integration.
COVID and mobility
The pandemic has created a temporary halt to mobility both domestically and internationally. As countries try to contain the outbreak in the first half of 2020, mobility restriction has caused disruption to the supply chain as people were not able to be on site to maintain production. Movement of goods are being restricted – both internationally and domestically. For decades, global economies prospered through cheaper overseas production. With mobility restriction, each country has to look at self- reliance measures. As countries seek ways to economic recovery and focus domestically, there is a likely move away from global economic integration. This is already evident in the travel industry where countries reciprocate quarantine rules – this impacts revenue from tourism as well as the aviation industry because customers are not able to travel as “freely” as they used to before the pandemic. COVID has put forth the case for more self-reliance to maintain survival and to close off this vulnerability of overseas reliance in the supply chain.
Connect the dots
What does this mean for the finance community and in particular to finance business partnering? Workforce safety and liquidity has been the most immediate concerns so far. This is closely followed by demand, supply and investment. However, the few factors discussed here are not mutually exclusive. Uncertainty is one of the greatest challenges in the near future. Taking these points, finance business partners should take a holistic view when chartering these unknown waters. Finance business partners are the link between decision makers and the multitude of data and data sources. Therefore, it is important that finance professionals connect the dots when analysing the data. Driver based projection is long been one of the best practices to promote better decision making. Finance must collaborate with other parts of the business to understand the financial implication of reduced global interdependencies on the organisation’s goal to maintaining global presence. The interdependencies range from availability of resources (workforce, materials, capital) to distribution chain and customers. Decision makers should also consider the implication of their actions on brand. Apart from necessity, consumer buying decision is also influenced by the brand of the products and services. Brand is a key value generator. Warren Buffett, the famous American investor and philanthropist, once said “It takes twenty years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.” During the pandemic, we have seen a few knee-jerked decisions that caused negative perception, for example the management decision of evicting all residents including employees at the Coylumbridge Hotel during lockdown and some government responses to the pandemic. Therefore, collaboration with marketing to understand consumer behaviour can help drive more meaningful recommendations.
As we slowly come out of the pandemic crisis and face the uncertainty of whether there will be a second wave and whether we will be as prepared knowing what we know today, we should note that
(1) globalisation and deglobalisation will continue as world economies recover;
(2) decisions taken today can have long term consequence to the survival of a business.
References
1. Trade set to plunge as COVID-19 pandemic upends global economy, World Trade Organisation Press Release 855, 8th April 2020, https://www.wto.org/english/res_e/res_e.htm
2. Michel Fouquin & Jules Hugot, 2016. “Two Centuries of Bilateral Trade and Gravity Data: 1827-2014,” CEPII Working Paper 2016- 14 , May 2016 , CEPII; IMF Direction of Trade Statistics data set http://www.cepii.fr/cepii/en/bdd_modele/presentation.asp?id=32
3. Value of exported goods as share of DGP, 2000 to 2014, Our World in Data, https://ourworldindata.org/grapher/merchandise-exports-gdp-cepii?time=2000..&country=~OWID_WRL
4. Here are Warren Buffett’s Most inspirational Quotes, by Zack Friedman, 6th May 2019, https://www.forbes.com/sites/zackfriedman/2019/05/06/warren-buffett-quotes-inspiration/#4e27f4fb4004
5. Coronavirus: Hotel made staff homeless in ‘admin error’, BBC News, 21st March 2020, https://www.bbc.co.uk/news/uk-scotland-highlands-islands-51972372
6. The pandemic adds momentum to the deglobalisation trend, by Douglas Irwin, 5th May 2020, https://voxeu.org/article/pandemic-adds-momentum-deglobalisation-trend
7. Will Covid-19 Have a Lasting Impact on Globalization? by Steven A. Altman, 20th May, 2020, https://hbr.org/2020/05/will-covid-19-have-a-lasting-impact-on-globalization#_edn1
3 Here are Warren Buffett’s Most inspirational Quotes, by Zack Friedman, 6th May 2019, https://www.forbes.com/sites/zackfriedman/2019/05/06/warren-buffett-quotes-inspiration/#4e27f4fb4004
4 Coronavirus: Hotel made staff homeless in ‘admin error’, BBC News, 21st March 2020, https://www.bbc.co.uk/news/uk-scotland-highlands-islands-51972372
