Following its accession to the WTO, China grew quickly, becoming the world’s workshop. The US and Europe came to rely on more and more good-value Chinese imports transported by massive cargo container ships. Years of progress under the General Agreement of Trade and Tariffs in the last century came to fruition with low or no tariff trade for the advanced countries and asymmetric terms for emerging market economies. This formed a good base for a golden age of more international trade.
China borrowed and expanded during the early years of the great financial crisis, helping the world economy avoid a worse downturn. The first signs of challenge to this assumed growth in global specialisation and trade benefits came with the election of Donald Trump as President of the USA. He argued that China was exploiting the system for her own ends, with an undervalued currency and with theft or coercive agreements to obtain Western technology. He put some tariffs in place in an attempt to narrow the large deficit in US/Chinese trade. Whilst President Biden was less aggressive in his rhetoric, he also decided to keep up pressure on China over issues with its conduct.
The need to impose lockdowns in many countries to tackle Covid disrupted many supply chains and this limited overseas trade. Just as the world was recovering from these problems, Russia invaded Ukraine. The West responded by ceasing many trades with Russia and seeking alternative supplies of energy. The trade-in grains and edible oils was also damaged by blockades. The war itself added to tensions between a Chinese-led bloc which includes Russia as an ally, and the US-led bloc.
We believe globalisation will reduce further
Today our theme of a retreat from globalisation with less free trade has many strands which we need to study and assess as background to investment. We have identified eight ways in which globalisation and free trade is being limited or reduced.
Defence procurement and weapons technologies
It was always the case that countries wished to keep certain technologies close for defence purposes. Free trade and competition rules never applied to sensitive weapons and military assets. Today there is an extensive rearmament underway in China, Russia and in the West. The European members of NATO are stepping up their budgets, Japan is expanding her defence capabilities. The West as a whole is having to make more weapons to send to Ukraine. There is more concern about relying on imports for components or goods needed for defence purposes. Each bloc or alliance grouping is seeking its own access to or control of crucial minerals and components and is wanting more domestic production capacity.
Control of technology and the digital revolution
President Biden has reinforced President’s Trump’s action to reduce the opportunity for China to gain access to US digital and communications technologies. The US has asked its allies to also secure their control of Western technology. Chinese suppliers of sensitive services and products are being removed from supply chains, and more effort is going into securing sufficient Western production of everything from computer chips to mobile phones. China has taken retaliatory action. There will be two competing world systems led by US and by Chinese technology, with the two blocs competing for customers and friends amongst the non-aligned world.
President Trump’s Section 301 tariffs on China were designed to correct a trade imbalance which has persisted. President Biden has made some reductions but there are still 25% tariffs that have been affecting around $250bn of imports from China, and a 7.5% tariff on around a further $110bn. China imposed some retaliatory duties. The US tariffs are up for renewal, with no indication of policy change planned, either to cancel more of them or to intensify their use. They remain a weapon and have become part of the international trade architecture given their continuation under two presidents. Relaxations would be welcomed by free traders but would be criticised by others for weakening the thrust of onshoring and the Inflation Reduction Act investments.
The US and the EU are engaged in seeking to attract major industrial investments to their territories by offering direct investment subsidies and other favourable terms to possible investors. There is concern about the way China dominates investment and capacity in areas like wind turbines, batteries, and solar panels for the net zero policies, and by the shortage of Western capacity in microprocessors, smartphones, electric cars, and other products. Whilst there are WTO rules over subsidies, price controls and soft purchasing, it looks like we will continue to see more generous offers in the dash to restore industrial capacity.
The OPEC cartel is not a new development, but there have been recent moves to strengthen its powers and increase its influence. After a period when the oil price was kept down to some extent by a big surge in extra US production of oil and gas, the US today is not so willing or able to make new commitments. Meanwhile OPEC Plus adds Russia’s large output to Saudi’s and the other partners. This alliance is willing to restrict supply to keep prices up. The BRICS grouping of five leading emerging market countries has widened its membership to include big oil producers with Saudi Arabia, Iran and the UAE now in the grouping. We should expect more managed trade in oil, with higher prices.
The scramble for minerals and rare raw materials
The new products of the electrical revolution will need access to large quantities of lithium, rare earths, cobalt, copper, nickel, and others. Uranium will also be needed for an expanded nuclear power programme. The leading countries are seeking to tie up supply agreements or to gain control of important deposits. There is also action to invest in smelting and production facilities outside China.
Price controls and additional taxes
The recent price spikes in energy markets as the West rushed to divert its oil and gas buying away from Russia led a number of advanced countries to introduce price controls and windfall taxes on energy businesses that were benefitting from the surge in world energy prices. Covid lockdowns also encouraged more direct regulation of business. Governments may be slower to take these special measures off than they were to put them on. We might also see prolonged use of more of these techniques as there was often no clear definition of what constituted windfall profits or unacceptable prices.
The drive to net zero
The advanced countries have very ambitious targets to remove fossil fuels from electricity generation, from general use for transport and heating and even from high-temperature industrial processes. The emerging world says that if they are to go the same way they will need extensive financial support as grants, cheap loans, and inward investments from the richer countries. The whole policy set will require extensive use of subsidies, grants, cheap loans, and policy-directed activity to achieve the staging posts on the way to net zero.
The investment consequences of deglobalisation
These trends offer both opportunities and threats to investors.
There will be companies that benefit from good terms to establish more capacity in favoured locations. They may well be able to put in place very profitable investments with more limited competition than if the goods and investments were freely traded and located. Whole sectors like defence are benefitting from the additional spending by governments and the limited range of companies and products that can benefit from it.
The general growth in green products should offer plenty of opportunities to those that can scale up and meet the rise in demand, and reward those who develop new technologies that offer better solutions for low carbon transport, heating and industrial activity.
There will also be dangers and negatives. With so much government intervention there is more likely to be misallocations of capital, as some subsidised ideas turn out to be loss makers. Further use of price controls and windfall taxes could limit returns for investors. When they have rightly identified businesses and activities that are in demand and can do well, they could be hit by a tax or control. Trade friction will mean dearer prices overall, as some markets lose out on best technologies and other markets take product from relatively high-cost producers. Traditional products and producers will suffer earlier decline as governments spend to speed transitions.
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