Globalisation – the flow of goods, services, people and capital across borders – has boosted global growth and facilitated the rise of numerous emerging markets in recent decades. Yet, in the aftermath of the 2007-2008 financial crisis, the globalised economy saw considerable political backlash as well as increasing trade conflicts and protectionism as a result of the shifting global economic balance of power. The confluence of the COVID-19 pandemic and Russia’s invasion of Ukraine ultimately marked a turning point for the global economy as these pivotal events laid bare economic vulnerabilities while greatly exacerbating existing geopolitical tensions. This has sparked a reorganisation of global trade and investment focused on security and resilience rather than efficiency. Amid this reset of globalisation, business strategies need to consider these new economic and geopolitical realities to mitigate rising risks and seize newly emerging opportunities.
Growing geopolitical rivalries raise risk of global economic fragmentation
Rapidly accelerating globalisation fuelled by liberal economic policies following the end of the Cold War in 1991 resulted in fundamental changes in the global economy, particularly with the rise of emerging economies, most notably China.
Due to increasing economic multipolarity, advanced industrial economies (G7) saw their share of global GDP decline from 66% in 1992 to 44% in 2022. At the same time, the group of major emerging economies (BRICS) rose from 7% to 26%.
Source: Euromonitor International
This shifting balance of global economic power has placed pressure on G7-led global economic institutions, including the International Monetary Fund and the World Trade Organization, that have underpinned globalisation. In addition to rising geopolitical tensions between the US and China, there has also been broader strategic competition around the global economic order, highlighted by growing influence of alternative institutions in BRICS countries and their decision to add new members in 2024.
The pandemic and Russia’s invasion of Ukraine have exposed vulnerabilities in the globalised economy while the latter has also represented the most significant shift in geopolitical relations since the end of the Cold War, with severe economic implications. The war in Ukraine not only led to an unprecedented economic decoupling between the G7 and Russia, but it has also further exacerbated existing tensions between the US and China, thereby significantly raising the risk for global supply chains and production networks.
As a result of these increasing geopolitical tensions, countries and businesses globally are intensifying efforts to reduce economic dependencies and de-risk concentrated supply chains, often along emerging geopolitical blocs. This reset of globalisation, focusing on security and resilience rather than efficiency, comes with significant risks of a fragmenting global economy. Furthermore, it signals a profound shift away from liberal economic policies to increasing government intervention, potentially resulting in weakened global growth.
Global trade flows reshuffle as governments and companies seek diversification
With growing geopolitical rivalries creating urgency to develop supply chain resilience, global trade and investment are expected to see accelerating shifts based on new geopolitical realities. Evolving dynamics in US foreign trade highlight the transformation of the global trade landscape. Over 2018-2022, the share of US imports from China decreased from 21% to 16%.
Increasing diversification away from China through nearshoring to Canada and Mexico has propelled Mexico to pass China as the primary US import partner in 2023
Source: Euromonitor International
The Asia Pacific region excluding China has also seen notable trade and investment shifts as global supply chains diversify away from the latter, reflected especially in US imports from Vietnam surging by 161% over 2018-2022.
The reshuffling of global trade flows point towards an increasing regionalisation around major free-trade zones, including the US-Mexico-Canada Agreement, which became effective in 2020 and the Regional Comprehensive Economic Partnership Agreement, which entered into force in 2022, and covers large parts of Asia Pacific and Australasia. Furthermore, global trade and investment will be increasingly driven by geopolitically-motivated global infrastructure and investment strategies, including China’s Belt and Road Initiative, the G7’s Partnership for Global Infrastructure and Investment, and the planned India-Middle East-Europe Economic Corridor.
How to identify the next manufacturing relocation opportunities
Global companies seeking diversification face a critical question: where to go next? Euromonitor International’s Future Manufacturing Hubs Index, assessing labour force, competitiveness and openness, helps identify prime manufacturing destinations and spot possible winners in today’s globalisation reset.
The labour force is crucial for companies when considering investment decisions, particularly amid the rapidly ageing of populations globally. An abundant, skilled and youthful workforce helps ensure companies’ demand for workers with the necessary skills is met, while, at the same time, sustaining the domestic consumption market, as working-age populations are often the largest spenders.
Production costs have been a major factor driving investment decisions. Markets that are competitive in terms of labour costs, infrastructure quality and productivity growth will continue to fare well in the race for foreign investment.
Market openness, including the level of global trade integration and freedom in doing business and trading, is also important when making investment and production relocation decisions. Countries with business-friendly economic and trade policies are favoured destinations for investors/exporters.
Numerous countries in Asia Pacific, especially Vietnam, India and Indonesia, are particularly well-positioned to benefit and emerge as the new manufacturing and export hubs
Against this backdrop, numerous countries in Asia Pacific, especially Vietnam, India and Indonesia, are particularly well-positioned to benefit and emerge as the new manufacturing and export hubs as the reset of globalisation unfolds.
While international trade and investment have seen growing restrictions and disincentives in recent years, outright deglobalisation remains unlikely. This is because companies continue to seek growth, efficiency gains and supply access through global production networks and markets abroad, including through the reallocation of trade and investment.
Learn more about how to identify opportunities amid the reset of globalisation in our report New Economic Reality: Geopolitical Risks and Globalisation Reset.