The growing geopolitical conflicts continue to translate into a withdrawal in blocks of world trade. The war in Ukraine or the tensions with Beijing have led Western multinationals to seek security with the provision of raw materials and the installation of production centers in friendly countries. Washington and Brussels have driven those trends by advocating seeking “reliable” and “like-minded” partners to control risks for their companies, which seek to reduce their ties with China to go to Indonesia, Malaysia or even India. According to the European Central Bank (ECB), 42% of the large companies of the Old Continent that it has recently surveyed have decided to produce in allied countries to reduce risks. However, this relocation has economic consequences, and international institutions—such as the IMF or the ECB—warn of its impact on growth and rising prices.
The policy of zero covid, which put the global supply chain in check, forced Apple to decide to transfer production from China to India. It was not something specific: this summer the multinational began manufacturing the iPhone15 in Sriperumbudur (India) in the face of Washington’s growing misgivings about Beijing. This is just an example: the United States and the EU look to countries with similar ideas and policies, that is, with less possibility of entering into conflict, to protect their companies. It is the call friend shoring. The US Secretary of the Treasury, Janet Yellen, was the first to advocate, already in September 2022, for a withdrawal of the productive machinery towards allied states. “We cannot allow countries to use their position in the market for key raw materials, technologies or products to have the power to disrupt our economy or exert geopolitical or desired influence. Let us build and deepen economic integration with the countries we know we can count on,” she said.
Brussels, which prides itself on its status as a banner of free trade in times of retreat, has approved this summer a new economic security strategy that contemplates that the bloc will strengthen its ties “with countries that share” its “security concerns.” economic”, as well as “those who have common interests”. In fact, the European Union has armed itself with a mechanism to supervise foreign investments in strategic companies or instruments to guarantee reciprocity in economic relations.
The World Trade Organization (WTO) maintains that it does not see an underlying trend that implies a “broad deglobalization”, but it has been warning of “signs” of this withdrawal of geopolitical blocks. The organization’s director general, Ngozi Okonjo-Iweala, recently admitted that companies are following a policy to minimize the risks of political and military crises, but she warned that a generalization of this trend would be “expensive and probably ineffective.”
International institutions for now endorse this warning from the WTO. The last to do so has been the European Central Bank (ECB), which in the Economic Bulletin this month makes several contributions on the impact of global trends on inflation in the euro zone. The monetary authority, for example, calculates that the fall in prices of products imported from China has subtracted four tenths from the CPI of the euro zone. But it also analyzes in depth the behavior of European companies in the new global scenario, which multilateral organizations define as “prone to economic shocks.” And the monetary authority also sees a change in large European companies, which say that in the next five years they will be “more active” in changing the location of their operations to “make their businesses more resilient.” 42% are moving their production, when in the last five years 11% did so.
According to the document, European companies cite “geopolitical risk” as the main factor behind their decision to move their activity. “This underscores a shift in business priorities from just focusing on cost-cutting or improving efficiency to also incorporating resilience into their decisions,” the report notes. When asked how they were going to do it, they gave three answers: bringing production closer to the country of the parent company, diversifying suppliers geographically and opting for politically close countries. What’s more, the ECB points out that this strategy will result in greater employment of European suppliers.
China risk
After the sanctions imposed on Russia, China emerges as the country that businessmen believe carries the greatest risks. However, 55% of companies rely on inputs from the Asian giant. And the majority also believes that it is “very complicated” to replace it with other countries. In the survey carried out by the ECB, however, the majority of companies say they are working to “reduce their exposure” to countries that create a threat. In fact, 20% say they are looking for those same products within the European Union.
These dynamics, which began in the midst of the inflationary escalation, worry the ECB due to their impact on prices. And its results support that fear. “60% of those contacted said that changes in the location of production and/or cross-border sourcing of inputs had raised their average prices over the past five years, compared to only 5% who said their prices had fallen as a result,” notes the report, which adds that 45% believe that the pressure will continue to be high in the next five years.
The ECB’s warnings are in line with other reports prepared by institutions such as the European Bank for Reconstruction and Development (EBRD). A document published by this institution concludes that the policies undertaken by companies can “undo” globalization, which has been “the force that has shaped international trade in recent decades, so this “era” of relocating friendly territories will imply “economic costs.”
The IMF, which at its recent annual meetings in Marrakesh warned about withdrawal in blocs, has noted in several studies that geopolitical tensions have led to a reconfiguration of investment flows. The pattern involves a reduction in capital and loans between countries from opposing blocs and an increase between allies, which reflects a setback in global integration. Although the advantages of relocating that capital could give companies more security, the fund also believes that relocation can penalize growth, specifically, in a proportion equivalent to 2% of GDP. And that in a world whose economic progress for the coming years already seems “mediocre,” in the words of the institution itself.
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