We have observed a general deglobalization trend taking place in recent years. But what does deglobalization mean? Is it the re-shoring of certain strategic businesses? The reduced reliance on foreign supply chains and the creation and support of national champions? Or is it something more detrimental to the world, marking the collapse of international trade agreements and the organizations that oversee them, leading to all-out trade war and disputes across the globe and the closure of international markets?
So far, we see little evidence to suggest it is the latter. The world remains economically integrated and trade continues to flow.
However, there is some evidence of deglobalization in its milder form in recent years. While the root cause is difficult to identify, there are many factors at play. A worldwide economic slowdown, excessively complex supply chains combined with pressure on corporates to prove the sustainability of supply chains have contributed to the deglobalization trend. We would note that the recent trend is generally flat, not growing, as per the chart below.
A surge in nationalism and populism across the globe and fears of further supply chain disruption from political and natural crises have accelerated the trend.
We think it’s hard to argue against the benefits of global trade over the decades, and not only in terms of consumer access to new, often exotic goods and new markets for producers. Trade has spurred innovation, created jobs, and lifted gross domestic product (GDP) in both advanced and emerging market economies, leading to higher living standards.
South Korea: An Example of a Globalist Approach
South Korea—a RCEP member—is a prime example of a globalist approach to trade. Instead of going inward, the country has been further opening its market to international trade via major bilateral free-trade agreements. In the 1960s, GDP per capita was among the poorest countries in the world, but by 2004, South Korea’s GDP surpassed one trillion dollars and today stands in excess of US$2 trillion.1 It is now the world’s fifth-largest exporter, with US$577 billion worth of goods including semiconductors, electronics, ships, textiles, automobiles and parts, steel and many other goods.2 Since the Asian Financial Crisis of 1997-98, South Korea implemented 16 free trade agreements spanning 58 countries.3
A New Trade Pact to Reignite Global Trade
While some countries have backed away from globalization, not all countries are keen to disrupt existing trade relationships. In fact, many continue to seek renewed trade deals, deepening integration with others. Many recognize the benefits of free trade and the need to have rules-based organizations to govern trade agreements. There are many positive examples across the globe of the benefits of trade and its ability to create wealth and opportunities for countries.
On November 15, China, Japan, South Korea, Australia, New Zealand and the 10 member states of the Association of Southeast Asian Nations (ASEAN) signed the Regional Comprehensive Economic Partnership, which some have dubbed “the world’s biggest free trade zone.”
The RCEP represents a significant regional trade bloc, covering about 30% of the world’s population and accounting for approximately 30% of global GDP.
While China has engaged in a number of bilateral trade agreements, the RCEP represents its first foray into a multilateral trade pact within the region. Notably, India was absent from the agreement (despite being involved in negotiations), reportedly due to concerns about imports from China. It could potentially enter it at a later date.
The United States, also absent from the RCEP, had been in talks to join the more expansive Trans-Pacific Partnership (TPP)—the precursor to the Comprehensive Trans-Pacific Partnership (CTTP)—which had included countries in the Americas. However, President Donald Trump’s administration withdrew, backing away from global trade agreements in favor of an “America First” vision with a more unilateral approach. It remains to be seen how trade relationships will evolve under the new Biden administration in the United States, but as Biden is considered a globalist, we could see the US re-engage.
While more limited in scope than the CTTP, the RCEP includes provisions addressing “rules of origin,” wherein countries would benefit from sourcing components within complex products amongst each other. The members plan to reduce tariffs on 90% of products to zero over the next decade, fostering more trade within the bloc. Beyond the planned tariff cuts, we are keeping an eye on the status of non-tariff barriers. Less-developed ASEAN nations may see increased imports and reduced exports as a result of RCEP, as it will be difficult for them to develop the manufacturing capacity and/or knowledge to compete with larger countries, like China.
Changing Trade Relationships
We are optimistic the political consequences of the US presidential election (assuming Biden as president) could bring positive outcomes in the area of trade relations. While US-China relations look likely to remain tense, there could be a comprehensive review of US policy towards China in particular, and in regard to trade agreements in general. We think the markets would welcome that wholeheartedly. Next year could be a period of re-engagement, potentially moving to new trade accords at the end of next year or into early 2022, or revisiting ones President Trump had dismissed.
That said, as investors, we don’t spend a great deal of time focusing on such existential issues. Our approach is to focus on company-specific factors, using our network of global analysts to best understand individual business models and how companies are prepared for the risks and opportunities that arise from a changing world.
While we think the RCEP is an interesting development, which could help drive economic growth in some countries recovering from COVID-19, it isn’t really a game-changer in terms of how we view investment opportunities.
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1. Source: CIA World Factbook.
2. Ibid, data as of 2017.
3. Ibid.
