Is This the End of Globalization?

Globalization in all its forms, from social to economic to political, has been on the rise since about the 1970s, and I genuinely believe it’s had more benefits than drawbacks on average. Although it may seem like an April Fool’s joke right now, the real cost of finished goods has trended down over the decades, and there’s evidence that the world has become more peaceful, with fewer wars and war-related deaths than in years past.

It goes without saying that the events of the past two years, including the U.S.-China trade war, Covid pandemic and now the Russia-Ukraine war and international sanctions, have challenged the merits of globalization. Inflation is at a 40-year high and Western Europe is facing a serious energy crisis, prompting policymakers and multinational companies to rethink supply chains that crisscross the globe and sourcing materials and labor from unfriendly jurisdictions.

Russia’s invasion of Ukraine “has put an end to the globalization we have experienced over the last three decades,” says Larry Fink, cofounder and CEO of BlackRock, the world’s largest asset management firm. In this week’s letter to shareholders, he adds that “companies and governments will also be looking more broadly at their dependencies on other nations” as a result of not just the war but also the pandemic. “Nearshoring,” the practice of moving business operations closer to home, could benefit Mexico, Brazil and even the U.S.

China Exporting Lockdowns

An important country Fink does not mention is China, but it’s key to understanding the consequences of unchecked globalization. China has long been the world’s factory. Of the 10 busiest seaports in the world, six are in the Asian country. An estimated one-third of global shipping passes through the South China Sea.

Today we’re seeing the risks of depending so heavily on one country for the movement of goods. China is experiencing an unexpected surge in Covid cases, and since it has a zero-Covid policy, it’s shut down businesses, factories and warehouses, particularly in Shanghai, a major port city that’s home to more than 26 million people. These lockdowns were reflected in the March reading of the Caixin China General Manufacturing PMI, which showed manufacturing activity slowing at the sharpest rate since the beginning of the pandemic two years ago.

China was one of six countries whose Manufacturing PMIs were below the key 50.0 mark in March, the others being Turkey, Mexico, Myanmar, Kazakhstan and, with a reading of 44.1, Russia. This was enough to drag down global factory activity, as measured by the JPMorgan Global Manufacturing PMI, to an 18-month low of 53.0.