The widely, if not universally, held belief that globalization is a win-win panacea for growth has never looked shakier.
While President Donald Trump has led the charge on calling out the failings of unfettered engagement with China and all that entails in terms of loss of manufacturing capability and sharing of hard-won technology, he is by no means alone.
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Globalization and China
There is a growing groundswell of opinion that the long-held liberal beliefs that engagement would change China’s behavior have proved flawed.
China today is arguably more centrist, more actively and belligerently nationalistic and worryingly less influenced by world opinion than it has been for decades.
And yet it has, from an economic point of view, proved remarkably successful so far.
China’s economy has bounced back faster than those in the West. Furthermore, its economy has recovered faster than even its close Asian neighbors. That is because, in part, the party’s control meant it could enforce harsh — compared to in the U.S. or Europe — lockdown measures in the face of the pandemic. That enforcement extends to continued adherence to social distancing and hygiene standards since.
It is unlikely that a change of president in January, were that to happen following the November election, would have a meaningful impact on U.S.-China relations. A Biden presidency may try to foster a more collaborative international approach. However, the direction would likely be similar.
Europe, too, is following a less bellicose but similar path.
Europe’s investments in China and reliance on China as a trading partner are greater than that of the U.S., for whom China trade still represents a modest percentage of GDP.
Yet, even in Europe, there is increasing talk of decoupling supply chains and restrictions of technology transfers to China. Furthermore, these is talk of restricting Chinese technology companies’ access to the European market.
A different world
Arguably, though, despite the massive rise in global supply chains, the world is less reliant on globalization today for prosperity than it was 10 years ago.
Labor costs in Asia are rising. Technology is replacing labor, blunting the necessity to offshore to survive.
The likely impact of this decoupling on global GDP will be less than many fear. Large trading economies like Germany and South Korea will feel a larger impact (given their integration with China). Meanwhile, for the G7 as a whole, it won’t be cataclysmic.
We saw cases of catastrophic failure in global supply chains following the Thai tsunami and the Japanese Fukushima accident. Supply chains have actually coped remarkably well with the more widespread and potentially more damaging coronavirus pandemic and associated lockdowns.
Companies have learned to build in resilience, dual sourcing, and have better oversight of manufacturing and logistics than during earlier disasters. This suggests companies will continue to adapt and evolve in the months and years ahead. The rules of engagement will morph, driven by the political and ideological drivers in process today.
So less globalization? Yes. More decoupling, more support for regional and national supply chains, and as a result probably some modest increase in costs. But not a disaster and extended supply chains will, for some industries, still have their place. Just no longer the holy grail for all manufacturing.
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