Key points
Deglobalization is not inevitable. We expect a multi-polar world in which trading blocs become more politically aligned.
As globalization evolves, trade intensity in goods will likely decline. But services could flourish in a global economy that is more virtual.
In any disruptive environment, there will be winners and losers – new opportunities and risks – as investors adapt and respond to change.
Is globalization – an era of increasingly close economic integration- about to go into reverse? We don’t think so.
Globalization will not unravel but it will evolve, in our view. We see a wide spectrum of possible outcomes. The most likely scenario is a multi-polar world in which trading blocs become more politically aligned. Overall, the global economy could become less efficient.
Precisely how globalization evolves will likely depend on the role of innovation and automation, demand growth in new markets, as well as rising (or declining) nationalism and shifts in regulation on climate, taxes, and data.
There will be winners and losers by geography and industry. For example:
Low wage economies that have derived the greatest benefit of decades of globalization appear at greatest risk. Those yet to partake in export-led growth may see development curtailed.
Greater regionalization as supply chains diversify and production moves closer to demand would benefit Asia and an increasingly wealthy consumer base.
Services sector takes the lead
As globalization evolves, trade intensity in goods will likely decline. But services could flourish in a global economy that is more virtual. Services industries should benefit from investment in skilled labor and labor-saving technologies. Economies such as India and the Philippines, with large populations of English speakers and established infrastructure, may also benefit and attract more foreign capital.
While regulations may tighten on the technology sector broadly, certain technology companies will benefit from new demands. The rise of “digital sovereignty” as a national security issue likely means increased spending on cybersecurity. Even before the Russian invasion of Ukraine, it was estimated that cybersecurity spending would surpass USD 200 billion by 2024, up 43% from 2021.
As the threat and costliness of security breaches worsen, companies and governments are highly incentivized to invest in protection. Similarly, defense sectors could benefit from a more tense and fragmented world.
Meanwhile, robotics and automation should become increasingly important and cheaper as replacements for workers, and as access to low-wage labor becomes more limited. We anticipate this trend continuing as aging demographics in developed countries further strains the labor supply and production shifts location to serve growth in new markets.
China’s shifting roles and relationships
What role will China play in the evolution of globalization?
China seems increasingly at risk of reduced trade with the rest of the world following a series of U.S. and European government actions aimed at regulating and curbing reliance on China. In such a scenario, other economies may see benefits. The rise in Chinese wages has already helped the wider Asian region as production has moved to relatively lower cost markets close to the source of final demand.
The shift to greater supply chain diversification could accelerate this trend, especially for manufacturers of consumer products such as textiles and technology hardware. It could also support infrastructure investment.
Investors adapt to change
The global economy has clearly benefited from 70 years of rising globalization. We expect a reconfiguration ahead, rather than a reversal. It will be a disruptive environment in many ways, with new opportunities and risks as investors adapt and respond to change.
