Reversing globalisation – will investors pay?

When we look at the forces affecting international shares we find one trend yet to be fully priced in – the creeping reversal of globalisation.

The world changed in 1989. Indian-American journalist Fareed Zakaria said, “The Berlin Wall wasn't the only barrier to fall after the collapse of the Soviet Union and the end of the Cold War. Traditional barriers to the flow of money, trade, people and ideas also fell.”

International equity investors rode that wave of accelerating globalisation. Globalisation meant more diversification – and thus less risk. It gave investors access to generational success stories like Taiwan’s TSMC and Korea’s Samsung – world class companies from countries that 30 years ago were emerging markets.¹ 

But it’s not only international equity investors – like Platinum clients – who’ve enjoyed the bigger world brought to us by globalisation. As far back as 1957, Australia chose openness over insularity, signing a trade deal with Japan – a country we’d been at war with less than 15 year before. That decision helped fuel our long post-war boom.

Australia made the same, successful choice with China as she liberalised in the 1980s. Independent economist Saul Eslake says China’s emergence as a manufacturing powerhouse…”has been a huge economic boon for Australia which, unlike most other 'advanced' economies, is an exporter of commodities and an importer of manufactured goods.”²

In a recent speech, Australian Treasury Secretary, Steven Kennedy noted: “China and India’s combined share of global manufacturing exports has gone from 2.4 per cent in 1990 to around 23 per cent today”. According to Dr Kennedy, that lowered the cost of imports, gave Australian consumers more choices in goods and services and made capital cheaper. “Reversing this would be disastrous,” he said.³

Going backwards?

Yet there is a growing movement to reverse globalisation, whether via nationalist industry policy, old-fashioned tariff and quotas, bringing production back home (reshoring) or concentrating supply chains in friendly economies (friendshoring).

How significant is this shift? According to the IMF, since 2018, measures restricting trade flows have outnumbered those liberalising trade by about three to one. In 2023 alone, more than 2,500 new ‘industrial policies’ were introduced in response to supply chain, climate and security concerns.^{4, 5}

The anti-globalisation trend is driven by a mix of geopolitical, economic and political forces. We’re going to look at those forces and the costs they impose on consumers and economies. Then discuss how Platinum manages its portfolios to respond to these trends.

1. The security dimension

Increasing geopolitical competition between China and the West is key to the push to bring supply chains back home. The geopolitical threat from China underpins much of the protectionist rhetoric from both Democrats and Republicans in the current US election campaign.

2. Lost jobs and ‘unfair’ competition

Another argument put for reshoring and so-called industrial policy is the effect of foreign competition on local businesses. In the US, many argue that low-cost, heavily-subsidised Chinese imports have hollowed out America’s industrial heartland. That heartland is now the battleground in the US election.  

Concerns about Chinese competition are not restricted to the US. The EU is currently proposing an additional set of tariffs on Chinese car makers, calibrated around the level of support they receive from the Chinese government.⁶ As we discuss below, the Japanese government is also promoting reshoring due to concerns around China’s geopolitical and economic threat.

3. Supply chain risks

One of the long-running arguments against relying on cheap imports is that geopolitical events and natural disasters can cut access to essential goods.

Recently, Houthi attacks on shipping in the Red Sea led to shortages and higher costs for goods previously shipped through that waterway. As our recent article on tanker shipping explores, Ukraine-related sanctions on Russia have driven up the price of energy and boosted the bottom line of tanker companies. They also exposed the risk Germany took in relying on Russian hydrocarbons to supplement renewable energy.

Covid showed us how entangled and complex global supply chains were. As a result, inventory management, which was built on the premise of just-in-time manufacturing, is now becoming “just-in-case”. Rather than aiming to minimise cost and inventory, businesses are focusing on ensuring there is sufficient inventory.

4. Technological insecurity

Technology is another potential front in the trade wars. As we’re seeing in Ukraine, modern battles are fought on laptops as well as in tanks so protecting military technology – like cyber capability – is a security priority. Countries are also competing around access to crucial technologies. Taiwan, which makes 90% of the world’s most advanced semiconductors, is more than a political prize for China. Its potential ‘loss’ is more than a geopolitical risk for the US.

Backing into a tarrif wall?

The four forces discussed above are reasons to carefully assess how globalisation evolves during the second half of the 2020s. The risk is that governments go too far. As Dr Kennedy says, "If we over-correct and adopt a zero-risk approach, shutting ourselves out of global markets and seeking to be overly self-sufficient, we will quickly undermine the productivity, competitiveness and dynamism of our economy".

Government subsidies and ‘industry policy’ designed to support targeted industries are a burden on government budgets. Tariffs and quotas make goods and services more expensive because they stop businesses buying from the cheapest source. Those added costs have an outsize impact on lower-income consumers, who benefit most from cheaper food and manufactured goods.⁷

Barriers to trade also reduce competitive pressure on domestic producers and stymie innovation, an argument prosecuted by the Keating/Hawke governments in the 1980s/90s who saw tariff cuts and a floating currency as vital to improving efficiency and productivity in the Australian economy.

One of the other key issues with reshoring is explained by our Co-Chief Investment Officer, Andrew Clifford, in the video below. “Moving supply chains back onshore is much harder than it looks,” says Andrew. “You’re not just moving goods and machinery, you’re trying to find and train highly-skilled workers and rebuilding complex processes and workflows that stretch way beyond the walls of your factory. And you’re trying to do it in jurisdictions where the cost base – for everything – can be dramatically higher.”

 

Playing the new playing field

Attitudes to globalisation have shifted and trade politics is now a contested space in many countries. If the push for protectionism continues to build it will undoubtedly influence the competitive dynamics of many individual businesses. Platinum is carefully watching how this trend unfolds and adjusting its portfolios to suit.

Over the past year or so, the geopolitical lens has influenced the Chinese stocks Platinum is buying on behalf of its investors. They tend to be stocks – like travel company Trip.com, e-commerce player Tencent Holdings and delivery business ZTO - whose prospects are tied to the Chinese consumer rather than its export industries. That helps protect our portfolio from the possibility of higher tariffs on Chinese goods while still offering us exposure to China’s huge domestic markets.

Japan is now clearly in reshoring mode, looking to bring elements of their supply chains back to their home islands. Platinum’s Japan Fund now has significant positions in business automation firm Keyence and in Taisei, a construction company likely to profit as Japanese firms build new, hi-tech factories – at home.

Best freight forwarder  

Thanks to geopolitical events and the push to reshore, moving goods across borders is getting more complex. US Census data shows China’s share of US imports peaked at over 20% but fell back to 13% in 2023. Indian and Vietnamese exports to the US have risen as China’s fell. The US is now India’s largest trading partner.

Platinum analyst Manroop Singh says, “Over the past 15-20 years, supply chains increasingly featured China as a manufacturing base, with Western economies the consumption base. As this changes towards a China+1 approach, supply chains become more intricate and complex. That increases the potential points of failure through the supply chain. The companies that win from this are logistics businesses such as best-in-class freight forwarders.”

DSV, a Danish shipping and logistics company Platinum holds in its International and European Funds is one example. It’s a typical Platinum investment because DSV itself is in the throes of a transient change and operating in an industry undergoing structural change from which it can profit. The increasing complexity of global supply chains and DSV’s proven ability to acquire and integrate smaller players in its logistics space has helped it to an 22% average annual return over the past decade.⁸

Watching this space

The anti-globalisation trend is one of the many intersecting trends that could influence the returns from global equity markets over the next five years and beyond. It will be interesting to see how the trend plays out in the medium term as the political and security advantages of reshoring run into the reality of higher costs for consumers.

As investors we’re watching it carefully to see the effect it has on businesses that rely on seamless global supply chains to cut costs and boost margins. Paradoxically, the breadth of today’s global investment universe – itself a product of globalisation – means Platinum can find companies, like DSV, Keyence and more, that benefit from this reshoring trend.