We can see the effects of globalization all around us: you call a 1-800 number in America and talk to someone at a call center in India. You buy a shirt made in China for just a few dollars at your local discount store. You go on vacation to Egypt and drink coffee at a Starbucks.
But after 30 years of a more globalized economy, experts believe that we may now be moving toward deglobalization over the next five to 10 years. It’s a move that may bring some blue-collar jobs back to the United States, particularly in middle America—but also may mean higher prices, less international trust and lower earnings for companies doing global business.
“Deglobalization isn’t a headline issue now, but it’s underlying everything that’s happening,” said Steve Wyett, BOK Financial® chief investment strategist. “The biggest issue that U.S. companies have to deal with now is that the amount of goods they can deliver to the domestic economy is lower than it otherwise would be.”
This smaller supply of goods may have a cascading effect through the U.S. economy, leading to lower earnings for companies, lower stock prices and stickier inflation, Wyett said. Meanwhile, it will place more strain on a labor market already short of workers, which may factor into keeping inflation high.
What is globalization?
The process of globalization started in 1989 with the fall of the Berlin Wall and subsequent collapse of the Soviet Union, said Matt Stephani, president of Cavanal Hill Investment Management.As the world moved away from the division between East and West, Communist and non-Communist countries, it led to greater trust between nations and what Stephani calls a “peace dividend.” This dividend grew further when China entered into the World Trade Organization in 2001, which enabled U.S. companies to offshore more jobs to Asia, including China.
The effects of globalization have been widespread because it created a more efficient global economy. In the U.S., it allowed interest rates to be low, stock multiples to move higher because of a constant tailwind and lower prices for U.S. consumers, Stephani said.
In Stephani’s words: “As trust increased around the globe, cooperation increased around the globe.”
Why deglobalization? Why now?
Deglobalization did not start suddenly; rather, the trend has been moving in that direction for the past five or so years, Wyett said. Two key factors driving the change are the cost of labor and the level of risk.
In the past, the difference between U.S. companies paying for offshore labor in China versus paying for labor in the United States was “so wide that you could accept other risks to your business and still do better because you were paying so much less for labor,” Wyett explained.
But that’s been changing.
One contributing factor has been the growth of China’s middle class, which has been driving up the cost of labor there, Wyett said.
Then, two recent events worked as a catalyst, accelerating deglobalization: the COVID-19 pandemic and China’s seeming alliance with Russia.
“COVID started breaking the peace dividend that we’ve had for 30 years,” said Matt Stephani, president of Cavanal Hill Investment Management, Inc., a subsidiary of BOK Financial Corporation.
The pandemic started poking not just one, but many, holes in globalization, he said. For instance, questions of where COVID really came from caused increased tension and mistrust between the East and West.
Meanwhile, supply chain disruptions also raised the production and distribution risks of U.S. companies who make their products in China, Wyett explained. That further eroded the advantages of lower labor costs there.
The economic strain caused by supply chain disruptions increased the political strain between Eastern nations like China and Western nations like the U.S., Stephani said.
“Then, the Olympics solidified it,” he continued. “When [China’s] President Xi and [Russia’s] President Putin stood onstage together at the Olympics and talked about increased cooperation before the invasion of Ukraine, that set the stage for a multipolar world stage rather than a global structure built around organizations such as the UN.”
What are the costs? What are the benefits?
As deglobalization continues, both Wyett and Stephani expect to see more U.S. companies move production out of China. Some of those factories may move to Central and South American countries, like Mexico. Others may move to Canada and U.S., particularly to states in the middle of the U.S., where property tends to be more affordable than in the coastal regions.
On the plus side, that could lead to more blue-collar jobs in the United States. However, filling those jobs will require more vocational education programs, which have been struggling to meet the demand for workers already, Wyett noted.
On the downside, moving factories back to the West will mean the cost of labor for companies will likely go up, which may have other consequences.
In Stephani’s words: “As this peace dividend that nations had created for 30 years evaporates, that potentially means higher interest rates, lower operating margins and lower multiples for stocks going forward.”
“All these concepts like just-in-time inventory that drove efficiencies and returns over the last 30 years of this peaceful, prosperous world may be coming to an end.”
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