Horizon 2024 - Geopolitical landscape

The global geopolitical landscape is undergoing profound transformations, with a gradual unravelling of the post-World War II global order led by the US. Several major trends are reshaping our world, including regional conflicts, increasing tension between the US and China, and emerging signs of a new Cold War. These trends have major implications for the global economy, particularly trade, pointing to an era of deglobalisation. In other words, as the existing global order fractures, the dynamics of power are being reshaped, challenging established alliances and raising concerns about the future of global economic integration.

The gradual weakening of the post‑World War II global order led by the US, is palpable. Trust in international institutions has waned, as reflected in a survey conducted by the Open Society Foundation in 2022. Among 22 countries surveyed, negative views outweighed positive ones in most countries, including in the biggest G7 countries, regarding the United Nations’ response to Russia’s invasion of Ukraine.

Recent regional conflicts have tested the post-war global order like never before. The invasion of Ukraine by Russia in February 2022 and the Israel-Gaza war that broke out in late 2023 exemplify tensions long in the making and shifting power dynamics within their respective regions. The conflict in Ukraine has had significant ramifications, including an ever-widening range of US and EU sanctions on Russia. Similarly, the Israel-Gaza conflict has been highlighting the deep-rooted challenges and competing interests that contribute to regional instability.

Elsewhere, China’s rise as a global power is being increasingly perceived as a threat to US global hegemony, provoking ever-stronger responses from the US and its allies. In recent years, the US has imposed tariffs on billions of dollars’ worth of Chinese goods, citing concerns about intellectual property theft and unfair trade practices. Furthermore, the Biden administration has actively pursued initiatives aimed at countering China’s influence in the Indo-Pacific region such as the Quadrilateral Security Alliance (‘the Quad’), which brings together the US , Australia, India and Japan.

The world has been sliding towards a new Cold War, characterised by strategic competition, ideological divisions and escalating military expenditure. According to the Stockholm International Peace Research Institute, global military expenditure reached USD 2.24 trn in 2022, with the US , China and Russia the top three spenders.

While this new Cold War differs from its predecessor in many aspects, the rivalry and ideological clashes between major powers present a similar dynamic and demand careful navigation.

The implications of these geopolitical trends for the global economy, particularly trade, are significant. By disrupting supply chains and increasing costs for businesses and consumers, new tariffs and trade barriers will probably contribute to a slowdown in global trade growth. Concerns about deglobalisation, characterised by reduced cross-border economic integration and protectionist measures, loom large during this time of persistent geopolitical tensions.

Chart 1
Growth in foreign direct investment in Asian countries

Reshuffling of global supply chains

In recent decades, a truly global supply-chain network, one of the main features of globalisation, has emerged to deliver goods and services at the lowest possible cost. But the shifting geopolitical landscape is forcing multinational companies (MNCs) to re-configure their supply chains, a process that was accelerated by the covid pandemic. The stringent covid controls adopted by China (especially in 2022) added to the tremendous supply-chain pressure and uncertainties caused by the pandemic itself. According to a flash survey carried out by the German Chamber of Commerce in China during the full lockdown of Shanghai in April 2022, 46% of German companies’ supply chains were “completely disrupted or severely impacted by the COVID -19 situation in China”.

Businesses had already started moving some production away from China prior to the pandemic, largely on cost grounds, with some ASEAN countries proving popular alternative locations for low-tech assembly operations and the textiles sector. This trend was broadened and accelerated by the US government’s imposition in 2018 of tariffs and other trade barriers on China. Since then, heightened geopolitical tensions between the US and China have further incentivised firms to reduce their dependence on China and to distribute production across multiple suppliers and regions.

The migration of supply-chains to the ASEAN economies is reflected in strong inflows of foreign direct investment (FDI ) into the region. According to the World Bank, FDI inflows into the six largest ASEAN economies (Indonesia, Singapore, Malaysia, Thailand, the Philippines and Vietnam) rose by 78.2% over the decade ending 2022 (at a compound annual growth rate (CAGR ) of 5.9%), with the Philippines, Singapore and Vietnam the biggest beneficiaries (chart 1). In the years 2012-21, the six major ASEAN countries’ exports grew by 41%, much higher than global export growth of 22%.

Within ASEAN, Vietnam stands out as a major beneficiary of supplychain re-location. From 2012 to 2022, Vietnam’s exports rose by 224%, or at a CAGR of 12.5%, far higher than the rate of growth in global exports over the same period. Vietnam’s exports to the US increased especially fast, at an average annual rate of 20.2% between 2012 and 2022, while Chinese exports to the US only grew by 2.3% per annum during the same period.

India is also becoming a popular production location for MNC s, especially in the consumer electronics sector. For example, Apple has accelerated its iPhone production shift to India and required some of its Chinese suppliers to set up local factories in that country.

Chart 2A
Where US imports come from

From globalisation to regionalisation

The reshuffling of supply chains may hasten the trend toward supply-chain regionalisation – a process that involves reorganising manufacturing into smaller, more localised blocks. This trend is probably most visible in North America as US MNCs try to move production closer to their home market. When outright ‘reshoring’ proves to be too expensive or unfeasible, ‘nearshoring’ provides a solution. A number of funding and tax-incentive schemes introduced by the Biden administration – including the Chips and Science Act, the Inflation Reduction Act and the Build Back Better Infrastructure Bill – encourage US manufacturers to move production back to the US but could also benefit alternative production sites such as in Mexico.

Mexico’s exports to the US surpassed China’s for the first time in 20 years in 2023 (chart 2A). Together, Mexico and Canada’s share of US imports has risen sharply since early 2022, reversing a two-decade-long decline (chart 2B).

In Asia, the relocation of supply chains away from China has also led to a strengthening of regional economic integration, in many cases focused around China. This may sound counterintuitive but involves the supply of machine equipment, raw materials and components. According to data from national sources, ASEAN economies’ trade exposure to China climbed steadily from 10% in 2012 to 16% in 2022, coinciding with the increase in the number of manufacturing facilities moving to this region.

Chart 2B
Canada and Mexico’s share of US imports has recovered

An especially striking example of this regional integration through supplychain shifts can be seen in the strong correlation between the growth of Vietnam’s exports to the US and the growth of Vietnam’s imports from China (chart 3).

The cost to the economy

Increasing trade barriers and deglobalisation are complicating the business environment. When geopolitical considerations dominate decision-making, the outcome could be sub-optimal from an economic point of view. For one thing, rebuilding just part of a supply-chain system can be very expensive. Billions of dollars of additional investment will be required in the coming years if current trends continue, and this may lead to excess production capacity in some sectors and countries, including most notably China.

Corporations may face higher costs for other reasons too. For example, while India is attracting increasing attention from MNCs as a production site, doing business there can prove burdensome, involving bureaucratic hurdles, complicated compliance and tax systems and logistical challenges. These can all lead to higher costs. Hence, deglobalisation could contribute to inflation, which could stay structurally higher than in the decade before the pandemic.

Chart 3
Growth in Vietnam’s exports to the US and imports from China

In conclusion, regional conflicts, increasing tensions between the US and China and the dawn of a new Cold War are reshaping the global geopolitical landscape. These trends are having a significant impact on the global economy, particularly trade, leading to a reshuffling of supply chains. There will be winners and losers in this change, but for the global economy as a whole it probably means higher costs and structurally higher inflation.