Investment Strategy

Are fears of deglobalization overblown?

In recent years, investors have been concerned about deglobalization (i.e., a reversal in global trade patterns that would hurt financial markets, GDP growth and corporate profits).

The good news is that we do not see signs of deglobalization in the global trade data. Manufacturing supply chains have proved resilient and flexible in the face of two serious hits: the tariff the United States put on many Chinese imports, and the unprecedented sanctions placed on Russia for invading Ukraine that produced an even more extreme trade shock.

That said, for several critical imports—most crucially pharmaceuticals (life sciences and biotech) and advanced weapons components—the United States still relies heavily on China, which has raised significant bipartisan concern as a national security risk.

In our latest article, we examine these national security risks by:

Identifying the beneficiaries of supply chain re-shoring, such as Mexico
Segmenting global trade data at a granular level to assess where specific risks lie
Showing where China remains dominant in advanced technology exports
Illustrating why South America hasn’t yet benefited much from re-shoring trends

Descriptive audio

Hi. I'm Jake Manoukian. I'm the US head of investment strategy at JP Morgan Private Bank. I'm joined by Joe Seydl, who's our senior markets economist. And Joe, one of the things that you do for us is you take a look at some of these debates that are happening in the economics community and in the markets community, and you do a real deep dive into the data to come up with our take on some of these key issues.

And your latest piece focuses on the concept of deglobalization. And the interesting thing to me about this piece is that you found that deglobalization is kind of happening everywhere except for in the data. So what did you find?

That's right. So we wanted to write on this topic of deglobalization because I think most investors think it'll be very costly. They think if we're reversing global trade patterns, it will be very costly from an inflation perspective, from a corporate profit margin perspective. I think the simplistic idea is that if we move the factories out of China and bring them back to America, it's going to be very expensive.

But we're not finding that in the data. When we look at the broad global trade data, we don't see a lot of evidence for deglobalization. We don't see a lot of evidence for us reversing globalization. The pace of globalization has definitely slowed down. But in terms of the actual advancement of globalization, we see that continuing. So that's one of our first takeaways of this article.

Yeah. It's really interesting. So to think back on really when this started gaining traction was in 2018 with the trade war with China. And I think the kind of bipartisan agreement in US economic policy circles is that we need to be diversifying our supply chains away from China. So if that's happening, where are the supply chains going?

Right. So we do see some shifts. Even though we're not deglobalizing, we do see some regional trade shifts in the data. We identify four main countries that are benefiting from these shifts, that are Mexico, India, Vietnam, and Thailand. We are importing less from China. And that trade is going to those other countries and benefiting those countries.

Rather than deglobalization, we think diversification of global supply chains is a better word. We see this as the next stage of globalization. And it's actually accretive to productivity and overall corporate margins. If you take an economy like Mexico, for example, Mexico actually has a lot lower transportation costs than China does. It's a lot cheaper for America to import products from Mexico than from China.

And so one of the points that we make in this piece is that the next stage of globalization is sort of less driven by labor cost differentials-- I think China was very driven by cheap labor-- and now automation in the industrial process has matured so much that it allows manufacturing supply chains to go to economies that are closer to the final destination, like Mexico.

So a lot of the trade that we see going to Mexico and the production that we see going to Mexico is highly automated manufacturing production. And that's sort of beneficial from a diversification standpoint and from a corporate margin standpoint.

Right. So if you're a corporate, you don't have to just optimize for the lowest labor cost. You're thinking about all of these costs, whether it's transportation or however it's going to cost to run the factory. So if we're diversifying some supply chains for China and the policy goal is to really continue to make progress, what are some areas where there's still work to be done?

So in this piece, we look at a very granular level of global trade. We're looking at specific products and how much we're importing from China, how much is going to economies like Mexico, and we identify a lot of these gains for a country like Mexico. But another point that we make is if you look at the most sophisticated, high technology imports, we're still importing a lot from China. And China is still actually making gains in some of these high technology areas.

So health care, for example, life sciences, biotechnology, the machines, the advanced components for the machines. China is still very dominant in those realms. And the United States has made little progress in terms of diversifying those. Another is the defense sector. If you look at advanced weapons components, China is still exporting a lot to the United States. And it's a high national security risk that I think is bipartisan in nature. I think both parties agree that this is a national security risk.

So when you look at these sort of most advanced levels of technology imports, you still see China being very dominant and in some cases still making gains. And so that's likely going to come in the future from policies. I think it's policymakers are uncomfortable with China continuing to make gains in those components of trade. And we're likely going to see those areas targeted more specifically with policies in the coming years.

So I think it's fair to say that this process of supply chain diversification and supply chain shifts may have many years to go.

That's right. This started in 2018 with the US-China trade war. And we're five years into this. And this is going to be decades in the making, just like it took decades for China to become very dominant as a manufacturer, beginning in the 1990s. It's going to take a long time for supply chains to be fully diversified. So we see this theme as durable and lasting for many years.

OK. So last question. I understand why, if I own a manufacturing facility, why I need to be on top of this. But just as a broad investor, what are some of the implications that should be in my mind?

Well, I think we're trying to do two things. One is sort of let investors know that deglobalization isn't the right word. We're not reversing global trade patterns. We still see advancements in terms of the automation process within manufacturing. And we think that will be beneficial ultimately to corporate profit margins.

So part of it is to sort of show analytically that the process of globalization is still underway. And that's generally favorable to the overall equity market or risk assets in general. Second to that is a more specific claim on some of the companies within the industrial sector or manufacturing more generally that are benefiting from these diversification trends within supply chains, that are benefiting from having more automation within the production process.

And so that's kind of exciting. It's value that's being created in economies that in recent years we haven't seen a lot of trade and manufacturing being created, like a country like Mexico. So that's exciting and is a little bit more tactical from an investment standpoint. But we think there are opportunities from that side of it as well.

Yeah. It reminds me of the adage that the only the only constant in investing is change. And this is another area of the world that is changing. And we're hopefully helping investors navigate that. So Joe, thank you very much for your insights. And thank you for watching. If you're interested in learning more, please continue to explore the Private Bank website or get in touch with your JPMorgan team.

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(SPEECH)

Hi. I'm Jake Manoukian. I'm the US head of investment strategy at JP Morgan Private Bank. I'm joined by Joe Seydl, who's our senior markets economist. And Joe, one of the things that you do for us is you take a look at some of these debates that are happening in the economics community and in the markets community, and you do a real deep dive into the data to come up with our take on some of these key issues.

And your latest piece focuses on the concept of deglobalization. And the interesting thing to me about this piece is that you found that deglobalization is kind of happening everywhere except for in the data. So what did you find?

That's

(DESCRIPTION)

Text, Joe Seedy, SENIOR MARKETS ECONOMIST, J.P. MORGAN PRIVATE BANK.

(SPEECH)

right. So we wanted to write on this topic of deglobalization because I think most investors think it'll be very costly. They think if we're reversing global trade patterns, it will be very costly from an inflation perspective, from a corporate profit margin perspective. I think the simplistic idea is that if we move the factories out of China and bring them back to America, it's going to be very expensive.