De-risking dangers; Anthony Rowley says amid shifts in geopolitics, supply chains and global trade, companies have been scared into rethinking how they operate
Reshaping the world economy is a sound idea if it is done in pursuit of a sound global polity, improved efficiency, reduced inequality and a gain in the general good. But financial markets, along with production and trade systems, are about to find out what a bad design looks like.
A bad design is one drawn with political and strategic advantage in mind and which is willing to sacrifice economic well-being to that end. This is about where we are now as production systems prepare to adapt to ideological divisions and consequent logistical demands.
The global investment landscape will change, in line with shifting production and trade patterns, and money will need to be redirected accordingly. But to where? The answer is far from clear at this point.
For a time after then US president Donald Trump launched his tariff wars against China and others, it was possible to believe we would be able to return to the status quo ante once he left office and enjoy free trade and investment again, with all its benefits of low inflation and wider economic inclusion.
But things did not work out that way and Trump's successor, Joe Biden, launched an arsenal of supposedly more sophisticated trade weapons including semiconductor export controls and targeted investment bans.
The supposed aim was to achieve "security" but it was really all about protectionism. What is clear now that these measures have scared the corporate world into a state of mind where they need to replan the architecture of business investment so they cannot be caught out by shifts in political ideology.
This is called decoupling, reshoring or, more politely, "de-risking". Whatever you call it, it is not the result of a global grand design but rather of rivalries among a few major powers – the US and China chiefly – that have embroiled much of the rest of the world.
The irony is that, far from decoupling from China, the US might have tied its fate even tighter to China's in the global economic context. As one seasoned analyst put it, 2024 could turn out to be the year of "synchronised recession led by the US and China".
In his view, Asia is "unlikely to be able to decouple from the US downturn. For that, China would have to recover strongly. But given China's balance sheet recession and deleveraging at home, plus protectionist policies against it, China is unlikely to take over as a new global engine for growth".
Much has been written about what "de-risking" means for global supply chains and service industries. But the wider impact on business and finance – specifically, decisions on where to locate enterprises and direct investments – is far less clear.
A general assumption has been that it would be mainly US and European firms that would reduce their dependence on China by shifting production back home. But the phenomenon goes wider and even Asian firms are responding to geopolitical tensions, as well as an uncertain policy outlook for China, by shifting activities to other parts of Asia.
However, risk consultancy Steve Vickers & Associates warned in a report published on Tuesday: "Such moves may alleviate certain threats arising from maintaining a China-based operation, but departure still entails significant risks."
For instance, "an ill-planned or precipitate departure could offend both local and higher-level officials, particularly where the firm employs substantial numbers of workers or contributes otherwise to the local economy. If irked, officials may refuse permissions to withdraw funds, or to scale back operations, and may even take action against executives".
While government officials are better equipped than politicians to make decisions on reshaping the global economic architecture, they should be doing so with a sound understanding of what is good for the world, as well as their national economy, as suggested by former US Treasury secretary Lawrence Summers in a recent lecture at the Peterson Institute for International Economics.
Although it is true that China's tremendous economic progress did lead to far more US imports of Chinese goods, he said that "it is hard to imagine a less credible approach to the problem than adding up all the losers from the imports without taking any account of the jobs created and the economic impacts of the goods we sold to China".
He noted that the US also received "lower cost inputs" from China, which led to moderate inflation, and benefited from "lower capital costs" associated with inflows of investment from China.
Taking the above into account, "the net benefit to the US economy has been substantial", Summers said. On the other hand, the notion that "domestic industrialisation" or "some kind of renaissance of manufacturing" is somehow vital to future US prosperity is "simply not a realistic idea".
We can only hope for wiser counsel to prevail in the future in the US and beyond. But it could take some time to put the world back together.
Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs