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If globalization is really over, what happens to supply chains?

WTO’s worst-case scenario: ‘Permanent disintegration of the world economy into two blocs’

Supply chain crystal ball is cloudy (Photo: Shutterstock/Phil Dolby)

Tariffs, COVID, port pileups, the Ever Given, the Russia-Ukraine war, mounting U.S.-China tensions — it seems like threats to world trade are the rule, not the exception. What does this mean to the future of global supply chains?

The positive view: Importers see the risks ahead and will act. They will preemptively revamp supply chains and become nimbler and more resilient. Economic benefits of globalization are too great to give up. Countries and companies will work around hurdles.

“No one can sit around and do nothing,” Peter Sand, chief analyst of ocean-rate data provider Xeneta, told American Shipper. “After two years-plus of COVID and a souring of the geopolitical environment, you can’t just cross their fingers and hope for things to settle down.”

The negative view: Globalization has peaked and will retreat. Costs will rise, profits will fall. The current war and future wars will constrict trade. U.S. importers will indeed just cross their fingers and hope for things to settle down. Strategic inertia will leave them highly vulnerable to future shocks.


Ominous commentaries abound. In a report released Monday, the World Trade Organization (WTO) warned that “trade could become more fragmented in terms of blocs based on geopolitics” due to spillover from the Russia-Ukraine war. A worst-case scenario involving the “permanent disintegration of the world economy into two blocs” would reduce long-term global GDP by 5%, said the WTO.

Blackrock Chairman Larry Fink told shareholders: “The Russian invasion of Ukraine has put an end to the globalization we have experienced over the last three decades.” Oaktree co-founder Howard Marks wrote that “the pendulum [has] swung back towards local sourcing” and away from globalization. New York Times columnist David Brooks opined that “globalization is over” and “the world is not converging anymore; it’s diverging.”

COVID catalyst for supply chain change

American Shipper spoke with Steve Saxon, a partner at consultancy McKinsey & Company, about how supply chain strategies evolved during the pandemic era.

Even before COVID, everybody was looking at diversifying supply chains, and we saw some manufacturing shifting out of China to Southeast Asia and South Asia and more nearshoring, to Eastern Europe for European [imports] and to Mexico for the U.S.,” he explained.


“But with COVID, we actually saw many supply chains returning back to China. Because China’s factories were able to keep producing at a time when factories in many other countries could not.”

The surge in containerized cargo out of China led to “double whammy” of high freight costs and unreliable service. “Container shipping has been at the absolute heart of the global supply chain and there have been unprecedented disruptions over the last 18 months.

“No one is going to rely on the container industry for a just-in-time supply chain until the container shipping industry wins back the trust of importers,” he continued.

“If you’re sourcing from China, that means you’re going to hold more buffer stock in your supply chain. And that additional inventory means more expense, both in terms of inventory carrying costs and obsolescence risk.”

Boosting inventories is a short-term fix; diversification and nearshoring are longer-term solutions. The short-term response should incentivize longer-term moves, believes Saxon.

“More inventory cost in itself encourages supply chains to nearshore. At some point, U.S. demand will pull back and we’ll see normality return. Shippers will breathe a sigh of relief. And it will give them a chance to look more fundamentally at their structure and we’re likely to see more diversification and more nearshoring.”

According to Sand, “There is a clear trend to build more resiliency into supply chains to an extent we haven’t seen before. We spent decades getting rid of the body fat in supply chains. Making them super-complex and just-in-time in every possible way. Now we are starting to build less efficient supply chains, and that comes with a cost.”

Or maybe not …

Then again, perhaps businesses will ultimately bet COVID effects are a one-off, revert to lean supply chains and roll the dice on geopolitical risks.


“Reshoring supply chains takes time,” acknowledged Saxon. “New suppliers need to be onboarded, tested for quality, and supply chains reconfigured. When we asked supply chain executives back in 2020 what they planned to do, 40% said they planned to reshore some of the supplier base. When surveyed again a year later, only 15% of them had actually done it.”

Even the inventory buffers may be transitory, said Vespucci Maritime CEO Lars Jensen in an interview with FreightWaves last year.

“What I fully expect to unfold over the next three to five years is that everyone importing and exporting cargo will have learned a hard lesson,” said Jensen. “They will build in buffers, have higher inventories and longer lead times than they would have liked.

“But here’s what’s going to happen. If I’m a medium-sized U.S. importer and I now build in these buffers after I learned my lesson, then rest assured, there will be a group of new, young people who are going to look at my company and say, ‘Look at this stupid old geezer who is too afraid of what might happen in the logistics chain. This is far too expensive. I’m going to set up a competing business with a lean supply chain. I’m going to outcompete him.’ And gradually, all of those buffers will disappear again.”

Harvard Business School professor Willy Shih addressed nearshoring and reshoring prospects during a webinar with investment bank Evercore ISI last year. “A lot of people are talking about reshoring to the U.S. But I’m very skeptical of setting up high-cost manufacturing and expecting consumers to pay for that if they have alternatives. I think low cost is still going to be king.

“There’s a big difference between offshoring from the U.S. to a low-cost country like China and reshoring to the U.S. from a low-cost country like China. In the former case, the cost of setting up the factory and training the workforce is paid for by the cost savings from the labor arbitrage. When you go the other way, who’s going to pay for all the costs you incur?”

Risk of future China-US conflict

If the “unprecedented disruptions” of the COVID era do not convince businesses to diversify their supply chains and/or nearshore, could fear of a future war between the U.S. and China spur businesses to act?

War between the U.S. and China “while not yet inevitable, has become a real possibility,” warned Kevin Rudd, former prime minister of Australia.

The supply chain consequences of such a conflict would be enormous, and potentially cataclysmic. America’s dependence on containerized goods from China calls to mind Germany’s dependence on Russian natural gas.

The U.S. is even more reliant on Chinese containerized exports than it was before the pandemic. Meanwhile, relations between the two superpowers have gone from bad to worse. Tensions over Taiwan and the South China Sea are being exacerbated by China’s allegiance to Russia.  

“It’s now a three-way game between Russia, China and the U.S. and there’s a lot to lose if mistakes are made,” said Berkeley Research Group partner Harry Boardman during a Xeneta webinar last month. “China is intertwined with our economy. We are obviously intertwined with the Chinese economy. So, it is in both sides’ interests to tread very carefully.”

Sand — who does not agree with the thesis that globalization is over — believes geopolitical risk will ultimately push more supply chains out of China. However, he predicts moves to other low-cost Asian countries such as Vietnam and Thailand, more so than a return to the U.S.  

“We will definitely see some reshoring and nearshoring,” he said. “But the lion’s share of changes I see will involve bringing manufacturing out of China to neighboring Asia countries. 

“China proved it is second to none in terms of delivering products during COVID. So, the extent manufacturers leave China will rest on the geopolitical environment. And it all comes with a price tag. It’s about: How much do you fear a geopolitical headwind going forward?”

Click for more articles by Greg Miller 

Greg Miller

Greg Miller covers maritime for FreightWaves and American Shipper. After graduating Cornell University, he fled upstate New York's harsh winters for the island of St. Thomas, where he rose to editor-in-chief of the Virgin Islands Business Journal. In the aftermath of Hurricane Marilyn, he moved to New York City, where he served as senior editor of Cruise Industry News. He then spent 15 years at the shipping magazine Fairplay in various senior roles, including managing editor. He currently resides in Manhattan with his wife and two Shih Tzus.