TRENDS OF DEGLOBALISATION

There has been much talk about the phenomenon of “deglobalisation” in recent times. Business environments, in particular, are increasingly experiencing discussions about bringing previously internationally-located activities back home. It suggests a decline in interconnectedness and emphasises the fact that aspects attributed to globalisation are becoming increasingly challenged or even reversed, hence deglobalisation.

Recent developments that fit within the category of deglobalisation trends have increased global fragmentation, creating a situation in which companies and investors are increasingly exposed to geopolitical risks. The quest for greater strategic autonomy, the race for technological superiority, and accompanying protectionist policy measures have increased global tensions and have already caused major issues for countries, as well as companies that function on an international level.

This Connecting the Dots post will explore how deglobalising trends threaten the business continuity of western companies.

WHAT? 

PURSUIT OF STRATEGIC AUTONOMY

The COVID-19 global pandemic and Russia’s invasion of Ukraine have laid bare the uncomfortable truth that western nations are often dependent on authoritarian regimes for critical resources. For example, Russia’s weaponisation of its energy exports in response to western nations’ involvement in the Ukrainian conflict has significantly disrupted European energy supplies. As a consequence, energy prices soared, as did geopolitical tensions between western nations and Russia. These events highlighted the need for investment in domestic energy infrastructure, particularly by promoting the development of new gas pipelines and other energy infrastructure that would allow for more diversified and resilient energy supplies.

However, whilst in pursuit of a more diversified and resilient energy supply through, for example, green energy, it has become exceedingly clear that Europe is also dependent on other authoritarian regimes for their rare earth materials. The consequences have led to the pursuit of greater strategic autonomy from many western nations. This new focus on strategic autonomy causes greater regionalisation and fragmentation of previously-extensive supply chains.

In sum, the newfound awareness of the vulnerability of supply chains regarding critical resource scarcity has resulted in a greater pursuit of strategic autonomy through processes focusing on domestic production and increased self-sufficiency, significantly illustrating deglobalising trends.

TECHNOLOGICAL ADVANCEMENTS

Technological advancements have been one of the core drivers of globalisation for centuries. These developments revolutionised the way in which businesses interact with goods, services, and labour forces. However, they have also contributed to deglobalisation, as technological advancements have increasingly become spaces of contestation and conflict for three reasons. Firstly, there is competition for technological superiority. As advanced technologies are increasingly claiming their place as the foundations of contemporary society, the race to develop and control advanced technologies has intensified the competition between major powers, giving rise to increased tensions. Secondly, the increased reliance on technology has increased the risk of cyberattacks, making it a critical concern for many countries. Thirdly, major powers seek to gain a military advantage by acquiring new technologies and integrating them into autonomous weapons or Artificial Intelligence (AI).

These spaces of contestation contribute to hostile competition between states, consequently fragmenting inter-state relations. Specific examples that demonstrate these particular deglobalising trends include a regionalising of internet domains and the harnessing of state technological capabilities to launch offensive cyber-attacks. In addition, state actors increasingly seek to control computer-chip manufacturing processes that are foundational to future technological developments.

PROTECTIONISM

As explored above, the pursuit of strategic autonomy and technological superiority has increased protectionist tendencies throughout the world. Protectionist policies display deglobalising trends because they fragment global supply chains and imperil global financial markets. The most notable examples of these are western nations’ attempts to increase their self-sufficiency in the semiconductor manufacturing industry, specifically by enacting the United States CHIPS and Science Act (2022) and the EU’s European Chips Act (2022). These acts seek to encourage semiconductor production in the US and the EU, respectively. What is more, protectionist tendencies have evolved to such a degree that even inter-ally relations have become strained. The US-EU relationship has become considerably strained as a result of the global energy crisis and the reactive US Inflation Reduction Act (IRA), which aims to direct investment into American domestic manufacturing capacity. EU authorities believe that the preferential treatment afforded to US businesses, in addition to generous subsidies, will unfairly affect European companies. Thus, these examples demonstrate the degree to which global supply chains are being negatively affected by protectionist tariffs imposed in response to quests for strategic autonomy and technological superiority.

Moreover, the disparity between developed and developing nations, and the rich and poorer members within those societies, will increase as a result of unequal access to profitable markets. This will likely heighten domestic tensions as such influxes in migration may contribute to an increasing unwillingness to accommodate migrants and a hardening of ‘them’ and ‘us’ cultures, given the strain already experienced on certain states’ capacity.

SO WHAT?

Upon analysis of these deglobalisation trends, it appears that the world is becoming increasingly fragmented. Companies face immediate risks that emanate from these deglobalising trends, which must be addressed for the sake of their business continuity. Figure 1 lists several significant risks that are associated with the discussed deglobalisation trends.

In the short-term, the pursuit of strategic autonomy will continue to fragment global supply chains and contribute to economic inflation. Additionally, a deterioration in the western economic situation could further escalate geopolitical tensions, threatening a decrease in trade flows.

In the medium to long term, increased regionalisation is plausible. Current levels of economic interdependence are inescapable, as are their accompanying risks.

WHAT NOW?

Companies should prepare and plan for future challenges and develop strategies to mitigate their impact by addressing the geopolitical risks that emanate from deglobalising trends. Developing your resilience may involve diversifying suppliers and customers, screening your personnel and trading partners, investing in alternative production facilities, double and/or triple sourcing, building stronger relationships with local stakeholders, and developing crisis management and business continuity plans. Failing to identify and assess geopolitical risks will leave your company vulnerable to unexpected events, potentially impacting your company’s operations, profitability, and even your long-term operational viability.

We at Proximities help companies on a daily basis address these challenges and translate geopolitical events in operational avenues of approaches. We help you to translate the global ‘what’ into your bespoke ‘so what?’, ‘what if…?’ and ‘what now?’. Do you want to see how this works? Do contact us, we are happy to support you!