Retreat of globalization stokes fears for poor nations
DAVOS, Switzerland (Reuters) – In 2014, Arnold Kamler, CEO of New Jersey-based Kent International, took a big step: he resumed making bicycles in the United States, 23 years after uprooting production to China. This year, he hopes to sell half a million US-made bikes.
For business and political leaders gathered in the Swiss Alps town of Davos for this year’s World Economic Forum, Kamler’s experience – part of a process Morgan Stanley once dubbed the “re-industrialization” of America – is a cause for some anxiety.
If a mix of accelerating automation and trade protectionism is the defining economic climate of the moment, globalization may well be in decline, and developing nations that failed to capitalize on the past two decades of economic integration – notably those in Africa – may have missed the boat altogether.
It is an issue with profound consequences – for emerging economies that have built their fortunes on exports, and for richer nations that hope a “reshoring” of industrial production will appease disgruntled blue-collar workers at home and reignite stagnant wage growth.
Global trade likely grew last year at just 1.7%, lagging world economic growth for the first time in 15 years and for only the second time since 1982, according to the World Trade Organization, which expects a further slowdown in 2017.
While there are complex reasons behind the slowdown, it’s hard to ignore the rising popularity of trade protectionism and anti-globalization. US President-elect Donald Trump’s campaign pledges and plans for “a very large border tax” on firms producing overseas fall into this category.
But perhaps even more influential is businesses’ push toward automation, digitization, robotics and innovations such as 3-D printing, which undermine lowwage countries’ biggest comparative advantage.
That contributed to the return of 250,000 manufacturing jobs to the United States between 2010 and 2015, according to data from Reshoring Initiative, a group that advises US businesses.
Kamler’s state-of-the-art plant, for instance, will soon be able to paint 2,000 bicycles per shift with just 12 workers involved in the painting process.
“Most of those people will be sitting looking at computer screens. The same operation in China would need 60 people,” he said.
Automation tends to see jobs return to the countries that develop the technology – carmaker Ford’s decision to expand a Michigan plant rather than start one in Mexico is seen as partly motivated by a focus on hi-tech electric vehicles.
Laggards
“Reshoring” is bad news for emerging economies transformed by the manufacturing-for-export boom and now suffering from its reversal.
But for countries only now getting in on the manufacturing act, things are worse, says Hung Tran, managing director of the Washington DC-based Institute for International Finance.
“The conclusion to reach is that the business and growth model that worked for many countries, especially in Asia, won’t provide the same growth opportunities as before,” Tran said.
“That’s the big challenge for emerging economies that are only just trying to take off... it’s much harder to do than 20 years ago when all you needed to do was attract investment, produce and export,” Tran said.
Laggards include swathes of Africa and also India, the world’s fastest growing economy. With a 1.2 billion population, it accounts for just 2% of global trade but needs desperately to create jobs for the 10 million youth entering the workplace each year.
The fear is that as low-level factory jobs for unskilled workers become scarcer, workers in these countries, unlike in early birds such as China or Malaysia, will be ill-prepared for the higher-tech manufacturing of the future.
Against that backdrop, India may struggle to meet its goal of raising manufacturing’s share of the economy to 25%. That share is currently 16%, half of China’s level.
Others are even worse off. Manufacturing comprises 10% of Nigeria’s economy and 6% in Tanzania, according to the World Bank. The picture is mirrored across Africa where the population could double by 2050 to 2.5 billion.
“There is a missed-boat aspect for industrial output especially for Africa,” said Marion Amiot at Oxford Economics, whose report on the impact of digitization concluded that upfront costs of technology and training would pose significant entry barriers for poorer economies.
Not everyone is pessimistic. India for instance may be able to capture the burgeoning trade in services. It and peers such as Indonesia are moving to reform their economies, unlocking faster growth and making exports less important.
Losers Everywhere
It could eventually prove a game in which everyone loses.
Take Trump’s tirades against Mexico.
US firms have invested more than $200 billion in Mexico, employing over a million people, but are now under pressure to shutter factories producing for US markets.
Yet reshoring may not deliver the kind of benefits Trump and US unions hope for. The new hi-tech plants will likely create far fewer jobs than expected.
Second, the loss of manufacturing jobs – and failure to create them in countries with huge populations – may trigger more migration to rich countries, exacerbating the tensions that are fueling the lurch towards rightwing parties.
Migration patterns already suggest people’s movement is increasingly dictated by “push” from poorer areas of the world, rather than by “pull” from richer countries, UBS said in a note.
As former Mexican president Felipe Calderon warned Trump in a tweet: “The more jobs you destroy in Mexico, the more immigrants the American people will have.”