Inflation Will Be Muted, Low Rates Are Here to Stay
David Hunt joins Bloomberg Markets’ “Balance of Power” to share his views on inflation and rates in the long term.
Few forces have shaped the world over the last four decades more than globalization and free trade – the belief that the free flow of people, goods and capital across borders is unambiguously beneficial. But lately that idea has come under assault, with governments in the U.S. and U.K. spurring conflicts with large trading partners and resurrecting protectionist policies from bygone eras to shield key industries. Today, with COVID-19 exposing the risks of concentrated global supply chains, many have forecast globalization’s permanent retreat in the post-pandemic world.
Far from retreat, however, globalization is evolving, largely due to advances in technology that have been accelerated by the pandemic. And while prior conversations around globalization have centered on the manufacture of goods, the next wave of globalization will focus on services industries, with profound implications for labor, businesses, and investors.
While globalization’s recent history has been dominated by China and the trade of goods and manufacturing exports, its future footprint will be more evenly dispersed.
Re-shoring has been a popular theme of late across advanced economies, but the labor savings associated with operating abroad are simply too great, especially for low-skill manufacturing. Instead, firms will likely diversify their supply chains away from key hubs to new countries and regions. Companies will reduce their dependency on China by relocating operations to other low-cost locations, to the benefit of other manufacturing hubs including Vietnam, the Philippines and Bangladesh.
At the same time, some production will move closer to end markets, with technology playing a key role. Advances in automation and robotics already enable increasingly sophisticated products to be made closer to end markets at a more competitive rate than was possible only a few years ago. Novel applications of 3D printing, for example, can make the cost-effective production of highly specialized parts much less tied to low wages. Countries with advanced manufacturing infrastructure and robust transport networks including Mexico and the Czech Republic are likely to benefit from this trend.
Before the pandemic struck, governments were actively implementing policies to protect key industries. In 2019, Germany proposed creating a state-backed fund to foil foreign takeovers as part of a larger defensive industrial policy. Simmering political tensions that had been mollified by trade concerns are no longer being contained. Increasingly, leaders are taking a “my country first” approach – an idea that once was deemed politically dangerous. This trend was amplified during COVID as governments were stung by shortages of essential medical supplies.
Pharmaceutical and medical equipment manufacturers will face immense pressure – if not outright mandates – to bring production of critical components closer to home markets. The likely outcome for most business sectors is a renewed focus and urgency in implementing policies to protect vital industries.
Ultimately, protectionist policies will cut both ways, with winners and losers emerging. While they may create jobs and shield certain industries from disruption, businesses such as aerospace firms will suffer if consumers turn to other markets to diversify their suppliers.
With technology continuing its advance, government intervention will have limited impact on the next phase of globalization that will center on services.
Given the inexorable advancement in technology, services will drive globalization’s next wave and trade between nations will no longer be dominated solely by the flow of physical goods.
The pandemic has already accelerated the adoption of new technologies across many sectors, which will drive the next wave. In the healthcare sector, for example, patients have grown accustomed to utilizing virtual platforms to interact with their doctors. In the future, it is entirely feasible that medical images could be interpreted by a qualified radiologist in India for a fraction of the cost of a similarly qualified physician in New York.
Likewise, businesses have adjusted to interacting with clients virtually. Architects, law firms, banking institutions and others all stand to benefit as they access and interact with a broader, more international customer base using virtual tools.
While globalization’s impact has thus far been centered on the manufacture of goods and associated “blue collar” jobs, the international expansion of the services industry driven by these technological advances will have a profound impact on numerous “white collar” professions that once seemed immune to its effects. It is critical that governments not repeat the errors of the past but instead enact robust policies to retrain and support workers in transition. The pace of technology change will only increase, and will run ahead of individuals’ ability to reskill, meaning that transition programs and funding will be required to avoid further inequality.
In summary, globalization is simply too powerful a force to arrest. The trend toward increased international engagement and cross-border trade is evolving rather than receding, and in 10 years will be as powerful a force as it is today, disrupting labor markets just as it has in the past. The best that we can hope for is that our leaders implement policies and strategies that stay ahead of and capture globalization’s benefits while managing its disruptive pressures on our economy and society.