The FT and IFIs recognise the passing of globalisation

In a Political Concern blog, Mario Draghi, president of the European Central Bank, Christine Lagarde, managing director of the International Monetary Fund, and Donald Tusk, president of the European Council, have all decried a system they claimed had neglected the security of its weakest members.

izabella-kaminskaEarlier this month Izabella Kaminska referred to UBS’ ‘big note’ reviewing the passing of globalisation. She comments that labour costs go up in emerging markets — and as western consumers become more conscious of what constitutes fair and unfair trade — we should not really be surprised that global supply chains are shrinking, and that:

“Shipping stuff half way across the world simply doesn’t make half as much sense if the pay-off from cheap labour or favourable currency effects doesn’t compensate for the shipping costs (or increasingly, the carbon footprint either)”. The downturn in global trade was detailed on this site in July

china trade graphic

Longer and more complicated supply chains require a far more complex and extended route to market — including far more expenditure on transport and energy — than they would require if they were sourced more locally.

UBS notes that global value chains have become shorter as some countries have on-shored (or reshored) production because bringing production closer to home often serves end customers better and there are now higher unit labour costs in Asia. (See the work of Professor David Bailey and references on the WM Producers website).

guy-standingAnd today the FT reviews a book by Guy Standing, a professor at the University of London’s School of Oriental and African Studies: The Corruption of Capitalism.

It notes that many of the author’s ideas for fixing the system — such as a universal basic income, where all citizens receive regular payments from the state whether or not they work — are receiving more attention from the mainstream.

 

Political Concern asks:Is localisation also part of the answer?”

lwm-loc-3-prosp-graphic

Its recommendation: “Search the Localise West Midlands site – and especially see the work on Mainstreaming Community Economic Development”.

 

 

 

 

 

General Electric says: “We will localise”

maersk contianer (2)

Last year came three reports on the downturn in global trade:

  • From the container industry: Søren Skou, chief executive of the Maersk Line, which carries goods and products between Asia, Europe, the US, Africa and Latin America and is now described as the only profitable freight line.
  • In a report from the Centre for Economic Policy Research: theslowdown in world trade has been much worse than previously reported, with global trade volumes plateauing over the past 18 months amid a rise in protectionism.

A higher proportion of the value of final goods is being added domestically

  • The World Bank: There is some evidence to suggest that part of the explanation may lie in shifts in the structure of value chains, in particular between China and the United States, with a higher proportion of the value of final goods being added domestically—that is, with less border crossing for intermediate goods. In addition, the post-crisis composition of demand has shifted from capital equipment to less import-intensive spending, such as consumption and government services.

china trade graphic

As politicians such as US Republican presidential candidate Donald Trump rail against “globalism” and promise to erect new barriers to commerce, policymakers and economists have also grown increasingly concerned about a slowdown in global trade growth. And according to the latest report by Global Trade Alert, which monitors protectionism around the world, that growth has disappeared altogether with the volume of goods traded around the world stagnant since January 2015.

Economists remain divided on the causes of the slowdown, some seeing long-term trends, including the shortening of global supply chains and the increasing role of digital trade. 

As the West Midlands Producers site notes, the reshoring trend, successes and possible pinch points, has been systematically explored and publicised by Aston Business School’s Professor David Bailey since 2013.

G20: mixed messages 

In their closing communique the G20 ministers last weekend reiterated a post-crisis pledge to avoid any move to protectionism, but ‘discriminatory measures’ such as local content rules and subsidies for local industry introduced by governments was up 50% in 2015 compared with the year before, according to the Global Trade Alert’s database – and G20 countries accounted for 81% of those measures.

The FT sees evidence that such measures are already having an impact on business decisions. In a speech in May at New York University, Jeff Immelt of General Electric said that faced with rising barriers to trade, a decision has been made to shift to a strategy of “localisation” rather than globalisation.

“In the face of a protectionist global environment, companies must navigate the world on their own,” said Mr Immelt. “This requires dramatic transformation. Going forward: We will localise.” 

 

 

 

Repatriating activity – onshoring – is very much on the agenda

Localise West Midlands welcomes a statement from Professor David Bailey (Coventry University Business School) that “repatriating activity – including some sourcing – to the UK is very much on the agenda”.

He recently summarised the impact of offshoring on British manufacturing over the last decade, and considered the tentative signs of “onshoring” in certain sectors due to a combination of factors, including:

  • a more competitive exchange rate (despite the very recent appreciation of sterling),
  • increased transport costs,
  • rising wages in key areas of China,
  • and a greater awareness of supply chain resilience, in the wake of disruption due to the Japanese earthquake and tsunami.

The UK could learn from policy initiatives taken by the US government

In the United States, Professor Bailey notes, this has been recognised as a major issue, leading to major policy changes. Last year President Obama launched a $500 million package aimed at boosting manufacturing employment, and earlier this year tax incentives were created, one offering a 20% income tax credit to allow for the expenses of shifting operations back to the US.

The debate in this country is just beginning

A recent Engineering Employers’ Federation (EEF) survey found that even during the 2008-2009 recession some 60% of British firms had concerns over the vulnerabilities of overseas suppliers, as against 20% being concerned over domestic suppliers. Around two thirds of firms had re-evaluated their supply chains to minimise such risks, with some bringing production back to the UK and other sourcing more components locally. Proximity matters in ‘just-in-time’ processes.

Rebuilding manufacturing capacity

Professor Bailey believes that the UK needs to consider how it can tailor an industrial policy focused on building manufacturing capacity, particularly in the supply chain. There is a ‘window of opportunity’ here.

More firms would ‘buy British’ if the components were available from local suppliers, and if end users and component suppliers could be ‘matched up’ in the UK, thereby offering the potential for some supply chain activity to be repatriated. Rebuilding supply chains locally can also offer customers greater flexibility in production as well as greater resilience.

A major policy effort is needed to make this happen on a significant scale

David Bailey appreciates the coalition government’s Advanced Manufacturing Supply Chain Initiative to help to develop local suppliers around the UK’s major manufacturers. The fund is aimed at supply chain companies and can be used for capital expenditure, skills and training, and R&D projects. However the amount of funding on offer, £125 million, is small, and due to the minimum project threshold value of £2 million, bids often need to be from several companies clustering together. The scheme should be extended so that smaller firms can directly access the support available.

Professor Bailey concludes that though “overall, there appears to be a real opportunity to rebuild some of the UK’s fractured manufacturing supply chains . . . a more concerted effort is needed as part of a wider industrial policy that looks to build manufacturing capacity, strengthening the possibility of repatriating certain manufacturing activities and the sourcing of some components back to the UK.”

Many will hope to see a similar shortening and strengthening of the country’s food supply chains.

Professor Bailey’s two page article may be read here: http://www.birminghampost.net/birmingham-business/business-comment/2012/07/06/david-bailey-seizing-the-onshore-opportunities-65233-31349483/2/#ixzz20CIbs2rD