It is called reshoring, instead of offshoring. Or insourcing instead of outsourcing. The recent reversal of these words represents a change from the globalizing world we have known since 1945. From far-reaching geo-economic integration until now, to geo-economic fragmentation in the near future. From globalization to de-globalization.
That is a fundamental change. After World War II, a large-scale reopening of the world economy took place under American leadership, with trade agreements and investments. First between Western countries themselves, then through the independence of the colonies under American pressure. Then through the fall of the Soviet Union and the fall of the Comecon – the economic community of the USSR and its Eastern European satellites – and the expansion of the European Union to the east. When China subsequently gave up its isolation and became part of the global economy, the process was complete. Free trade for all, cross-border investments that flowed around the world and technology that moved with it.
Globalization is on the eve of a major reversal. The International Monetary Fund (IMF) spoke for the first time last year about “geoeconomic fragmentation”. There are several reasons for this trend. The rise of China as a rival to the US superpower has long undermined confidence in international business – particularly in the field of intellectual property. The low economic growth of its own economy over the past ten years has already made the West less indulgent and generous. The fact that China continued to present itself as a ‘developing country’, with the accompanying right to exceptions – from trade to cheap postal rates – caused more and more irritation.
Thereafter, the pandemic exposed the fragility of overly long international supply and production chains. Everything came to a standstill at that time. And if that one screw was missing, or that specific chip, an entire car or washing machine could no longer be manufactured. And finally, there is now the war in Ukraine, which is accelerating the world’s disintegration into new political spheres of influence. Security is the new thing, and that certainly includes economic security. Prefer to produce a little closer to home, and then a little more expensive. Although: perhaps the expensive labor costs will give home automation and robotization a huge boost.
But how do you measure whether that process of fragmentation is already underway? Analyzing the course of international trade is a good approach, the IMF said this week. And technology transfer tracking. But in the end it is mainly about direct foreign investment, so in actual factories overseas. And that has now been extensively investigated by the IMF.
Here you can see, per quarter, the number of foreign direct investments per region in the world. The West is already retreating to its own soil, especially in the chip industry, where China is left out.
But what exactly are the considerations behind this retreat? ‘The West’ is a broad term: Australia is also part of it, and Japan is actually part of it. Geographical proximity plays a role, but political proximity even more so. The IMF has therefore looked at the percentage of foreign direct investment that companies make in countries that are relatively close to each other, but are also politically related. The yardstick here is voting behavior in the United Nations.
The message seems clear: geo-economic fragmentation is reflected in the investments that countries make in each other. The shirt is closer than the skirt, both geographically and ideologically.
However, some nuance is in order here. After all, does the West itself remain such an indivisible ideological bloc when it comes to direct economic interests? Last year, US President Biden introduced his Inflation Reduction Act, which has some 340 billion euros ready for direct or indirect subsidies to keep or attract green technology business in the US. The alarm immediately went off in the EU: if European companies are lured to America in this way, the continent will become empty.
Although there are already European counterplans, if Biden’s plan succeeds, direct European investments in the US would increase considerably. This shows up in the statistics as an example of how the West retreats to its own common territory. While, precisely the other way around, it would be a sign of geo-economic fragmentation within the West itself.
And then there is the reliability of the figures on the direction of foreign direct investment itself. This is being seriously affected by countries such as the Netherlands, Ireland and Luxembourg, which are pivotal in international tax-friendly routes. This means that many direct investments go through these countries by holdings and other branches of thousands of foreign multinationals, which are not ‘Dutch’ or ‘Irish’ at all, but can appear as such in the statistics.
According to research by Statistics Netherlands and De Nederlandsche Bank, this concerns two-thirds of all foreign direct investment. That is no small matter: the total Dutch direct investments abroad that are not ‘Dutch’ at all, add up to no less than 3,700 billion euros over the years. No wonder that the Netherlands has long been known as one of the largest foreign investors in the US.
The figure below shows how disproportionate the Dutch investments are, compared to, for example, those of much larger countries such as Germany and the United Kingdom.
This disruptive problem is not going away for the time being, although initiatives have been taken internationally, especially through the club of rich industrial countries OECD, to erase tax routes. Perhaps, therefore, that this aspect of globalization is also being pushed back further and further. And that is a development that is not so bad at all.