Trend: Increasing fragmentation of globalisation

A trend indicates a direction of change in values and needs which is driven by forces and manifests itself already in various ways within certain groups in society.

Globalisation was driven - since the end of the cold war in the early 1990s - by optimising the cost side of production, by the global division of labour and by reaching out to new sales markets. This led to an ever-growing chase for suppliers with cost advantages based on cheap labour costs, and to optimising supply chains, e.g. by replacing warehousing through ‘Just-in-Time delivery’ and cheap transport costs. Digitalisation and Industry 4.0 are enablers for the optimisation of such processes.

The financial crisis of 2008-2009 marked a peak in the globalisation boom, and was followed by a slowdown, or retreat of overseas direct investments, trade, bank loans and supply chains. Intra-regional trade improved, and countries like China have become more able to self-supply. Systemic weaknesses and strong international dependencies of the highly interconnected global banking system, has led to stronger regulation of international activities. The impact of deeply interconnected supply chains became obvious during the COVID-19 pandemic and the Russian aggression against Ukraine. ‘Just-in-time’ availability across supply chains is no longer a given.

Populism and nationalism are driving policy initiatives such as ‘Make America Great Again’ and the related US-China trade wars, or the Brexit campaign that focused on resurgence of national lost industries to regain jobs and wealth in the UK. Geopolitical instrumentation of supply dependencies for resources, intermediary products and technologies are driving the rethinking of (open) strategic autonomy of countries and regions to increase their independence with respect to critical resources and national priorities (such as public health, or national security).

Fragmentation of the global economy is leading to the strengthening of regional economic areas, or globalisation of like-minded countries, and not to a ‘de-globalisation’. Global trade will remain an important pillar.

Manifestations

Developments happening in certain groups in society that indicate examples of change related to the trend.

Increasing supply chain fragility

Trouble arises when there are no safety margins (or preparedness plans) built into systems. Missing safety margins can get highly interconnected systems into trouble when minor disruptions occur, such as a blockage of the Suez Canal. And even more trouble when longer-term unforeseen crises like the COVID-19 pandemic occur, or the Russian war of aggression in Ukraine. The vulnerabilities of just-in-time delivery across distributed highly specialised global production networks become evident, with temporary closing of production sites, shortages of workers and reduced logistics capacity.

This leads to shortages of essential goods, such as food, medicine, personal protective equipment for example. Furthermore, the lack of supply of intermediary products, material and equipment ranging from wood to semiconductors causes an interruption of production in the manufacturing industry. Shortages drive skyrocketing prices for logistics and products, heating up inflation, and negatively affecting the EU’s trade balance. As a reaction, countries and firms are considering to turn away from cost-optimised supply in certain areas and are switching to warehousing and stockpiling of critical inputs, reshoring of production (more locally) and diversifying supply sources.

Using one-sided supply dependencies can be used as geopolitical weapon, as observed with critical raw materials, energy, food and others. Reducing demand and circularity strategies are rather long-term approaches, because re-routing to other supply sources is often quite difficult.

Signals of change: Vox, Bloomberg, Euractiv, Euractiv, New Internationalist

Supply chain disruptions due to Russian war against Ukraine

Economic boycotts and sanctions are being executed by Western countries against the Russian economy in response to the Russian war of aggression against Ukraine. The decrease of imports of goods, oil and gas from Russia have led to a more expensive rerouting of supply in Europe, with second order effects on downstream products from energy intensive industries, as well as all energy consuming process. This is resulting in rising inflation in the West at historical peaks. The missing export possibilities for wheat from Ukraine, and reduced export from Russia is leading to soaring food and fertiliser prices that affects the food import dependent countries in the Global South in particular. Emerging markets in Latin America and Africa are planning to become more self-sufficient in commodity supply, to be less dependent on global market vulnerabilities. The act of sabotage at gas pipelines shows the vulnerability of critical infrastructures of all kinds against warfare and terrorism.

Signals of change: MIT, IEA, EPRS

Glocalisation – re-shoring and re-regionalisation

Three key forces are driving the slowdown of globalisation and change in global supply chains and production networks. First, geopolitical tension and related trade conflicts are leading to increased protectionism in parts of the world (e.g. Brexit, US-China trade war, WTO negotiations). Countries and regions are rethinking which critical R&D and production would be better located locally, to improve resilience (e.g. EU Chips Act, Made in China 2025). Crises experiences (such as the COVID-19 pandemic impacts) are driving the new realisation and need for re-prioritisation. Rising South-South trade is further leading to a regionalisation of global supply chains.

Second, climate change policies and environmental protection policies require a reduction in the environmental footprint of global supply chains and there is a global race for cleantech innovations and circular economy approaches (e.g. re-use, recycling). Sustainability criteria become a driver for global supply chain activities, alongsdide cost minimisation, flexibility and speed. The mass rollout of green technologies from solar PV to electric vehicles is bringing shifts to global supply chains, in particular an increasing need for critical raw materials. Leapfrogging of network infrastructure solutions with decentral innovative approaches in the Global South, show the potential rise of local innovators with independent supply chains.

Third, digital technologies such as the Internet of Things, robotics, Artificial Intelligence and 3D printing are changing production processes, raising productivity and saving labour costs that allow production to be located closer to the consumer. This type of reshoring has impacts on workers and economic development in developing countries.

Signals of change: International Trade Centre, World Trade Organisation, WEF, WEF, Brookings, UNCTAD, Science, Fortune

Fragmentation of the global technology landscape

Globalisation profits from markets for products that include technological components when there are low degree of variation in standards and openness of the technologies to work with foreign products. As more and more products are digitally connected and companies build on data driven business models as well as on Industry 4.0 digitally connected supply chains, connectivity and interoperability are crucial. The internet as the network of networks was designed to be an open and global technical infrastructure. But political, commercial and technological interests are challenging the open design. Global state powers are strategically executing geopolitical interests in the cyberspace. The EU regulates privacy and data ownership in its domain; the Digital Single Market drives convergence within the EU, while digital sovereignty could imply fragmentation at a global level. Autocratic countries like China or Russia control the internet traffic top-down to be able to censor content and communication. This leads to an alignment of the cyberspace along state borders, with respect to internet routing, data storage and firewalls as well as available communication and messaging channels.

Technical interoperability issues related to protocols, devices and applications can fragment connectivity globally. Big digital giants, like Amazon, Google, Apple and others built their walled gardens that keep consumers in the own field of software (operational systems and applications), hardware, online shops, payment systems etc. and make it uncomfortable for consumers to switch. Divergence in global technology standardisation paradigms between the EU/US approach of private sector-driven public-private partnership model of technical standardisation and the Chinese state-steered approach to standard setting challenges global interoperability, constitutes the ethical values that constitute the social lives of the people using the technology or being exposed to it (with respect to e.g. privacy, data ownership).

Signals of change: European Parliament, Tech Review, Atlantic Council, Lowry Institute, Euractiv, The Diplomat

Interesting questions

What might this trend imply, what should we be aware of, what could we study in more depth? Some ideas:

• What if trade is mainly regionalised, and takes place within regional blocks?
• What if the Global South relationship would lead to a more autonomous development?
• What if the sustainability transition would radically change globalisation based on use of renewable resources, circular economy principles?