The global economic crisis triggered by the covid-19 pandemic in 2020 and the Russian invasion of Ukraine in February this year has intensified the risk of less trade integration between countries. This process is known as the deglobalization of trade.
The pandemic has impacted supply chains around the world. For this reason, companies in more advanced economies have begun to bring the production that they had outsourced in Asia to their countries, or at least to closer areas. With these changes, it is expected to avoid, both now and in the future, interruptions in supply chains to ensure a constant and reliable supply of goods.
The Russian invasion of Ukraine has accelerated global supply shortages in the aftermath of the pandemic. Furthermore, it is fueling expectations of less dependence of companies on global supply chains. This is especially the case with companies in Europe and the United States.
This trend risks adding to the strain on African economies, which are already experiencing economic difficulties today, due to the inflation of food and fuel prices imposed by the war in Ukraine.
A deglobalized world poses serious risks for Africa. This has been confirmed in the conclusions of a recent World Bank report. The paper shows that reversing globalization through the relocation of value chains can push an additional 52 million people into extreme poverty.
The inhabitants of sub-Saharan Africa would be the most affected. It would intensify poverty in Africa. As shown in Figure 1, global trade integration (the contribution of trade to world GDP) accelerated after 1990, then slowed down after peaking in 2008, when the financial crisis triggered an economic recession. The remarkable increase in global trade integration in the 1990s and 2000s is closely linked to the rapid growth of global value chain trade.
Why is it important to be connected?
The connection with the world economy is vital to stimulate growth and development in the continent, since it creates opportunities for companies to specialize in specific tasks. In turn, it allows them to integrate into parts of a global value chain, even if they lack the competitive advantage to create a complete product at the national level.
In addition, increased participation in global value chains provides African companies with better access to capital, technology and other inputs needed to upgrade products and further diversify. This is important to note, as African companies face significantly higher costs that reduce their ability to compete in regional and international markets. These costs particularly constrain small and medium-sized enterprises (SMEs), the mainstay of most African economies.
Entering global market chains is crucial for several reasons. First, it drives the growth of African SMEs. Second, it supports the African Continental Free Trade Area to advance regional trade integration. Third, it diversifies production and export structures. And lastly, it promotes the rise of industrialization.
Over time, positive economic results would greatly reduce poverty in Africa, a situation reminiscent of the impact of the second wave of globalization that accelerated rapidly after 1990. This wave helped some Asian and emerging economies pull their millions of people out of poverty by supporting their integration into global value chains and narrowing the income inequality gap between advanced economies and developing countries.
Several companies are moving their production facilities. Among them, the manufacturer of electric motorcycles and bicycles Pierer Mobility, with the construction of a facility in Bulgaria to be closer to its main clients in Europe, and the suit designer Hugo Boss, who has also moved his production to closer areas. to your country.
In the United States, Stanley Black & Decker has expanded its tool production operations in North America. Its objective is to support the regional development of its supply chains and facilitate shorter terms. US garment companies also see problems with supply chains as an opportunity to reconsider bringing them home.
Governments in advanced economies are also strengthening the repatriation of production, mainly for geopolitical reasons. Now the EU is seeking to boost its own chip production and has promised to back chipmakers like Intel Corp, for example, with multibillion-dollar grants. The United States also plans to spend billions of dollars to bolster domestic chip production, and Japan is pouring huge funds into developing its own semiconductor industry.
Such significant spending reflects the geopolitical importance of next-generation chips, vital to technological advancement now and in the future. US and European chip investments are also motivated by Chinese competition and a desire to reduce their reliance on Taiwan and South Korea as major suppliers, as they could be vulnerable to supply crises and geopolitical conflicts in the region.
In addition to the growing geopolitical rivalry and tensions between China and the West, the rise of Western nationalism following the 2008/09 financial crisis has also dampened enthusiasm for accelerating integration into world trade.
In the United States, for example, the program Make America Great Again (Make America Great Again) of former President Donald Trump was essentially a program against global economic integration and specifically promoted protectionist policies that focused on reducing trade between China and the United States.
Across Europe, similar nationalist and anti-globalist movements were also taking place, which were key to the UK’s exit from the European Union in 2020.
And now that?
Globalization is a strong driver for integration into the global value chain of great importance for the growth and development of Africa, whose economies have suffered even greater damage due to the pandemic. In addition, differences between the recovery of advanced and developing economies in Africa (and other regions) threaten to reverse progress in poverty reduction.
In the absence of decisive action, the repatriation of production means that future trade will be dominated by a few powerful regional blocs. Among them, we would probably find the Asian bloc dominated by China, the North American bloc led by the United States and the European Union bloc.
If this were to happen, decades of progress in reducing global poverty would be at high risk of being further derailed. The world would be a poorer place and Africa would be the worst affected as the continent would be cut off from global value chains.
This article has been translated with the collaboration of Casa Africa. Translation: Lilian Navarro Molina.