What deglobalization means for retail sourcing

Both economic and geopolitical forces are reshaping a new world order, one which is turning from globalization toward polarization and the formation of regional entities bonded by ideological and economic interests. While the shift away from globalization has been in the works for years, it was accelerated by the pandemic and other factors. As a result, the reshaping of global supply chains will continue. 

TradeBeyond’s Retail Sourcing Report: Q3/Q4 2024 Insights & Indicators is out now, and in addition to critical updates on economic indicators and commodity prices the report features extensive reporting on the impact of decoupling and deglobalization on global supply chains. Whereas in the past, supply chains shifted for economic reasons, today the shift is also driven by politics, mostly related to the interests of the U.S.-led West, China, and Russia. 

Here are seven implications of deglobalization: 

1. The de-dollarization of the global south 

The trend of de-dollarization — adopting alternate currencies for trade settlement — has now extended to several countries with strong trade relationships with China. The BRICS alliance (Brazil, Russia, India, China, and South Africa) has pushed harder for de-dollarization since 2022 under the principle that developing economies are under threat from U.S. sanctions at any time given their dependence on the dollar. The BRICS countries are pushing for their currencies to be used for trade settlement ahead of the dollar and developing new payment mechanisms. Russia and China are also leading the charge for de-dollarization by convincing their trading partners to avoid the dollar. Russia has now officially adopted the yuan/ruble as their benchmark trading pair. 

2. Supply side shortages  

One challenge for a de-globalized world order is that supply chains for critical raw materials used in high-value technology products are more geographically concentrated than that of oil or natural gas. For example, the global production of lithium, cobalt, and rare earth elements is controlled by a handful of countries.  

China has also invested heavily in regions such as Africa in recent years, where many supplies are located. The Democratic Republic of Congo (DRC), for instance, is responsible for around 70% of global cobalt supply. 

Metals such as aluminum, copper, nickel, cobalt, and lithium, which are used in a broad spectrum of products, are likely to see a big mismatch between supply and demand. Their prices have the potential to rise significantly over time. 

3. Increased tariffs 

As we saw with the U.S.-China trade war, tariffs can have a significant impact on global trade. Along with the U.S., the EU has implemented tariffs of up to 38% on Chinese electric vehicles to defend against Chinese subsidies and oversupply. In turn, China is likely to apply tariffs on food and other European imports, sparking an EU/China trade war. Tariffs also have a domino effect of shuffling trade flow. For example, trade restrictions and tariffs on computer chips from China have led to soaring exports of chips to Russia. Also, the burden of tariffs ultimately falls on the consumer, in the higher prices paid for the affected products. 

4. Higher defense spending 

Along with choosing countries that might be more expensive, another impact of this shift is that countries will increase defense spending. Overall global military spending increased by 6.8% from 2022 to 2023, reaching $2,443 billion, the biggest increase since 2009. China now has the second largest military budget, after the U.S. Along with the wars in the Middle East and Ukraine, analysts report that this increase is directly related to the escalation in global geopolitical tension, especially between economic powerhouses. Aside from the drain on budgets, this spending heightens the potential and risk of any conflict. 

5. Increased inventories  

As we saw during the pandemic, when supply chain risk increases, companies respond by increasing inventory stockpiles to prevent stockouts and disruptions. Added to the potentially higher cost of producing goods onshore, nearshore, or less economically viable locations, stockpiling adds cost which again ultimately will be passed on to consumers.  

6. Emerging economy growth 

Several emerging economies stand to benefit from the restructuring of global supply chains. These include India, Malaysia, the Philippines, Thailand, Vietnam, and Indonesia. Each country has strengths and weaknesses that determine the kind of industries they attract.  

Another indicator of the growing influence of developing countries is the expansion of the BRICS alliance. As of Jan. 1, 2024, the BRICS bloc of countries, which consisted of Brazil, Russia, India, China, and South Africa expanded to eleven countries. The addition of Egypt, Ethiopia, Iran, and the United Arab Emirates now pushes the BRICS share of global GDP to 37.3%. In addition to economic power, the BRICS is now a powerful alliance that can influence geopolitical agendas.  

7. Fragmentation of climate change initiatives 

Another key impact that polarized regions based on political and economic interests is on environmental initiatives. Addressing climate change requires a coordinated global effort, communication, and shared goals, which is difficult given the current geopolitical tension. For example, the EU Carbon Border Adjustment Mechanism (CBAM) is an initiative requiring multi-lateral support, which is unlikely given the current political climate. It is hard enough to gain consensus on the sustainability agenda among friendly parties across borders. This challenge will intensify in the current climate of global divisiveness. 
 
For much more coverage of shifting geopolitical trends, including the impact of China’s expanding reach of Russia’s shifting trading alliances, download your copy of our Retail Sourcing Report: Q3/Q4 2024 Insights & Indicators now. This free report is packed with timely research, facts, and analysis to help brands and retailers make the most informed sourcing decisions. 

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