The world’s economies don’t need the coronavirus to drive them to protectionism and trade wars — they were headed that way on their own. For the 73rd CFA Institute Annual Virtual Conference, economist and author Vikram Mansharamani discussed how global forces have already been changing the flow of international trade and what that means for the future.
According to Mansharamani, four global transitions have been at work:
- China’s economy. “China endured a credit-fueled investment bubble that burst,” Mansharamani said. Excess investment capacity has created an excess of supply while the amount of bad debt and non-performing loans is increasing. “When we see this economy transition towards a consumer economy, we’re going to have to think about the headwinds it’s facing,” he explained.
- Technology. The pace of scientific advancement is increasing, finding new ways to increase efficiency and maximize productivity. “In the language of supply and demand, what we’re enabling is more output given the same or fewer inputs,” Mansharamani said.
- Energy. New sources of alternative energy have become more cost-effective, competing with established energy sources. The expansion of battery and storage technology is also allowing these alternative sources of energy to have meaningful impact and increase the available supply of energy. “This is a big, potentially geopolitically destabilizing development,” he noted.
- Demographic transitions. The world’s largest economies are aging. “What we can say by looking at the demographic profiles of those large economies is that those economies are aging, and larger percentages of those populations are entering retirement,” Mansharamani said. Although emerging market countries have younger demographic profiles, he questioned whether they can successfully build a middle class in the current global environment. The combination means a drop in consumer buying capability.
Together, these four transitions are creating more supply and less demand in developed and developing nations around the world. Decreasing global demand and rising deflationary pressures mean more conflict as countries struggle to capture larger amounts of a shrinking market.
Politicians are left looking for a scapegoat, either taking a populist approach to blame elites within their country or taking a protectionist stance to blame outsiders in foreign countries. “Nationalism captures that spirit,” Mansharamani said. “That’s the political outgrowth that comes from this dynamic. And as a result, we get trade wars.”
It’s a challenging environment for cross-border collaboration, and it leaves large companies with complex global supply chains especially vulnerable. Mansharamani said, “This coronavirus pandemic, and the lockdown, is pouring fuel on the flames of deglobalization that were already underway.”
These developments have changed the tone of discussions in board rooms everywhere. As companies re-examine their supply chains and address their vulnerabilities, priorities will change. Mansharamani expects the overall mindset to shift from “just in time” inventory management to a “just in case” approach.
Choices are being made that favor the greatest resilience over the lowest cost, moving operations away from high-efficiency processes to embrace high-security procedures. It will become more attractive to manufacture products in locations that are closer to the end consumer, using supplies that are sourced domestically and less vulnerable to global disruption.
These decisions could ultimately re-align global markets. “I think we could see the emergence of two global economies,” Mansharamani said. One of them would develop around China, and the other would be centered around the developed nations of the west. “And it’ll be defined, in large part, by these supply chains.”
This year, archived recordings of every presentation from the CFA Institute Annual Virtual Conference will be available online, with additional insights and commentary published on the CFA Institute Annual Virtual Conference blog.
All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.