Chatham House Report

Donald Hepburn, Andrew Black, Matteo Ferrazzi, Andrea Goldstein, David Hurst, Steven McGuire and Michael Owen

Although protectionist pressures are unlikely to lead to a significant or sustained reversal of globalization, governments will need to be ever more proactive in arguing for the benefits of continuing globalization.

The World's Industrial Transformation
  • The last 25 years have seen a dramatic transformation of the world's manufacturing landscape. Globalization has hugely increased the world's available labour supply while a flood of foreign direct investment by multinationals has unlocked new sources of advantage. 
     
  • The star performer has been China. It is now the world's largest manufacturer, overtaking the United States in 2011. Most dramatically, in the automotive sector it produced more vehicles in that year than the United States and Japan combined. 
     
  • Prospects for the world's manufacturing landscape are more uncertain. In developed countries the financial crisis and recession have highlighted structural problems which will take a long time to overcome, and a long period of tepid growth is likely in the West. This will involve rebalancing in favour of industry as financial and public-sector services shrink. Fortunately, developing countries such as China and India should continue to grow at a healthy rate, partly owing to the emergence of a huge middle class that will need consumer goods and vast infrastructure investments. Both will boost domestic industry.
     
  • Putting these two economic outlooks together, the long-term fall in the share of manufacturing in the world economy is likely to be halted. Much faster growth in the developing world, where manufacturing has a bigger share than in the developed world, will reinforce this trend. 
     
  • Companies will continue to seek out the best locations. Wages in some developing countries are growing much faster than in the West. This is the case in China’s coastal provinces, prompting companies to move to inland China and to other lower-cost locations such as Vietnam and Bangladesh. This trend will also lead to the ‘re-shoring’ of some production to developed countries. Further factors that could encourage this trend are higher real exchange rates in developing countries and higher transport costs if oil prices rise. 
     
  • Many multinationals have an interest in preserving free trade, given their dependence on global supply chains. Despite this, there may be greater political pressures to promote domestic production and bring jobs home during future recessions and at certain points in countries' upcoming electoral cycles. Although these protectionist pressures are unlikely to lead to a significant or sustained reversal of globalization, governments will need to be ever more proactive in arguing for the benefits of continuing globalization.