Proving Globalization or Deglobalization Is a Waste of Leadership Resources
Another day. Another news story. Another vain attempt at finding a metric to prove globalization is dead or deglobalization is dead.
As I’ve said before, globalization and deglobalization are intimately related – they are yin and yang. You cannot separate the two.
The solution is not to decide which is right, which is wrong, what is increasing, what is decreasing. The solution is to redesign your supply chain and global network with complete optionality. This means sourcing, production, suppliers and distribution.
Believe it or not, Western oil companies, including Exxon and Chevron, have been doing this several years. And they are doubling down on optionality.
But let’s go back to the beginning …
What is Globalization? What is Deglobalization?
Globalization refers to the interdependence of economies, cultures and populations.
Deglobalization is the movement toward a less-integrated world, characterized by local solutions, onshoring, tariffs and border control.
Many stories about deglobalization refer to decoupling from China. As The Washington Post and others report, U.S.-China geopolitical tensions have increased in recent years. Tariffs, export controls, import and investment restrictions, the whole anti-trade playbook is there.
Still, U.S.-China trade hit a record last year – $760.9 billion worth of goods and services.
But again, it’s not an either-or. Globalization and deglobalization are opposite, interconnected, mutually perpetuating forces. As my latest analysis explains, they are yin and yang.
Companies and countries that deglobalize from China simply globalize elsewhere. Yes, reshoring is important, as Forbes noted. And an important tool in redesigning your complete global network. But no country will bring all production back home.
Globalization and Its “Metrics”
Most globalization “metrics” are pointing toward deglobalization.
Bloomberg reported that foreign direct investments declined by $11.8 billion in the third quarter of 2023. That contraction is the first since 1998, before China joined the World Trade Organization. The United States is investing $553 million in a Sri Lankan port to curb China’s influence.
And as The Wall Street Journal reported, trade as a share of global output has never recovered from its 2008 record.
That same report claims a different metric, the ton-kilometer, proves that globalization is increasing. Ton-kilometer is the “total distance traveled by freight, multiplied by its total weight.”
“How Far Goods Travel: Global Transport and Supply Chains from 1965–2020” explains the metric. Assistant professors from Georgetown University and the University of Oregon calculate ton-kilometer for global trade.
“Ton-kilometers of trade surged 49% from 55 trillion in 2008 to 82 trillion in 2019, outpacing global-inflation adjusted GDP growth by 18% during this period.”
So now we have a metric “proving” that globalization increased. Although many claim globalization has decreased (deglobalization) since 2008.
Why The New Globalization ‘Metric’ Does Not Matter
Well, with all due respect to the assistant professors, SO WHAT!
Listen, I’m an industrial engineer. I like numbers. I like metrics. I like mechanical things that you can turn on and turn off.
Metrics are good. But you have to use them the right way. Trying to prove globalization or deglobalization is a waste of time for busy CEOs, supply chain leadership and anybody involved in manufacturing and distributing raw materials, parts or finished product.
Instead, you should deploy optionality to increase your supply chain resilience. No more single sourcing. Your enterprise needs multiple sources for raw materials, components, final assembly, shipping hubs, everything.
In a world of perpetual supply chain disruption, optionality is the only way to go.
Real Life Supply Chains Prove My Point
In fact, the example at the start of their Journal of Economic Perspectives paper proves my point.
The professors do a fantastic job explaining the evolution of global transportation. They cite telephone manufacturing as an example.
Back in the day, the Western Electric Hawthorne Works factory in Illinois sourced a few raw materials from distant locations. Things like Bakelite, rubber and metal.
For the most part, Western Electric built components in house.
These days, Apple and Samsung manufacture phones differently.
For Apple, research and design take place in the United States. The U.S. and Taiwan add more engineering. Production involves 43 countries on six continents. Components can come from South Korea, Taiwan, Japan, Malaysia, Vietnam, the United States, Mexico or the European Union.
Likewise, Samsung designs their phones in South Korea. South Korea, Japan and the U.S. manufacture components. Korea, Vietnam, China, India, Brazil and Indonesia complete final assembly.
Why? Because in 1890 it costs $200 per ton to ship goods from California to Europe. That price declined to $2 per ton 100 years later.
Those shipping costs alone make complete deglobalization impossible. Unlike in the midst of the 2020 pandemic, we’re paying $1,500 per shipping container, not $20,000.
Supply Chain Operators Who Do It Right
Competitive advantage in the future means delivering goods when parts of your global supply chain fail. Friendshoring, nearshoring and reshoring are all part of the optionality mix.
And some companies are paying heed, making moves to do it right.
Apple, TSMC, Mazda and others are moving parts of their supply chains out of China.
Back to another WSJ story: Chevron inked deals for oil from Guyana and shale oil in North Dakota. Exxon made a deal to secure access to oil in West Texas and New Mexico.
Is anybody expecting trade wars with Guyana or North Dakota? Texas is not going to invade New Mexico. New Mexico is unlikely to slap tariffs or import restrictions on Texas.
In fact, Western oil companies have been adding optionality since before the pandemic. Some have left unstable regions in Southeast Asia, West Africa, Russia and parts of Latin America.
Hope Is Not a Plan
As I explained earlier this week, many companies fear China’s retaliation in the trade wars.
Any CEO operating in China must worry about uncertainty. Authorities could detain and question your staff. Authorities could close offices. Authorities could levy fines. They have done all of the above at some point.
Quit arguing over globalization or deglobalization. As you move some operations out of China, you will be integrating into other regions – yin and yang.
Friendshoring and nearshoring are key to the optionality your supply chain or markets might need at a moment’s notice.
Decoupling will be long and arduous. But if you never start, you will never have optionality. You will never achieve supply chain resilience. You could lose one-third of your market or half your supply base in a moment’s notice.
You can hope for the best. But insightful leaders need optionality for the worst.
Jim Tompkins, Chairman of Tompkins Ventures, is an international authority on designing and implementing end-to-end supply chains. Over five decades, he has designed countless industrial facilities and supply chain solutions, enhancing the growth of numerous companies. He previously built Tompkins International from a backyard startup into an international consulting and implementation firm. Jim earned his B.S., M.S. and Ph.D. in Industrial Engineering from Purdue University.