Mark Thirlwell GAICD on uncertain global economic geography

With the green energy transition, trade redistribution, tech revolution and changing industrial policy, global economic geography is shifting beneath our feet. 

The world’s economic geography is in transition. State-led economic coercion, war and sanctions, intensified geo-economic competition, the ongoing energy transition and a new wave of industrial policy in response to several of the previously listed developments are some of the most important drivers. Climate change, COVID-19 disruption and technological progress are also helping to redraw the global economic map.

Economic geography has never been a fixed thing. Shifts in comparative advantage and relative economic performance are constant contributors to changes in firms’ decisions about where to produce and where to sell. But there are times when a sequence of changes comes together to deliver an adjustment phase considerably broader and deeper than the regular reshuffling of commercial relationships between economies. 

Heading into hyperdrive

Consider the previous era of hyperglobalisation that started around the time of China’s accession to the WTO and ended with the global financial crisis. The onset of economic reform in China, the end of the Cold War and the collapse of the Soviet Union, the presence of a broad developed economy consensus supportive of (at least some) deregulation and liberalisation of trade and capital flows together allowed for the kind of intense cross-border economic integration that had previously been impossible. Meanwhile, a wave of information communications technology (ICT) innovation enabled businesses to construct the complex global value chains (GVCs) that took advantage of — and then helped underpin — the new geo-economic order. A host of new regional and preferential trade and investment agreements set the rules for this new order — and the Chinese economy sat at its centre as the world’s factory.

The new economic geography is a rejection of several of the critical elements of the hyperglobalisation era. Faith in GVCs has been replaced by pandemic-fuelled concerns about their fragility. The once-compelling business logic of Chinese cost competitiveness has been challenged by security-led arguments for de-risking and decoupling. And rather than the promotion of economic interdependence setting government policy agendas, policymakers have instead become keen to weaponise it. Think of the recent deployment by Beijing of a mix of formal and informal trade measures targeting Australia. The result was a mix of trade destruction and trade diversion. For example, Australian coal exports were redirected to India and Japan while Chinese importers turned to Russian and Indonesian coal as a substitute.

Drums of war

A more fundamental example of the forces shaping the new order is the crumbling of the Pax Americana. The Russian invasion of Ukraine in February 2022 and the subsequent introduction of economic sanctions by the US, EU and their allies not only triggered major shocks to global food and energy prices, but was followed by dramatic rearrangements in global oil and gas flows. Russian oil and gas imports that once flowed to EU members are now sold to China and India. They are being replaced by US, Middle Eastern and West African oil, and by US, Algerian, Norwegian, Turkish and Azerbaijani gas. The invasion has also prompted divestment by Western countries from Russia while forcing Moscow to seek new supply chains. We are yet to see the full impacts of the Israel-Gaza conflict.

This war-driven energy shock has occurred alongside the slower-moving but much larger shock to world energy markets from the green energy transition. There are multiple effects here, but to pick one example, the rapid growth of investment in renewables is generating a transformative rise in demand for raw materials such as copper, cobalt, nickel and lithium. Alongside new economic opportunities for producer nations, there has been a parallel growth in resource nationalism. In the case of lithium, Mexico nationalised and Chile “semi-nationalised” their domestic industries, while Zimbabwe and Namibia introduced lithium export bans. Similarly, Indonesia has deployed export bans on nickel ore and bauxite. Jakarta has even floated the idea of an OPEC-like cartel for critical minerals.

Geopolitical risk, geo-economic competition and the exigencies of the energy transition have also manifested in a wave of industry policy across Western economies. One prominent example is the Biden Administration’s CHiPS and Science Act, which includes US$52.7b in funding for domestic semiconductor producers as well as about US$24b of manufacturing tax credits. Washington is also using non-financial measures such as its “foreign direct-product rule” (FDPR) to restrict Chinese access to some high-end capabilities, lowering a so-called “silicon curtain”. 

Even more dramatic, at least in terms of size, is the US government’s Inflation Reduction Act (IRA) which offers (as a minimum) US$391b in financial support for clean energy and related initiatives. With this policy largesse sucking increasing amounts of capital into the US economy — an April 2023 Financial Times estimate said that investment into semiconductor and clean technology since the IRA’s August 2022 introduction was almost double the relevant commitments made in 2021, and nearly 20 times greater than the 2019 figure — others feel compelled to follow. Hence the EU’s European Chips Act has promised €43b of government support and Brussels is deploying a range of its own clean tech subsidies, all the while relaxing previous restrictions on state aid. Observers talk of a “subsidy war”.

But wait, there’s more

Two other forces are also at work. First, climate change is already having its own consequences for economic geography — ranging from changes in agricultural productivity prompting shifts in grain production and International Labor Organization warnings on the implications of higher temperatures for worker productivity to post- Cerberus heatwave fears for the longer-term future of the Mediterranean tourism season.

Second, there are the dynamics unleashed by the latest wave of technological change. The remote-working innovations prompted by the WFH revolution — combined with the transformational possibilities of AI — raises the potential for a technology-led acceleration in commercial services trade that could mimic the earlier ICT-led revolution in global supply chains.

However, if it does happen, this revolution would take place against a very different political, geopolitical and geo-economic backdrop. 

This article first appeared under the headline 'Standing on Shaky Ground’ in the November 2023 issue of Company Director magazine.