Why globalization is going into reverse?

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Onshore Manufacturing

More firms are bringing production closer to home. Trends of diminishing gap in labour cost, proximity to customers and headquarter and tax incentives are main factors. Moreover, consumers are now switching to a more localized services with more personal touch.

Shifts in the structure of value chain

Countries such as China are transitioning towards a model focused on domestic consumption, services and innovation. It is becoming less reliant on importing components for its export. China government is now focusing on sectors such as financial market, R&D, service sector, internet innovation.

Increasing trade-unfriendly government policies

Since the financial crisis, governments worldwide has done many interventions as an effort to boost up the economic. Export incentives and subsidies, trade barriers, higher tariff were implemented to protect own country industries. However, this net gains by one nation’s exporters must come at the expense of another nation’s.

Automation and manufacturing technologies

Automation reduces the labour-cost differences between countries. This is one of the reasons for firms to bring back production to home, as automation may cost less. However, there is a rising flow of ‘knowledge-intensive’ activities such as R&D, highly skilled labour, entrepreneurs.

Capital Restriction

Capital restrictions is used in countries to stabilize its currency during economy crisis (Greece, Russia). Domestics consumption plunges as cash constrained curtail spending and foreign investment. Capital in the country is vulnerable to freezing or devaluation.

Globalization good or bad?

Pros

Foreign investment greatly improve quality, knowledge and standards

FDI brings in capital, knowledge and skills which eventually improve social economy of the country.

Fragmentation of work allows useful allocation of resources

This optimize production efficiency as different fragments do their particular compartment before sending to assembly plant.  Production cost is reduced significantly.

Less developed countries benefited from participating in global supply chain

Works are outsourced to take advantage of national differences in both cost and various factors of production (land, capital, labour etc.) Labour-intensive job is outsourced to low wages countries. Extra wealth generated by globalization has brought an increase in service sector employment.

Improve employment rate, incomes and lift poverty rate

Globalization bring more jobs to less developed countries. China, Vietnam, Cambodia, India are some of the countries benefited from it. China poverty rate fell from 88% in year 1981 to 6.5% in 2012.

Cons

Environmental damages

Environment are usually exploited in order to search for the lowest cost of production especially when a corrupted nation whose enforcement is low.

Financial policy become a trade weapon

Combination of artificially low interest rate, artificially inflated forex rate to gain competitive advantage in exporting. This causes inequality in wealth and economic turbulence.

Fragmentation of work causes countries to focus on certain industries only

Countries may face difficulty to survive when there is a change in consumer behavior, business environment as they have no developed other skill, capability and expertise in the field.

Low quality of FDI

Capital may flood into the housing market or industry that eventually leads to asset bubble and economy crisis

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