The reshoring of manufacturing is well under way but the globalisation of services is set to continue. However, as Brian Caplen writes, for banks the offshoring/reshoring calculation is extremely complex.
US president Donald Trump may win his battle to bring manufacturing back to the country, although it may not create many jobs. The higher costs of producing in emerging markets such as China combined with advances in robotics and 3D printing are pushing the trend for reshoring. What the Trump administration should do is forget about tariff barriers and focus instead on making sure the US has the skillset and investment conditions for advanced manufacturing to thrive.
The business of services, which gets much less attention from politicians, is a different matter. Consultancy AT Kearney pointed out in its report From Globalization to Islandization that while peak globalisation in goods trade may have been peaked as far back as 2007, “one area of globalisation presenting strong growth is international trade in services which includes transport of passengers and freight, telecommunications and postal services, insurance and financial services, legal and accounting services, and other business services”. While trade in goods as a share of GDP has been falling since a 2008 peak of 52%, services has risen above its pre-financial crisis peak to top 12.5%.
Services is where many advanced countries such as the US and the UK have a comparative advantage and they are rarely covered by trade deals. Instead of rejecting trade deals the Trump administration should be promoting them to cover services instead of fighting last year’s battle about manufacturing.
The UK should also be pushing this agenda in its new free-trade agreement with the EU. Despite EU propaganda about its commitment to free movement in goods, capital, people and services, the European market remains highly restricted in services.
But what about banks? They are experiencing contradictory forces. The growth in regulation since the financial crisis and the determination of regulators to control their home patch has led to both deglobalisation and derisking in banking. Many banks have pulled out of overseas ventures and retreated home although capital markets remain an international business.
Yet the pressure to reduce costs and the additional compliance burden are driving banks to find solutions that still involve offshoring. The Financial Times reported that Bank of America, JPMorgan Chase, Morgan Stanley, Wells Fargo and Goldman Sachs employ 120,000 people, or 12% of their global workforce, in Asian support centres.
Even with banks, however, while reshoring is not a trend, offshoring may be nearing its peak. Again technology is playing a role with the rise of machine-based data analytics and of regtech to automate processes. The back office is set to be completely computerised rather than reshored.
Then there are offshore call centres that have their problems in terms of quality, high staff turnover and rising costs. A reshoring rush may not be on the cards but the economic case for offshoring is becoming more marginal.
Where banks are still doing international business, however, on the ground operational support staff in the growing areas of business are essential. With so many push and pull factors, the offshoring/reshoring calculation for banks is more complex than for any other industry.
Brian Caplen is the editor of The Banker. Follow him on Twitter @BrianCaplen
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