As new trade flows emerge, the global economy could start to balance out.
Trade relations between developed and developing countries are changing. Cheap manufacturing had for years been based in the latter while consumption of those goods had predominantly originated in the former. But rising wages in a number of emerging markets – led by China – coupled with spiralling shipping costs and surplus labour in the developed world, have convinced a few corporates to ‘re-shore’ some of their operations. Too early to be defined as a trend, these cases are important in highlighting how quickly competitiveness can both be lost and gained.
In the US, General Electric, Whirlpool and Caterpillar have been the highest profile examples of multinationals that have brought manufacturing back home. The shale gas boom has also played a large role in these decisions as it has reduced energy costs in the US, while higher unemployment has caused an abundance of skilled workers. In Europe, Portugal’s loose labour market is allowing the country to compete with India for call-centre business. Exports from Portugal have increased over the past five years to reach more than 41% of gross domestic product in 2013. In the UK, a number of companies, including Santander UK, have repatriated call centres from India because of both cost and service quality.
Meanwhile, in the emerging markets, rising wages and an expanding middle class are boosting consumption, helping to offset slack demand in parts of the developed world caused by unemployment and a general loss in confidence after the financial crisis.
China is already adapting to this new order and is modifying its growth path by reducing its reliance on exports. Other countries, such as Brazil, which have based their expansion on commodities, are struggling to adapt. But eventually what the change in trade flows could lead to is a more balanced global economy where manufacturing and services are distributed across different countries rather than being based only in one region. Both developed and developing countries should benefit in the long run.
