Against this backdrop, it seems to us that unrelenting globalisation is now under heavy scrutiny. Indeed, globalisation of trade is now confronting three substantial tests with each, individually, possibly not significant enough to stop its course but which taken together have the potential to dramatically alter corporate behaviour and investment decisions for a long time.
The first wave against globalisation of trade came from the U.S. administration’s decision to reduce the U.S.’s trade deficit with some of its largest business partners. Tariffs have awakened many companies to the risks embedded in their supply chains and these businesses have started either to find alternative suppliers in other locations or to ask their existing suppliers to locate some of their factories in multiple locations to reduce supply and tariff risks. It is difficult to precisely assess how much onshoring/nearshoring has taken place because of these tariffs, but evidence from conversations with companies in which we invest and public statements suggest that diversification of origin of supplies is happening and is now integral to every supply decision. While product cost was the main selection criteria of a supplier until recently, predictability of prices and supply have gained in prominence.
The second wave is related to COVID-19. Global trade will be impacted as a consequence of the following issues: 1) people and businesses will remember the virus originated in China, the manufacturing hub to the world 2) in the absence of a cure or vaccine, the only way to stop the spread of the virus is to isolate clusters and close borders 3) businesses and people cannot be dependent on international supply chains for a prolonged period of time. In the future, even if the virus is identified early and a country or region locks itself down to protect the rest of the world, the rest of the world cannot be cut from a sole source of supply coming from that country or region and ‘just in time’ inventory may need to be adjusted. Here again, onshoring/nearshoring and diversification of supply are the solutions.
The third wave was building up before the onset of COVID-19 and will return to the forefront as soon as the pandemic is under control. We are referring to a climate border tax or any climate-related action to favour clean power and clean product manufacturing. The idea of supplying products from anywhere around the world irrespective of their carbon footprint will have to change. We have previously discussed the E.U. Green Deal and firmly believe that climate change mitigation will be central to E.U. policies going forward. The E.U., COP meetings, government and corporate actions will produce a relentless stream of attacks on Green House Gases (GHG) that will impact imports of products manufactured using high carbon-emitting power.
Considering these three waves together, even if it is difficult to forecast their impact, it becomes undeniable that behaviour will change to ensure a more resilient and cleaner supply base than most companies have today. This means a higher share of onshoring and nearshoring for U.S. and European companies. It also means a higher rate of automation in factories around the world to reduce the human risk factor related to pandemics. We believe that both factors will converge to boost demand for electricity.