Publications

- July 1, 2022: Vol. 9, Number 7

Globalization lives: Corporate America is well positioned for a tri-polar world

by Joe Quinlan

Globalization isn’t dead, but it is being refined and reconfigured. As Bank of America noted in a recent essay, U.S. multinationals confront a much more challenging environment than in the past, given rising government calls for “reshoring,” economic self-sufficiency and the promotion of national champions. These policy preferences are helping to sculpt a tri-polar world — a world that pivots around North America, Asia and Europe.

U.S. firms are not deaf or blind to the shifting contours of globalization, and are increasingly focused on building more resiliency into their supply chains. But this doesn’t mean firms are coming home, decamping from the rest of the world for the supposed greener pastures of the United States. That’s the consensus, but the consensus is wrong.

Companies are focused on building in more resiliency into their supply chains by relying more on foreign labor, overseas markets and non-U.S. resources. They understand what the International Monetary Fund (IMF) recently noted, that “policies such as reshoring are likely misguided.” According to the IMF, “supply chain resilience to shocks is better built by increasing diversification away from domestic sourcing inputs.” That is another way of saying that in the evolving tri-polar world of today, companies that have roots in all three poles of the global economy will be better positioned to weather future shocks and better able to drive future earnings growth.

That said, corporate America — given its vast global footprint — is well positioned for a tri-polar world.

The outlines of this new world are defined in the table “Taking stock of the tri-polar world.” Some key takeaways from the figure: First, if you are the head of a U.S. multinational, it’s hard (aka, risky to the bottom line) not to be positioned in Asia, given that the region accounts for roughly 36 percent of world output, and is home to half the world’s population (about 4 billion people) and half the world’s labor force (1.9 billion people). From this base, Asia accounts for 29 percent of global personal consumption, a sizable chunk of global spending that any serious multinational can’t miss out on.

Second, Europe isn’t as large as Asia in terms of GDP, population and workforce, but the region is wealthy. And wealth equals consumption, with personal consumption expenditures in Europe totaling $11.6 trillion in 2020, or 29 percent of the global total. With less than 9 percent of the global population, Europe still accounts for one-quarter of global consumption, a fact not lost on many U.S. multinationals. The bloc is also home to a large pool of skilled human capital.

Finally, North America (defined as the United States, Mexico and Canada) is no slouch, accounting for nearly 27 percent of global GDP and 33 percent of global consumption. However, the bloc is home to only 6.3 percent of the world’s population and dependent on a labor force (roughly 235 million) smaller than Europe’s. Hence, the importance to corporate America in having access to foreign markets and external resources. And, hence, corporate America’s massive wager on globalization, with America’s stock of outward foreign direct investment rising from $215 billion in 1980 to $8.1 trillion in 2020, according to figures from the United Nations.

How U.S. firms are positioned in the unfolding tri-polar world is outlined in the table “Anatomy of America’s global footprint.” The upshot: U.S. firms are well-embedded in Europe, owing to the region’s longstanding policies toward enlargement and the creation of a single market and, to a lesser extent, a single currency. U.S. business roots in Europe have deepened over the decades as Europe has become more economically cohesive, with many U.S. multinationals today more Pan-European than most European firms themselves. That said, the near-term downside is that, as Europe tilts toward recession and the euro cracks against the U.S. dollar, many U.S. firms are set up for some negative earnings pain, courtesy of Europe’s travails.

U.S. firms began to pivot toward Asia over the 1980s and have continued to build out their Asian operations in the subsequent decades. As of 2019, the most recent year of available data, there were nearly 2,000 U.S. affiliates operating in China, the largest cohort in the region. Australia (1,200 affiliates) and Singapore (1,000) ranked second and third. Japan, China and Singapore are key markets in terms of affiliate sales, while China and India are where U.S. firms employ, the most workers, 1.7 million and 1.4 million, respectively, in 2019, according to data from the Bureau of Economic Analysis.

Looking forward, it’s even more imperative that corporate America maintain a presence in Asia, given the recently completed Regional Comprehensive Economic Partnership (RCEP) trade agreement. The latter is not only the world’s largest regional trade agreement — encompassing 15 countries including China, that cover 30 percent of the world population (2.2 billion people) and $38 trillion of output (one-third of the global total, — it is also an agreement that excludes the United States, which has the potential of putting many U.S. firms at a competitive disadvantage.

That’s the bad news. The good news: Although America is not a signatory to the agreement, U.S. firms operating in RCEP countries can access the terms of agreement if they meet the 40 percent rule of origin on content sourced from any of the 15 nations. Similarly, U.S. firms can gain access to this massive market via the free-trade agreements the U.S. has signed with RCEP member states Australia, Singapore and South Korea.

Against this backdrop, the calculus for many U.S. firms in a tri-polar world is straightforward: Being absent from the Asian bloc means putting future earnings growth at risk and being vulnerable to supply-chain disruptions.

What about America’s North American Free Trade Agreement partners, Mexico and Canada? They are also critical nodes in the global networks of U.S. multinationals, serving not only as a key source of demand (with combined personal consumption expenditures of $1.6 trillion in 2020), but also a critical source of supply, with U.S. affiliates employing more than 1.2 million workers in Canada in 2019, the last year of available data, and 1.4 million in Mexico. Given labor constraints in the United States, having access to workers in Mexico and Canada remains critical for many U.S. multinationals.

So, what’s all this mean for U.S. investors? One, don’t panic about all the chatter about de-globalization and the attendant risks to U.S. corporate earnings. Globalization has been slowed, not derailed, by the virus and the Ukraine/Russia conflict. Second, globalization is dynamic, not static, and is presently being reconfigured around a tri-polar world led by North America, Asia and Europe. These blocs are interconnected and, therefore, catalysts for more, not less, cross-border trade and investment. Three, U.S. firms are among the best positioned for a tri-polar world, given their extensive global networks of affiliates, the foot soldiers of globalization. Finally, at the core of any U.S. portfolio should be large-cap U.S. multinationals — across all sectors — positioned to leverage the globe’s resources.

 

Joe Quinlan is head of CIO market strategy for Merrill and Bank of America Private Bank.

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