With the price of energy commodities spiking, the scramble for Europe to find quick substitutes for Russian energy has led to a clear downgrading of carbon-emissions commitments.
Frankly, any energy will do – and while this may boost the drive to renewables in the medium and long term, the imperative to keep the lights on in German and French factories this winter trumps any previously espoused emission target.
However, there is one area where the war – and the subsequent realignment of global political and economic blocs – is helping to accelerate a core environmental, social and governance aim: it is boosting the rationale for US and European companies to find manufacturing supply sources closer to home, following on from the supply-chain chaos caused by the pandemic.
The fragility of long supply chains has been shown to be a clear and present danger. That more closely integrated operations are also preferable for a more sustainable supply chain just adds a further incentive for firms to near-shore their operations.
This has driven a complete reversal of the macroeconomic thrust to globalization that prompted one of Bill Clinton’s advisers in the 1992 election to observe: “It’s the economy, stupid.”
As one commodity trade finance banker observes: “Today, it’s the politics, stupid.”
Opportunities
Sanctions on goods, protectionism on raw materials and the weaponization of energy and currencies all mean that the driving economic theory of globalization – that free trade and production specialism lowers the cost of production for developed economies – is dead.
Now, security of access to commodities and manufacturing capabilities will trump lower unit costs – even to the point where large US companies import inflation as a geographic economic cost. The transfer of technologies – either through outsourcing production or simply allowing M&A from companies in non-aligned countries – will make all such trade decisions politically based, not economically.
Finance is relearning the importance of geography in this post-globalized world
In Latin America, there is much discussion about the opportunities that near- shoring could bring to the region. Its relative proximity to North America and Europe is an advantage. The rule of law and respect for democratic institutions remains largely solid, but with some obvious exceptions.
Many countries have labour costs that are already more competitive than China’s. Opening up to trade at this point in the global economic cycle also offers huge upside risks for policy-makers who embrace bilateral trade relations with the US and Europe.
Finance is relearning the importance of geography in this post-globalized world. “Look at Turkey – its importance today isn’t because Erdogan is some kind of strategic genius – it’s just a fact that Turkey is the key to the Bosporus,” points out the banker. “All these trading routes are physical. In the recent years of digital contracts and unfettered trade routes, we’ve just forgotten how fundamentally important geography always was to power relationships. We’re remembering that fast, now.”
A golden age
Despite the talk about near-shoring, however, there has been very little action. It takes time for global companies to disentangle global supply chains, to run-off and close manufacturing operations in Asia and start anew elsewhere. But there is also a growing view among the business community that the leaders of Latin American countries have been slow to grasp the opportunity for foreign investment that this trend could have for national economies and the region as a whole.
“Our leaders should be in Washington every week, leading delegations to open up our markets, to make deals to ensure these flows happen and happen for the long term,” says another regional banker. “We talk about lost decades in LatAm, this time we could be losing the opportunity to turn the next 10 years into a golden age of trade and growth.”