Globalisation and supply chains
Four decades in which production was split across borders to wherever it was cheapest. The consequences for prices, wages and fragility are still being argued about.
A finished product today is rarely made in one place. Components cross borders several times before assembly, and the location of each step was chosen for cost, skill or proximity. That arrangement was built deliberately over roughly forty years, and it is now being partially unwound — also deliberately.
The economic case
The underlying argument is comparative advantage: even if one country is better at making everything, both countries gain if each specialises where its relative disadvantage is smallest and they trade. The logic is two centuries old and it is not seriously disputed as arithmetic.
Trade integration reliably raises total output. It also reliably produces concentrated losses — specific industries, in specific towns, over a short period — against diffuse gains spread across every consumer as slightly cheaper goods. Economics predicted both halves. Policy in most countries attended to the first and largely neglected compensating the second, which is a substantial part of why the politics turned.
The effect on prices
Moving manufacturing to lower-cost economies, and adding a very large workforce to the globally tradable labour pool, exerted sustained downward pressure on goods prices. Across the period, goods inflation in advanced economies ran persistently below services inflation, and that wedge did real work in keeping headline inflation low.
Which raises an uncomfortable question about the decades of low inflation that followed: how much was skilful monetary policy, and how much was a one-off supply-side windfall that central banks took credit for? The honest answer is that both contributed and the split is contested. See supply shocks.
The effect on wages
For workers in tradable manufacturing in high-cost economies, exposure to global competition weakened bargaining power directly. For workers in non-tradable services, the effect was largely absent. That asymmetry is one candidate explanation for why measured productivity and median real wages diverged in several countries — a divergence with several competing explanations and no settled one. See wage growth.
Efficiency against resilience
Holding little inventory releases working capital and removes storage cost, which is why the practice spread. It also removes the slack that absorbs disruption. A system optimised for average conditions performs worse than a buffered one under stress, and that is not a flaw in the optimisation — it is what was being optimised for.
A sequence of disruptions made the trade-off visible: a single component shortage can halt an assembly line, and a single chokepoint can hold up a large share of world trade. Firms responded by holding more inventory, dual-sourcing, and moving production closer to demand.
Reshoring, and what it costs
- Higher costs. Production moves to where it was not cheapest, by definition. Some of that reaches consumer prices.
- Capital intensity. Reshored manufacturing is generally more automated than what it replaces, so it returns fewer jobs than the ones that left.
- Duplication. Maintaining parallel capacity in several regions is resilient and expensive at the same time.
- Slower, not reversed. Trade in services and in digital goods has continued to grow even where goods trade has flattened.
What it means for an investor
A company's cost base, tax rate and political exposure all depend on where it produces and where it sells — and the consolidated accounts blend that away. Segment reporting by geography is where the exposure becomes visible, and it is worth reading for any business with concentrated production in one country and demand in another.