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There has been a steady drip of news stories regarding China’s weakening economy recently; there are several reasons as to why this is happening. 

The troubles of China’s overleveraged property sector are well documented. China has failed to transition to a domestic, consumption-driven economic model. Some feel that the recent weak data signifies the end of China’s free market experiment and the beginning of a potentially dramatic decline driven by demographic collapse; China’s population is predicted to halve by the end of the century.

Under Xi Jinping, China has become more authoritarian. China has always stayed in its Leninist system of Government, where the CCP has a say in everything and property rights are at the whim of the Government. These facts, COVID-19 and Russia’s invasion of Ukraine, have given foreign companies pause for thought on their investments and exposure to China.

In turn, this feeds into a growing economic narrative of deglobalisation, where it starts getting more interesting for the Welsh economy.

What Drove Globalisation?

Decisions on industrial investment are driven by the relationships between:

  • Political stability and certainty of property rights
  • Cost and availability of labour
  • Cost and availability of energy
  • Cost and availability of transport
  • Cost and availability of capital
  • Cost and availability of technology
  • Cost and availability of raw materials

Between 1990 and 2019, energy was cheap and plentiful, containerised global shipping was cheap and, more importantly, secure capital was cheap. Worldwide communication and travel made technology easily transferrable, and raw materials could be shipped anywhere cheaply.

In this post-Soviet world, where almost every country signed up to the WTO and Pax-Americana, the US Navy guaranteed global shipping and energy security. Industrial investment decisions were driven by the only significant variable: the cost and availability of labour.

In this environment, the entry of 500 million low-cost Chinese workers into the global labour market won out, with human labour-intensive manufacturing relocating to China en mass.

What is Changing?

The economic and political environment that has driven industrial relocation and globalisation for the last 30 years is now deteriorating. We have left a low-risk world of plenty, and we are entering a new era of increasing risk, uncertainty, and resource competition.

Energy costs and political stability are now more critical factors in industrial location than labour costs. Covid exposed the risks of extended supply lines. Technology is becoming a nationally significant resource, with governments implementing protectionist policies. Global capital markets are under strain, and capital flight is increasing. 

Political stability is deteriorating with the rise of ethno-nationalism and populism. Any company that invested in Russia is learning the hard way that the rule of law and property rights may mean nothing. 

Finally, the security of global shipping is looking increasingly fragile. The Black Sea, the South China Sea, the Sea of Japan, the Strait of Hormuz, the Arctic and the Baltic Seas are all hot spots of increasing military posturing.

As technology now reaches a tipping point where machines and computers can replace most unskilled labour, all of the above trends point towards a new era of deglobalisation, where everything other than the cost of labour matters most.

The US is leading the reversal of the globalisation trend; energy self-sufficiency in North America is a game changer. Machinery can now replace cheap, unskilled labour in most industries. Whatever oil price on the market, the US economy now produces energy at cost.

Suppose energy cost, transport security, political stability and technology outweigh labour costs in the manufacturing value chain. In that case, the US will be the big winner. Where cheap, low-skilled human labour is still required, resources remain available within and around the country. Energy self-sufficiency also means the US has far less incentive to spend vast amounts guaranteeing global shipping security.

Could the Welsh Economy Ride this Wave?

As energy costs, access to carbon-neutral energy, and political stability become the most critical factors in determining manufacturing investment, Wales should have a global competitive advantage. Regarding wind and tidal power, Wales is one of the best-placed countries in the world.  

However, Wales faces a few challenges regarding becoming a major winner from the onshoring trend. Lack of barrier-free access to the EU or the US is the most significant risk to Wales missing out on the benefits of deglobalisation. 

Next is the sluggishness in our ability to create a genuine renewable energy grid in Wales. While things like the Celtic Freeport could be essential building blocks in creating an economic strategy to benefit from these trends, the UK and Wales’s lack of a clear economic and industrial strategy risks holding us back.

A net-zero strategy that considers that most of the carbon footprint of what we consume is created outside of Wales and the UK would be the obvious starting point. The Welsh Development Agency remains contentious, with many lamenting its loss. The truth is that the demise of the WDA was inevitable due to the expansion of the EU in the early 2000s – labour costs in eastern European countries massively undercut the attractiveness of Wales for foreign direct investment. Now could be the time to examine how Wales attracts investment to ensure we take advantage of emerging economic trends.