The rapidly transforming global economy presents a significant paradigm shift, with a focal point being the de-risking of supply chains. While it’s faced with skepticism, many believe that it can occur without generating a significant shockwave throughout the global economic structure.
The Emergence of a Multipolar World
Over the past half-decade, there has been a noticeable shift towards a multipolar world, a state of the world that is deeply rooted and continues to solidify. In this new world order, security overtakes economic efficiency as the central concern for policymakers, driven by the dominant U.S.-China rivalry and the ripple effects of Russia’s war in Ukraine.
Technology and Sovereignty
In this dynamic scenario, distinct boundaries are drawn over technology, especially those resulting from highly globalized research and development programs. These divisions emphasize the transformation of global power dynamics, reflecting a shift from the economics-driven global interdependence of the past to a more geopolitically-centered era.
Addressing Global Market Imbalances
The Covid-19 pandemic has underscored the necessity for a significant change in the global economic structure, drawing attention to the imbalances and concentrations that have been present in global market shares since the 1990s. To amend these discrepancies, we require a shift in perspective and method, necessitating substantial investment to de-risk supply chains.
The Financial Implications of De-risking
Investments to the tune of $1.5tn are projected to de-risk supply chains, including those involved in advanced semiconductors and critical minerals. The global electric vehicle battery industry will need a whopping $7tn over the next two decades. Nevertheless, since 2021, over $2tn has already been invested in clean energy, backed by more than $500bn in government incentives.
Navigating Policy Tools in a Multipolar Economy
To aid this endeavor, policymakers have started to assemble a multipolar policy toolkit to channel resources, comprising massive subsidy programs, enhanced export and investment controls, and novel regulatory frameworks.
Maintaining Technological Collaboration Amid Transitions
To ensure a smooth transition from the globalized regime, policymakers need to foster a healthy collaboration with the corporate sector, focusing on the most vital nodes. It’s of utmost importance to maintain the collaboration that has been a driving force behind technological breakthroughs.
The Silver Lining Amid the Challenges
In the face of the challenges, there are several reasons to be optimistic. First, these immense capex programs around the world will fuel global growth and create a fresh catalyst for demand and employment. Second, the intense competition in the realm of emerging technologies is expected to drive productivity. Lastly, the additional capacity brought about by alternative supply chains will balance out their higher costs.
The Synergy of Policy Support and Technological Progress
Our analysts predict a fall in green electricity generation costs through 2030. The capital costs for wind and solar generation will decrease by 50%, making them 35% cheaper than fossil fuels on average. Additionally, the cost of lithium-based electric vehicle battery storage is anticipated to drop almost 40% below current levels by 2030.
Navigating the Risks of Global Decoupling
The risk of comprehensive global decoupling looms large due to the potential weaponization of economic interdependence amid current conflicts. This could fuel a cycle where one country’s defensive actions reinforce the concerns of trading partners, leading to counterproductive trade policies.
The Path Forward: Communication and Compromise
Avoiding such a scenario will require international communication and compromise. We believe the end goal of de-risking supply chains can be achieved through higher inventory buffers and greenfield capex, diversifying and boosting production capacity. This outcome could result in a multipolar economy that’s more resilient and balanced than the globalized world it supersedes.
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FAQ
What is the importance of de-risking supply chains in the global economy?
Investments to the tune of $1.5tn are projected to de-risk supply chains, including those involved in advanced semiconductors and critical minerals. The global electric vehicle battery industry alone will need a whopping $7tn over the next two decades. Nevertheless, since 2021, over $2tn has already been invested in clean energy, backed by more than $500bn in government incentives.
What are the silver linings amid the challenges of de-risking?
First, these immense capex programmes around the world will fuel global growth and create a fresh catalyst for demand and employment. Second, the intense competition in the realm of emerging technologies is expected to drive productivity. Lastly, the additional capacity brought about by alternative supply chains will balance out their higher costs.
How can we navigate the risks of global decoupling?
Avoiding such a scenario will require international communication and compromise. We believe the end goal of de-risking supply chains can be achieved through higher inventory buffers and greenfield capex, diversifying and boosting production capacity. This outcome could result in a multipolar economy that’s more resilient and balanced than the globalized world it supersedes.