What does a shifting world order globally mean for financial wellness locally?
“Globalization is not a choice. It is a reality. We are all in it, whether we like it or not… but I believe we have underestimated its fragility.” Kofi Annon, former Secretary General of the UN, said those words over two decades ago, but it has never rang more true than it does today.
Over the last 40 years, globalization has triumphed. It directly led to economic growth, shared technological advancements, and increased cross-border migration to economic prosperity. China and other developing countries rapidly increased their share of world trade and brought millions out of poverty. Globalization kept inflation tamed and rates low, spurring consistent and sustainable global borrowing and consumption.
Yet, we are now in the midst of a global reckoning. Increased inequality in developed nations has led to widespread frustration among blue-collar workers, reaching a dangerous level of tension with white-collar workers who benefited from globalization. Targeted xenophobia played a major role in the election of populists around the world, shifting political rhetoric towards nationalist sentiment and tightening borders. Environmental degradation continues to shine a light on lax global enforcement of regulations and create finger pointing between emerging and emerged markets. And finally, with regard to the United States’ hegemony, a non-democratic counterpart, namely China, has become a burgeoning economic powerhouse and an increasing risk to the established world order.
The last few years provided two major catalysts for change. First, the risk of global trade was laid bare when trade screeched to a halt during the pandemic. What started with challenges in sourcing PPE spread to supply chains in other critical industries, most notably semiconductors. Inflation skyrocketed for the first time in decades and consumers inevitably bore the brunt of price increases. Consequently, supply chain resiliency has been a strategic focal point for all major retailers and manufacturers coming out of the pandemic. Second, geopolitical tensions rose to levels not seen since the Cold War. Russia’s unprompted invasion of Ukraine forced the entire world to pick sides. While the U.S. has stood strongly with Ukraine, the rest of the world has remained much more neutral and China, in particular, has seemingly picked the other side.
The era of unfettered globalization has come to an end. And while globalization will not disappear, which is a great thing given all the benefits it provides, we will see more manufacturing jobs move back to the United States, geographically-close allies, such as Mexico, and ideologically-close allies, such as Europe. We are already seeing the beginnings of this trend, as foreign investors last year put more money into Mexico than China and Mexican imports to the U.S. increased a whopping 22% YoY. This process of “near-shoring” or “reshoring” has positive implications, such as greater control, faster turnaround times, fewer transportation risks, alignment of values, and positive environmental implications. It also has implications for financial wellness. Since the Great Financial Recession, average hourly earnings on an inflation-adjusted basis has barely budged (Chart #1). In fact, it is lower than it was in 2008 and this trend has been exacerbated with earnings growth lagging inflation in the past few years.
Across the border, bringing labor to Mexico can have incredibly powerful implications for financial wellness. As millions were lifted out of poverty in China, Mexican poverty rates decreased marginally in comparison (Chart #2). Shifting manufacturing trends can enable a transformation in Mexico similar to that of China.
However, perhaps higher inflation, perhaps lower productivity remain major risks of this shifting world order. Fintech solutions will play an integral role in ensuring a smooth transition to a new manufacturing regime and mitigating these risks. First, new SMB manufacturing businesses across the supply chain will be grappling with financial strains. This applies not only to new investment into Mexican manufacturing businesses ramping up, but also working capital loans to U.S. businesses which currently are plagued to the tune of over $900b in working capital constraints. The flow of money from production to sale needs to be cheaper and frictionless in order for SMBs to compete and ultimately dampen the inflationary effect of this transition.
Second, trucking logistics will come under stress as transporting goods and raw materials transitions from boats to trucks. Load management, invoice financing, payments, spend management, and optimized business analytics are all ways that fintech companies such as CloudTrucks, AtoB, Loop or Outgo are helping. Cross-border with Mexico will specifically come into focus where moving goods is even more complicated and regulated. Companies such as Nuvo Cargo are optimizing supply chain logistics specifically for this corridor with a thesis that having a specialty corridor pays dividends.
Third, businesses will remain global and need global operations. To be intentionally repetitive, globalization is not going away! Through technological innovations, business demand is actually becoming more global with greater access to new customer bases. In a world where supply chain resilience is imperative, that means businesses will try to build closer to wherever they are selling. For instance, a business selling in the U.S. and Europe may have two unique supply chains to improve redundancy and resiliency. These global businesses will need seamless global banking and fx exchange for an increasingly complex financial stack. Companies like Jeeves or Levro are solving the pain point of managing multiple geographies.
These are just a few of the ways fintech and fintech-adjacent solutions will play a role. If you’re building in a space that you think will benefit from the shifting world order, let me know!
On twitter @roosontheloos