Which sectors are most at risk from the rise of ‘neo-protectionism’?

Posted by Sino SCS

High-tech industries and sectors with high levels of research and development are most at risk of a “significant” reduction in cross-border investment following repeated supply chain shocks, according to a report.

Government measures aimed at increasing controls over incoming investment as well as Covid-19 measures have had a “statistically significant negative effect on cross-border investment”, a report has claimed.

Consequently, foreign direct investment (FDI), in which companies from one country establish new operations in another, and cross border investment projects fell by 30% in 2022 compared to the median recorded in 2019 before the pandemic. 

Job roles associated with these projects fell by 34%, and the value of capital expenditure companies put towards these projects fell by 29%, the report revealed.

Data processing, professional and technical services, “miscellaneous” manufacturing, telecommunications and transportation support activities were the sectors which saw the greatest gain in their share of global FDI projects.

Meanwhile, credit intermediation, transportation equipment manufacturing, nonmetallic mineral product manufacturing, rental and leasing services, and accommodation were the sectors which saw the greatest loss in their share of global FDI projects.

Petroleum and coal manufacturing, warehousing and storage, and the oil and gas extraction sectors also saw their share of global capital expenditure for FDI projects fall by 50% or more, the greatest fall in capital expenditure share of all studied sectors. 

Logistics analyst Transport Intelligence’s CEO, John Manners-Bell, told Supply Management the report reinforces a “long-term trend of increasing numbers of protectionist barriers,” which he warned will have “significant” impacts on global trade.

The report highlights an “acceleration” of deglobalisation, he explained. “A lot of government regulation, and the rise of neo-protectionism, are already having a significant impact on global trade flows. Protectionism is not good for anyone. It really is a roll back to the policies which were endemic during the postwar period and right up into the 1970s.”

These “neo-protectionist policies” are a result of governments attempting to protect national security and health following the pandemic and its associated supply chain shocks. 

The report identified a 2.6 percentage point drop in the probability of cross-border investment as a result of these policies, pointing to a possible “cumulative effect” of supply-chain disruptions and changes to market access rules.

Moreover, this drop has disproportionately impacted emerging economies, and increased the negative effect a large distance between countries has on potential FDI.

“Learning about business opportunities, locating suitable suppliers and clients and navigating administrative requirements for doing business further from home is subject to information frictions,” the report explained. “Geographic distance… [is associated with] coordination costs from cross-border trade and multinational activity, and is documented to cause lower trade and investment. A rise in the role of distance can, therefore, be indicative of a rise in such costs.”

Manners-Bell added that the “losers” of global trade “will be emerging markets”. 

“Supply chain shocks caused a lot of importers, retailers, and manufacturers to really reappraise their supply chains and start looking to regionalise those supply chains in order to mitigate supply chain risk,” he explained. “The political environment has changed very significantly towards one which is far more fragmented, and so supply is becoming fragmented.

“We could talk about nearshoring, but we could also talk about friendshoring, for example, or ally-sourcing. The world is fragmenting politically as well as economically, and that’s having a big impact on supply chains.”

Nonetheless, he added that companies would have to get used to this new environment, and learn how to navigate complexity better than ever before. He advised firms “focus in on supply chain risk as the core of the business” and change their perceptions on the importance of lean inventory towards resilience.

The OECD report identified the degree of change in FDI each sector had seen in terms of global share of projects as a result of supply shocks and subsequent policy shift.

Author Sino SCS
中品供应链-Sino Supply Chain Service