The demise of globalization—if true—could not come at a less propitious time for US businesses.
Illustration by Rob Dobic
Text size
About the author: Joseph Quinlan is head of CIO market strategy in the Chief Investment Office for Merrill and Bank of America Private Bank.
Nothing is more fashionable these days than writing the obituary for globalization† The ensuing tragedy would leave lasting scars on the US But missing from the debate about deglobalization is this: If the world of unfettered, cross-border flows of goods, services, people, capital, and data is really a thing of the past, then one of US businesses’ biggest bets of the postwar era is about to go bust.
No entity in the world has wagered more resources on globalization over the past four decades than US multinationals. America’s stock of outward foreign direct investment rose from $215 billion in 1980 to $8.1 trillion in 2020, according to figures from the United Nations. The Netherlands, with some $3.8 trillion in FDI stock in 2020, was a distant second, underscoring the fact that no one has a larger global footprint than US firms.
Going global became the mantra of many US companies as the world of the late 20th century was unlocked by falling trade barriers, investment reforms, industry liberalization, falling communications and transportation costs, and the proliferation of regional trading blocs. These structural dynamics were complemented by seminal, one-off events such as the opening of China, economic reforms in India, the enlargement of the European Union, and the collapse of communism.
US foreign affiliates have led the charge overseas. The global foot soldiers of US businesses, these foreign affiliates can now be found in virtually every country in the world, and numbered nearly 39,000 in 2019, according to the latest data from the Bureau of Economic Analysis.
America’s army of affiliates are an economic powerhouse unto themselves, producing nearly $1.5 trillion in output in 2019. That’s equivalent to the total output of Brazil or Spain. They employ nearly 15 million workers, with sales of US foreign affiliates totaling $6.8 trillion in 2019, a figure some 2.5 times greater than US exports of goods and services. The difference underscores how US companies primarily deliver their goods and services to foreign customers—via investment and affiliate sales, not through arms-length trade (exports).
The bulk of these affiliates—roughly 60%—are situated in the developed nations, notably the European Union. When it comes to venturing overseas, companies are more interested in gaining access to wealthy consumers and skilled workers, as opposed to chasing low-cost labor. Accordingly, roughly 90% of US affiliate sales are to the local market—rather than for export back to the US Affiliates aren’t standalone entities but integrated with US parent entities via global supply chains. These linkages promote cross-border trade in goods and services, which in turn supports US exports and attendant investment and employment activities in the US
Given all of the above, the demise of globalization—if true—could not come at a less propitious time for US businesses. Confronting one of the tightest labor markets in decades, the last thing US companies need is less access to foreign talent. Short of critical raw materials, US companies can’t afford to be locked out of certain resource-producing markets. And with America’s share of global personal consumption in a structural decline, the future earnings growth of many multinationals hinges on access to consumers in both the developed and developing nations. In the end, globalization has been hugely bullish for US businesses—and very beneficial to the US economy in general.
While globalization has motivated US firms to venture abroad, it has also encouraged firms to come to America. No country—including China—has attracted more foreign investment capital than the US since 1980. Portfolio foreign inflows have been just as robust over the decades, helping to finance America’s perennial budget deficits. At the end of 2020, inward FDI stock in the US totaled a staggering $10.8 trillion, or 26.1% of the global total.
And based on recently released figures from the BEA, both US FDI inflows and outflows rebounded strongly in 2021. The former hit $368 billion, the strongest level since 2016, while the latter topped a record annual level of $403 billion. That’s another way of saying that if globalization is dead, someone forgot to tell the world’s top multinationals. If globalization were truly deceased, the S&P 500 index would be down a lot more than the 18% decline from the peak set in January 2022. The good news is that the markets have not bought into all the hype about deglobalization.
That said, multinationals confront a much more challenging environment than in the past, given rising nationalist calls for “reshoring,” economic self-sufficiency, and the promotion of national champions, among other policy pressure points. Companies are not deaf or blind to these tensions. Neither are the markets.
Companies are focused on building more resiliency into their supply chains, but in many cases, that means relying more on foreign labor, overseas markets, and non-US resources. To paraphrase Mark Twain, the death of globalization has been greatly exaggerated. For now, that is bullish for US equities, since a sharp turn toward deglobalization would come at a steep cost to the US
Guest commentaries like this one are written by authors outside the Barron’s and MarketWatch newsroom. They reflect the perspective and opinions of the authors. Submit commentary proposals and other feedback to ideas@barrons.com.
†