Friday Nov 22, 2024

EP89: Winners and Losers: The Global South's Future in the Era of Nearshoring

Summary:

In this episode, we discuss the concept of the "Global South," which encompasses countries outside of Europe and North America, often characterized by lower income and development. We explore the potential impact of reshoring and nearshoring on these countries, examining the opportunities and challenges they face. Some Global South countries are well-positioned to benefit from these trends due to factors like proximity to major markets, a skilled workforce, and government incentives. However, other countries, hindered by political instability, infrastructure deficiencies, and economic turmoil, may struggle to attract investment. We argue that the future of the Global South depends on its ability to leverage its demographic and resource advantages, while simultaneously addressing structural issues to ensure a central role in the evolving global economic order.

Questions to consider as you read/listen:

What are the main factors influencing the Global South's future in the context of reshoring and nearshoring?
How are countries in the Global South positioned to gain or lose from the shifting global supply chain?
What are the key challenges and opportunities facing the Global South in achieving economic growth and development?

Long format:

Winners and Losers: The Global South's Future in the Era of Nearshoring

By Justin James McShane

TL;DR:

The Global South refers to countries outside Europe and North America, often characterized by lower income, high population growth, and underdevelopment, but increasingly contributing to global economic growth. While some countries like Mexico, Vietnam, and India are positioned to benefit from trends like reshoring and nearshoring, others, such as South Sudan, Haiti, and Venezuela, face barriers like political instability and poor infrastructure. Countries with strategic locations, growing populations, and improving industries stand to gain, while those hindered by internal challenges risk being left behind. The Global South's future depends on leveraging demographic and resource advantages while addressing structural issues to play a key role in the global economic shift.

What is the Global South and its future in the face of restoring and nearshoring?

Introduction

Although the term may be going out of style, the term "Global South" encapsulates a dynamic and diverse group of nations that lie outside the traditional Western economic and geopolitical spheres of influence, including much of Africa, Asia, Latin America, and Oceania. Historically associated with underdevelopment and marginalization, the Global South is undergoing a transformation, marked by demographic shifts, economic growth, and increasing geopolitical relevance. As global supply chain dynamics evolve through reshoring and nearshoring, opportunities and challenges emerge for these nations. This paper explores the current landscape of the Global South and its future role in global trade, focusing on how nations within this grouping stand to gain—or lose—from the trend toward manufacturing relocation closer to primary markets.

Information

The Global South is a term used to describe the countries outside of Europe and North America, which are often low-income and marginalized. It includes countries in Africa, Asia (excluding Israel, Japan, and South Korea), Latin America and Oceania (excluding Australia and New Zealand).

The term was first used in 1969 by political activist Carl Oglesby, and gained momentum after the breakup of the Soviet Union in 1991.

The term is used to group countries with common positions on global issues, and to describe global divisions. It's based on a mix of political, economic, and geopolitical commonalities.

These countries are generally thought of as less developed. As a rough generality, they feature lower incomes, high levels of poverty, high population growth rates, inadequate housing, limited educational opportunities, deficient health systems and poor infrastructure in cities.

The four largest economies in the Global South are China, India, Indonesia and Brazil. Other notable economies include Argentina, Mexico and Chile.

Features of the Global South

Countries within the Global South, particularly in Asia, are experiencing significant economic growth. They now contribute a substantial portion of global GDP growth, with some projections indicating that by 2030, several of the largest economies will be from the Global South (e.g., China, India, Indonesia). This shift in economic power is altering global trade dynamics and financial flows.

The Global South has a large, young, and growing population. This demographic advantage provides a vast labor force, a growing consumer market, and an increasing influence in global issues due to sheer numbers.

Many countries in the Global South are rich in natural resources, including minerals, oil, and agricultural products, which are crucial for global industries, especially in the context of transitioning to green energy and sustainable agriculture.

There is an increasing trend of South-South cooperation where countries in the Global South collaborate directly, bypassing traditional North-South dependencies. This includes trade, technology transfer, and cultural exchanges which empower these nations to have a more significant say in global affairs.

Many Global South countries are expressing dissatisfaction with policies from the Global North, especially regarding issues like climate change responsibilities, trade rules, and geopolitical alignments. This has led to a strategic distancing or alignment with non-Western powers like China and Russia, which present themselves as alternatives to Western hegemony.

China and the Global South

China aims to expand its market access. The Global South represents a vast consumer base with growing middle classes, which is particularly attractive for Chinese exports. Many Global South countries are rich in natural resources essential for China's industrial needs. Securing access to metals, minerals, oil, gas, and agricultural products is a key driver for Chinese investments. Through the BRI, China seeks to create a network of trade and infrastructure routes connecting Asia with Africa and Europe via land and sea. This initiative not only facilitates trade but also enhances China's geopolitical influence. China promotes its development model, dubbed the "China Model" or "Beijing Consensus," as an alternative to Western liberal capitalism. This model emphasizes state-led development, infrastructure investment, and less focus on political liberalization, which appeals to many Global South governments. China's involvement sometimes includes providing security assistance, which can be seen in anti-piracy operations off the coast of Africa or military base development in countries like Djibouti. Some critics refer to China's lending practices as "debt-trap diplomacy," where countries are given loans for infrastructure projects, potentially leading to strategic advantages or influence over debtor nations, although this perspective is debated. China has built strategic partnerships with countries in the Global South through forums like the Forum on China-Africa Cooperation (FOCAC), which foster economic, political, and cultural ties.

US and the Global South

The United States' engagement with the Global South is a nuanced topic, and while there are areas where the U.S. appears less engaged compared to other global powers like China, it's not entirely accurate to categorize the U.S. as disengaged. The U.S. maintains diplomatic relations with nearly all countries in the Global South. It engages through various bilateral and multilateral platforms, including the United Nations, G20, and regional organizations like ASEAN, OAS, and the African Union. Trade with the Global South is significant for the U.S. For example, trade with Latin America and the Caribbean is substantial, and Africa has been identified as a region of strategic importance for future economic partnerships. Initiatives like the African Growth and Opportunity Act (AGOA) aim to facilitate trade. The U.S. remains one of the largest providers of foreign aid to developing countries, through agencies like USAID (U.S. Agency for International Development). Programs focus on health, education, agricultural development, and governance, aiming to promote stability and economic growth. The U.S. has extensive military and security cooperation with countries in the Global South, including joint exercises, training, equipment sales, and counter-terrorism initiatives. This is evident in regions like Africa through operations like AFRICOM. Some argue that the U.S. has not kept pace with China's rapid expansion of economic and infrastructural influence in Africa and parts of Southeast Asia and Latin America. Public opinion in many Global South countries shows mixed feelings about U.S. engagement. While some view the U.S. as an essential partner, others see it as part of an old order that does not address current global realities or their specific needs.

Reshoring and Nearshoring in the Global South

Reshoring and nearshoring, where companies move production back to their home countries or to neighboring countries, respectively, can have several impacts on the Global South. Some Global South countries might benefit from increased foreign direct investment as companies look for alternative locations closer to their primary markets. Countries like Mexico, Vietnam, and parts of Eastern Europe have already seen benefits from this trend. If nearshoring leads to a spread of manufacturing away from traditional powerhouses like China, it could provide an opportunity for other Global South countries to diversify their economies, reducing dependency on single industries or markets. With companies setting up more advanced manufacturing facilities closer to home or in nearshore locations, there might be a transfer of technology and skills to the workforce in these regions, potentially leading to higher value-added industries. To attract foreign direct investment, countries will improve infrastructure and education, which can have long-term benefits for the local economy beyond just manufacturing.

The countries in the global south who would benefit from resorting and nearshoring

Several countries in the Global South are positioned to potentially benefit from reshoring and nearshoring due to a mix of geographical, economic, political, and infrastructural advantages.

The clear potential winner in North America is Mexico. Proximity to the U.S., part of the USMCA (United States-Mexico-Canada Agreement), a large and skilled workforce, and existing manufacturing infrastructure make Mexico a top candidate for nearshoring. It has already seen an increase in manufacturing projects from both automotive and electronics sectors moving from Asia will help Mexico benefit from nearshoring.

In Latin America, Costa Rica, Brazil and Chile are likely “winners” despite their demographic issues. Costa Rica has a strong focus on high-tech and medical device manufacturing, stable political environment, and high-quality human capital. Brazil has a very large internal market with natural resources in abundance. Infrastructure, bureaucracy and logistics are its main challenges other than demographic decline. Chile is also ready to benefit from nearshoring as will as it is known for its economic stability, business-friendly environment, and improvements in infrastructure, making it attractive for certain industries looking to diversify supply chains.

In Southeast Asia, the clear potential beneficiary from nearshoring will be Vietnam. Vietnam has competitive labor costs, government incentives for manufacturing, a growing middle class for domestic consumption, and strategic location. It's becoming a significant manufacturing hub for electronics. Vietnam labor costs significantly less than China labor costs. In 2024, the average hourly labor cost in Vietnam is around $2.99 compared to $6.50 in China, making Vietnam the cheaper option for manufacturing labor. Also ready to benefit from reshoring is Malaysia, Thailand and Indonesia. Malaysia has a well-developed infrastructure, political stability, and an established manufacturing base, particularly in the electronics sector. Thailand is also attractive because it is strong already in automotive and electronics manufacturing, has good logistics and infrastructure, and is part of ASEAN which facilitates regional trade. Indonesia has a large labor force, significant domestic market, and government efforts to attract manufacturing with incentives.

In South Asia, India is king. India has a large, skilled labor pool, government initiatives like "Make in India", improvements in infrastructure, and a burgeoning tech sector. It's looking to diversify beyond IT services into manufacturing. Companies like Apple are considering moving its operations to India.

In Africa, Ethiopia and South Africa are the likely “winners” of nearshoring. Ethiopia has very low labor costs. The government is making a major push towards industrialization and is heavily investing in industrial parks. South Africa has violence and income distribution related issues but it has advanced manufacturing capabilities, particularly in automotive, and is a gateway to broader Africa.

The countries in the global south who will not benefit from resorting and nearshoring

There are some countries in the Global South that will not do well in reshoring and nearshoring. This is due to demographic decline issues, proximity to major markets, infrastructure deficits and political and economic instabilities.

In Africa, Burundi, political instability, internal conflict, and poor infrastructure make it less attractive for foreign direct investment. The Central African Republic (CAR) features ongoing conflict, lack of stability, and minimal infrastructure development. Eritrea has highly restrictive economic policies, limited infrastructure, and focuses on military rather than economic development. South Sudan is embroiled in a constant state of civil war with economic instability, and almost non-existent industrial base.

In South and Central Asia, Afghanistan has well known and diverse ongoing security issues, political instability issues, and underdeveloped infrastructure . All of these deter investment. Yemen is a failed state that is in a state of civil war with economic collapse, and a large humanitarian crisis that overshadow any potential for industrial growth. Plus, the Houthi rebels have turned away shipping in the Red Sea and has destroyed the image of the country as anything other than a rouge and dangerous stateless state.

In Latin America and the Caribbean, Venezuela is a disaster. It features an economic crisis with political instability, hyperinflation, and is under international sanctions which greatly limit its attractiveness for new industrial investments even in the oil and gas sector. Haiti has been rocked recently by large scale political instability, natural disasters, extreme poverty, and lack of infrastructure.

Argentina

Some folks point to the demographics and the geography as a potential “winner” in the Global South. However, when one looks at the data, we see some significant headwinds outside of demographics that makes Argentina not as attractive for direct foreign investment. Argentina has experienced significant economic volatility, including high inflation rates, currency devaluations, and frequent changes in economic policy. Argentina's geographical location is not as advantageous for nearshoring to the U.S. as Mexico, given the distance. However, this doesn't preclude it from benefiting from trade within South America or from potential reshoring activities by European or other South American companies. Argentina has a significant domestic market which can be an attraction for some businesses looking to nearshore for market access rather than just production for export. But the economic policies, including protectionism at times, can deter foreign investment. The unpredictability of government policies, including sudden changes in foreign exchange controls and import barriers, can make it challenging for businesses to plan long-term investments. While labor costs are relatively competitive, labor laws and regulations can sometimes be seen as restrictive, which might influence companies' decisions on where to invest. Without significant reforms, continued economic instability might prevent it from fully participating in or benefiting from these global trends, potentially positioning it more as a bystander unless it carves out a niche in specific industries. Hyperinflation scares business. Full Stop.

Conclusion

The future of the Global South in the context of reshoring and nearshoring is a complex interplay of economic potential, geopolitical positioning, and structural readiness. While countries such as Mexico, Vietnam, and India appear poised to benefit significantly from these trends, others, constrained by instability or inadequate infrastructure, may struggle to capitalize on the shifting global supply chain. The rising importance of the Global South underscores its growing influence on the global economy, with some nations emerging as critical hubs of production and innovation. To maximize these opportunities, targeted investments in infrastructure, education, and governance will be essential. Ultimately, the trajectory of the Global South will depend on its ability to leverage its demographic and resource advantages to carve out a central role in the evolving global economic order.

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