18.01 Review

Beneficiaries of Reconfiguration: Instead of de-globalisation, the world awaits a change in the geography of trade and investment flows, which will strengthen the positions of a new group of developing countries

Experts have been talking about growing global geo-economic fragmentation, the beginning of which was marked by the US-China trade war and COVID-19, and which has been catalysed by Russia's aggression against Ukraine. However, this term is deeply inaccurate. A more careful analysis leads to the conclusion that a pool of beneficiary countries has emerged amid increasing geopolitical tension. While a number of countries, above all China, are losing investors and attractiveness as 'world assembly' workshops, others are rapidly attracting investment to establish new production facilities, importing components from China and exporting finished products to the EU and the US. The list of the most successful countries, connecting the two new geopolitical blocs, connector countries as Bloomberg calls them, includes Vietnam, Indonesia, Morocco, Mexico, and Poland. Thus, today it is more appropriate to speak not of the winding down of globalisation, but of its reconfiguration, as a result of which the economic positions of a new group of countries — those who can identify the new trend and take advantage of this ‘open door’ - will significantly strengthen. Russia could have been a potential member of this club if Vladimir Putin had not launched its aggression against Ukraine in 2014.

Geoeconomic relocation has been one of the main trends in global trade and the world economy in recent years. It would be wrong to link this process exclusively to the war in Ukraine and sanctions against Russia. It was triggered by the US-China trade war and growing investor concerns about the development of their strategic rivalry. The COVID-19 pandemic, which forced the world economy to rethink the geography of logistics chains, further contributed to it. It was only at the third stage that the Russian-Ukrainian war and sanctions gave impetus to this process. 

As Re:Russia has previously written, trade between the countries of the two blocs (sanctioned and non-sanctioned) grew several percent slower than between the countries within these blocs. Experts have been sounding the alarm about global geoeconomic fragmentation, which poses a serious threat to the world economy. The International Monetary Fund estimates the maximum damage from the breakdown of ties due to the division of the world into two blocs, coalescing around the US and China, at 7% of global GDP.

The majority (almost 70%) of top economists surveyed at the World Economic Forum in Davos expect fragmentation to accelerate in 2024: 86% believe that localisation of production and investment will increase, and 80% believe that the further formalisation of geoeconomic blocs is inevitable. However, as Re:Russia has already discussed, this watershed is unlikely to be along the lines of North-South or 'sanctions coalition-everyone else'. Rather, it is more about the reconfiguration of trade and investment flows. While some are losing investors, others are gaining them: analysts at Bloomberg Economics note that a group of countries, beneficiaries of this new confrontation, is forming before our eyes. They call them 'connectors' - a link between the two emerging blocs.

This trend is also noted in the UN report ‘World Economic Situation and Prospects 2024’. After the start of the US-China trade war in 2017-2018, the share of the Association of Southeast Asian Nations (ASEAN) countries in US exports began to grow amid a decline in China's share in American exports. The increase in tariffs on imports from China led local companies, such as Apple's assembly plants, to build production facilities and logistics centres in neighbouring countries. However, economic considerations, such as the rising cost of labour in China, have also contributed to this. As a result, shipments from ASEAN countries to the US even grew during the pandemic, the report notes. Two ASEAN countries — Vietnam and Indonesia — are among the most successful connectors according to Bloomberg Economics. In recent years, they have significantly increased imports from China and exports to the US or the EU, and have also shown higher rates of growth in foreign direct investment for establishing new ventures (so-called greenfield investment).

Bloomberg Economics analysts included five countries in their top list of connectors. In addition to Vietnam and Indonesia, these are Morocco, Mexico and Poland. Since 2017, they have attracted 10% of all greenfield investment, which is considered a remarkable achievement given that their combined GDP accounts for only about 4% of the global total (approximately $4 trillion, roughly equivalent to Germany or Japan), the Bloomberg Economics analysts note.

From 2017 to 2022, Vietnam increased its exports to the US by 174%, reaching $127.5 billion, and imports from China by 104%, reaching $147.6 billion. Almost a third of Vietnamese exports to the United States came from electronics, some of which are being produced by Chinese companies that have built new factories in Vietnam. For example, Foxconn, Apple's largest Chinese partner, is investing $1 billion in a factory to assemble MacBook computers in Vietnam. In 2022 alone, Vietnam attracted $25.9 billion of greenfield investment, a 21% increase compared to 2017. 

Thanks to free trade agreements with the United States and Canada, Mexico has, during the five years of the US-China trade war, also begun to transform into a major assembly hub for a variety of Chinese products — from automotive components to furniture items. Overall, greenfield investment in Mexico totalled $41 billion in 2022 alone, which is one and a half times higher than investment in 2017. Mexican imports from China in 2022 were 115% higher than in 2017, while exports to the US ($455 billion) increased by 45%.

Indonesia, Poland and Morocco are attracting Western and Chinese investment in electric vehicles, batteries and green technologies in general. Indonesia mines the nickel needed for battery production, while Morocco mines phosphates. Morocco attracted 15.3 billion greenfield investments in 2022, matching the total for the previous five years. Poland has successfully become the world's second-largest producer of batteries after China. The largest factory in the country was built by a subsidiary of the Korean LG, but its raw materials (in particular, graphite) are supplied by China. The finished products are supplied not only to Volkswagen Group and other European production facilities but also to Chinese companies. In addition, in 2025, the production of Chinese Geely cars will commence in Polish Silesia. Poland's exports to other EU countries have more than doubled in five years, reaching $257.8 billion, while Polish imports from China have doubled to over $38.2 billion. 

These five countries are not alone in their 'opportunistic' desire to capitalise on the US-China conflict; they just happen to excel at it, largely due to their geographical location, the Bloomberg Economics analysts conclude. Thus, it is more accurate to talk not about the winding down of globalisation, but about its reconfiguration, resulting in a significant strengthening of the positions of a new group of countries — those that managed to recognise this new trend and take advantage of the 'open door'. 

Russia could have been a potential member of this club if Vladimir Putin had not reclaimed the presidency in 2012 and launched its aggression against Ukraine in 2014. Russia simultaneously lies on the Sino-European trade route and has a place in the Asia-Pacific trade and investment forum. However, the Russian leadership has chosen to play the role of China's trade and political periphery, selling oil and gas to China at reduced prices in exchange for importing finished Chinese products.