Deglobalization Would Be Bad for Equities. But Its Not Here Yet. – Barron’s

The demise of globalizationif truecould not come at a less propitious time for U.S. businesses. Illustration by Rob Dobi

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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 U.S. 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 U.S. 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 U.S. multinationals. Americas 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 U.S. firms.

Going global became the mantra of many U.S. 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.

U.S. foreign affiliates have led the charge overseas. The global foot soldiers of U.S. 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.

Americas army of affiliates are an economic powerhouse unto themselves, producing nearly $1.5 trillion in output in 2019. Thats equivalent to the total output of Brazil or Spain. They employ nearly 15 million workers, with sales of U.S. foreign affiliates totaling $6.8 trillion in 2019, a figure some 2.5 times greater than U.S. exports of goods and services. The difference underscores how U.S. companies primarily deliver their goods and services to foreign customersvia investment and affiliate sales, not through arms-length trade (exports).

The bulk of these affiliatesroughly 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 U.S. affiliate sales are to the local marketrather than for export back to the U.S. Affiliates arent standalone entities but integrated with U.S. parent entities via global supply chains. These linkages promote cross-border trade in goods and services, which in turn supports U.S. exports and attendant investment and employment activities in the U.S.

Given all of the above, the demise of globalizationif truecould not come at a less propitious time for U.S. businesses. Confronting one of the tightest labor markets in decades, the last thing U.S. companies need is less access to foreign talent. Short of critical raw materials, U.S. companies cant afford to be locked out of certain resource-producing markets. And with Americas 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 U.S. businessesand very beneficial to the U.S. economy in general.

While globalization has motivated U.S. firms to venture abroad, it has also encouraged firms to come to America. No countryincluding Chinahas attracted more foreign investment capital than the U.S. since 1980. Portfolio foreign inflows have been just as robust over the decades, helping to finance Americas perennial budget deficits. At the end of 2020, inward FDI stock in the U.S. totaled a staggering $10.8 trillion, or 26.1% of the global total.

And based on recently released figures from the BEA, both U.S. 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. Thats another way of saying that if globalization is dead, someone forgot to tell the worlds 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-U.S. resources. To paraphrase Mark Twain, the death of globalization has been greatly exaggerated. For now, that is bullish for U.S. equities, since a sharp turn toward deglobalization would come at a steep cost to the U.S.

Guest commentaries like this one are written by authors outside the Barrons and MarketWatch newsroom. They reflect the perspective and opinions of the authors. Submit commentary proposals and other feedback toideas@barrons.com.

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Deglobalization Would Be Bad for Equities. But Its Not Here Yet. - Barron's