Deglobalization Will Spur the Reorganization of Channels

The shift to regional trade networks will create greater complexity for channel strategists and operators.

By Larry Walsh

The world is getting smaller and more challenging as geopolitical tensions rise, accelerating the deglobalization trend and transforming the global economy into regional networks. This trend will realign the way trade and channels work, creating more challenges for channel strategists and managers operating across multiple regions.

Look no further than the United States’ southern neighbor, Mexico, for evidence of this regional realignment. According to the Federal Reserve Bank of Dallas, Mexico is the largest trading partner of the U.S. again for the first time in more than a decade, replacing China at the top of the list. The United States-Mexico-Canada Agreement (USMCA), which replaced the North American Free Trade Agreement (NAFTA), is a contributing factor.

In fact, China didn’t just fall out of the top spot. It slid to third place behind Canada on the list of U.S. trading partners. The deglobalization process that’s fueling the extraction of manufacturing from China to friendlier near-shore countries is a more significant catalyst. Many businesses are repatriating manufacturing to their home markets, considered more secure and cost-effective in their lines of communication.

Several factors are contributing to the deglobalization process, including the pandemic, which showed countries that they were overdependent on offshoring partners for critical materials and goods; the cost of shipping across the Pacific Ocean; rising costs in developing markets; and geopolitical tensions that are putting global trade at risk.

For the past two years, the U.S. has worked with allied and friendly countries around the world to create new, secure trading relationships that bypass rivals and troublesome areas. The intent is to ensure access to strong trading partners and critical resources, while reducing dependency on hostile and potentially unfriendly countries.

China is at the top of the list of potentially unfriendly countries. While many countries have enjoyed strong trading relationships with China for manufactured goods, economic and military policymakers see China as a threat. The Trump and Biden administrations have used tariffs and export bans on advanced technologies to slow China’s economic ascent. The U.S. recently banned American investments in the development of advanced technologies in China. These policies are making significant dents in China’s economic prowess.

But restrictive trade policies aren’t the only things slowing down China and accelerating deglobalization. While China remains a powerhouse and dominates many industries, including solar energy and electric vehicles, the Middle Kingdom is on shaky economic ground. Its economy is slowing rapidly, ending nearly 40 years of uninterrupted hypergrowth. Economists say that China’s economy will grow just 4% this year, roughly half its typical rate. On top of that, China is suffering from a massive real estate bubble, high amounts of government and personal debt, and graying demographics. Experts say China’s economy could stall, causing significant regional and global economic disruptions.

China and Russia are promoting a new trade and economic alliance with Brazil, India, South Africa, and other non-aligned nations. They’re trying to counteract and insulate themselves from the economic strength and influence of the U.S. and developed Western-leaning nations (including South Korea and Japan).

And then there’s the chip issue. While China can’t produce the advanced semiconductors and computer processors that drive sophisticated machinery and systems, it does dominate in producing low-end chips that go into everything from toys, home appliances, and IoT systems. The U.S. is trying to wean itself off of China’s semiconductor manufacturing through investments such as the Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act, but it’ll take years for the new fabrication facilities to come online.

What does all of this matter to the channel, you ask? The channel is global, regional, and local, operating in parallel at the same time. Channel strategists, planners, and managers can no longer think of the world as a fully connected network. Rather, their go-to-market strategies must be based on multipolar thinking — consideration of which markets are grouped into disparate regional networks with differing and unique regulatory climates, operating restrictions, risk profiles, and costs to serve.

A Channelnomics report called “Channel of the Future 2030” cites deglobalization as a top trend impacting the IT channel through 2030. The report highlights and analyzes several key trends, noting that fragmentation into regional trading networks will be especially significant. Channelnomics states that channel leaders must re-evaluate strategies and operations as global trade shifts toward a more localized model over the next decade.

Larry Walsh is the CEO, chief analyst, and founder of Channelnomics. He’s an expert on the development and execution of channel programs, disruptive sales models, and growth strategies for companies worldwide. Follow him on Twitter at @lmwalsh_CN.