Research by Barclays Corporate and Investment Bank suggests the era of globalisation could be coming to an end, and that we are moving towards ‘deglobalisation’. International geopolitical events such as the COVID-19 pandemic, Russia’s invasion of Ukraine and the conflict in Israel/Palestine are but three examples of disruption that leads to deglobalisation. More recently it has been reported that several countries may introduce protectionist measures in response to the new “America First” policies. But how can we define deglobalisation?

Deglobalisation is the process of reducing interdependence and integration between global economies, with an emphasis on moving to a more self-sustainable approach to build trade and commerce.

From an economic standpoint, this shift poses various risks for companies, particularly those thriving in a globalised environment. The impact on profitability can be profound, necessitating significant strategic adjustments to mitigate these risks.

Below we explore the risks associated with deglobalisation and suggest a few legal strategies to help ensure sustainability.

Risks posed by deglobalisation

Global supply chains are the backbone of many industries, providing cost efficiencies and access to diverse markets. Deglobalisation can lead to disruptions in these supply chains due to trade barriers, tariffs and geopolitical tensions. Any companies embedded in these supply chains face increased costs, delays and shortages of critical components – a potentially massive blow to production schedules and profitability.

Protectionist policies, often driven by deglobalisation, can include measures such as tariff increases and import restrictions, which limit access to international markets. For companies that rely heavily on exports, these policies may lead to reduced sales, shrinking market share, and ultimately lower profitability.

As more countries focus on self-sufficiency, it’s up to companies to relocate production facilities closer to their primary markets, leading to increased operational costs. Higher labour and production costs in domestic markets can erode profit margins, especially for industries that previously benefited from lower costs in emerging markets.

Different countries may implement varying legal and regulatory standards, making it challenging for businesses to maintain compliance across multiple jurisdictions. Navigating these legal and regulatory landscapes diverts resources from core business activities.

Where developing countries historically relied on international co-operation to tackle important socio-economic risks, a different approach will no doubt become necessary in the years ahead.

Mitigation strategies

Businesses should consider diversifying their supply chains to reduce dependency on any single country or region. While this can often involve sourcing materials from multiple suppliers in different regions, diversification enhances resilience against geopolitical risks and supply chain disruptions.

Yet, diversification must be carefully considered, because the laws in each jurisdiction may vary and any agreements with suppliers will have to reflect the nuances of doing business in each jurisdiction.

Forming strategic partnerships and alliances with local firms can provide companies with valuable insights and access to new markets. These collaborations can help navigate regulatory challenges, share risks and leverage local expertise to enhance market presence and profitability.

Companies can also use financial instruments such as forward contracts, options, and swaps to hedge against currency fluctuations. Effective hedging strategies can protect against adverse currency movements, stabilising cash flows and profitability. However, the complexity of this move means companies should avoid embarking on such an exercise without seeking sound financial and legal advice.

Investing in advanced technologies and innovation can significantly enhance operational efficiency and lower costs. For instance, section 11D of the Income Tax Act 58 of 1962 provides tax incentives for investments in scientific and technological research and development. Automation, artificial intelligence and data analytics can improve decision-making and streamline processes. Even though these technological advancements will become much more regulated going forward, they can help offset rising operational costs and boost competitiveness, especially in a deglobalised market. Counsel from local legal advisors can help with establishing how to comply with any applicable and emerging laws and regulations.

Furthermore, companies must adapt their business models to keep pace with changing market dynamics. By staying agile and responsive, businesses can maintain profitability despite evolving challenges. It’s rare to hear a company executive say, “We should have done this later.” Instead, a common sentiment is, “We should have done this sooner!”

Thriving in a localised world

As countries shift towards more localised policies, the legal landscape could change rapidly. Businesses will have no choice but to stay compliant to avoid potential penalties. And, as deglobalisation leads to more disruptions in global supply chains, it’s time to get ready to renegotiate contracts, understand trade restrictions, and manage new disputes. 

Deglobalisation forces companies to confront a new reality, one that may seem daunting, especially for those that have flourished in the interconnected world of globalisation. The opportunities once offered by global supply chains, cross-border trade and international markets are now being disrupted. However, this shift does not have to spell doom. By recognising the risks and collaborating with trusted advisors who can offer nuanced strategies for adaptation, companies can find their way through this uncertain terrain.

Rather than merely surviving the challenges of a deglobalised world, those who embrace these changes can unlock new paths to growth and resilience. The question is no longer about weathering the storm, but about how companies will leverage this moment of transformation to redefine their strategies and future success