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Geopolitical tensions are driving more multinational companies to signal plans for moving production into countries that are politically closer to their final markets, according to a European Central Bank survey.
The ECB found almost four times as many European multinationals said they would shift production to politically friendly countries — a phenomenon known as “friend-shoring” — as have done so in the past five years.
While 42 per cent of the 65 companies polled by the ECB claimed they would increasingly produce more in politically friendly markets, a higher number — 60 per cent — flagged that changes to their supply chains and production locations have pushed up prices over the past five years.
Of those surveyed over this summer, 45 per cent said they expected it to exert more inflationary pressures in the future.
Economists fear the global trading system risks being fragmented into competing blocs, reflecting diplomatic rifts caused by Russia’s invasion of Ukraine, Israel’s war with Hamas and growing trade tensions between the US and China.
The IMF warned earlier this year that its estimates showed the trend could cut global economic output by 2 per cent in the long term. ECB president Christine Lagarde said earlier this year the fragmentation of the global trading system had “contributed to the steep rise in inflation over the last two years”.
“Geopolitical risk was the most frequently cited factor behind decisions to (re)locate production into the EU, while demand and cost factors motivate moves out of the EU,” the ECB said in a report published on Monday.
However, reworking supply chains to avoid geopolitical risk is difficult, especially when many companies rely on inputs from China that are hard to find elsewhere, such as materials for making batteries.
“Most analysis to date does not find evidence of significant changes in aggregate European trade patterns,” the ECB said. But it added that such shifts “may take time to unfold, given the challenges and costs involved in modifying business models, supply chains and contracts”.
Many of the businesses polled, which together have an aggregate value-added equal to about 5 per cent of EU gross domestic product, expressed concern about their reliance on sourcing critical supplies from China.
More than half of the companies said the supply of critical inputs from a specific country or countries was subject to “elevated risk”, the ECB said, adding that in “a large majority” of cases this related to China.
Most companies said it would be “very hard” to find these critical inputs elsewhere. But many said they were trying to diversify their supplies, while others said they were holding more inventory, changing their product composition or monitoring risks more closely.
The ECB said changes to companies’ production locations and supply chains was likely to reduce the share of jobs they have in the EU, due to a lack of labour availability and the cost of workers in the region.
But at the same time, it said these changes seemed to be shifting more companies “towards greater use of EU suppliers”.
Source: Economy - ft.com
