Reshoring leads to more global trade

One of the hotly predicted trends of the coming years is the rise in reshoring as a reaction to the supply chain disruptions of recent years. A big part of this reshoring trend will be the increased adoption of robots and other automation technologies in industrialised countries, in particular in industries where in the past we had no robots (e.g. service industries). The naïve conclusion would be to avoid companies that benefit from global trade like logistics firms because bringing production to industrialised countries, there is less need to ship goods across the globe. But investors might apply a faulty logic there.

I think expecting global trade to grow less as reshoring (aka backshoring aka homeshoring, you pick your favourite terminology) might be another exercise in first level thinking, like the assumption during the pandemic that there will be less demand for office space since everybody keeps working from home or that the future of work leads to increasing disparities among the regions of the US.

A team from the LMU in Munich and the University of Göttingen looked at the impact the adoption of robots in Europe had on exports from Latin America to Europe. They found that yes, if a country in Europe increased its use of robots the exports of goods from developing countries to that country in that industry declined. Increased adoption of robots led to a roughly 3.8% drop in the exports in that industry to that country.

But if robots produce goods in Germany or the UK rather than in Mexico or Brazil, where do these robots get the semifinished goods and raw materials from? Ironically, these semifinished goods and raw materials tend to come from developing countries.

Global value chains almost universally start in developing countries and end in industrialised countries. Hence, trade shifts away from finished goods and toward semi-finished goods and raw materials as final assembly and production is reshored to Europe. According to the study of robot-adoption in Europe in the past, trade along the value chain in industries connected to the affected industry increased by a quarter as European countries adopted more robots. The net effect across all sectors was a large 18% increase in trade, not a decline in trade! So if you think about an underappreciated long-term investment for the next ten years or so, you might want to look at global logistics companies.

Change in exports from Latin America to Europe as a result of robot-adoption in Europe

Source: Baur et al. (2023)