What is actually happening to globalization?

The pandemic, conflicts in the middle-east and Europe, industrial policies, and export restrictions have disrupted supply chains in the last five years.

Buzzwords such as decoupling, de-risking, nearshoring, and strategic autononmy point to a similar pattern:

As Martin Wolf concludes, we see a ‘growing confidence in governments’ ability to reshape their economies for the better’ (Wolf, 2023). Conversely, there is a declining confidence that markets ‘always allocate capital productively and efficiently’ (Sullivan, 2023).

This translates in a growing desire on behalf of policymakers to shape the geography of supply chains:

‘I know I’ve been criticized for saying this, but I’m not changing my view. We’re going to make sure the supply chain for America begins in America. The supply chain begins in America.’ (Biden, 2023).

The puzzle: more, not less glolbalization

The argument: Two modes of supply chain restructuring

There are two competing modes of supply chain restructuring. Rich states seek to restructure supply chains from below to integrate lower value added functions that have become geopolitically indispensable.

Firms, aided by middle-income states, seek to restructure supply chains from around to circumvent risks and serve competing powers whose direct trade relations are breaking down.

This leads to three key patterns:

1. Firm and country-level choices are driven by their structural position in supply chains

2. Profit-orientation often creates misalignment between state goals and firm strategies

3. Firm responses break down by sector more than geography

Supply chains and hierarchy

As global commerce and production unbundled in the 1990s due to IT-innovations (Baldwin, 2019), firms became linked as parts of globe-spanning supply chains.

In terms of who captures the value and who controls operations across the supply chain, the global economy is characterized by a hierarchical, three-tier corporate structure. Intellectual property-rich firms sit at the top and exert control over other firms through ‘information rents’ (Durand and Milberg, 2020; Schwartz, 2022).

Physical capital-intensive production and labor-intensive processes have been pushed to lower-cost locations to be carried out by firms with thinner profit margins.

Statecraft and extraterritoriality

From the early 2010s onward, we see an increase in trade-distorting market restrictions and industrial policy subventions (Evenett et al., 2024; Juhász et al., 2023). Invariably, these policies are about placing domestic firms in global value chains and preventing diffusion of advanced technology and critical raw materials (Allan and Nahm, 2025; Malkin and He, 2024; Riofrancos, 2023).

Many of these interventions are not simply about acquiring or expanding information rents, but rather about controlling production networks and integrating lower value-added activities.

Crucially, the devices of containment, competition, and coercion rely on ‘jurisdictional expansion’ (Kalyanpur and Newman, 2019): the ability of states to assert extraterritorial control over global value chains.

The limits of weaponized interdependence

The clearest and best-known formulation of these dynamics are found in work by Farrell and Newman (2019) and Farrell and Newman (2023).

In densely connected economic networks, asymmetrical control offers states abilities to monitor and control the activities of other members. The famous example is payment clearing system SWIFT.

But in translating these examples from the digital world of payment systems and internet surveillance to the very physical world of supply chains, the argument hits a snag: global trade lacks a central clearing house and a (fully) digital ledger. In other words: the means of control are much softer and blunter, and offer many more ways of circumvention.

In sum:

1. Global commerce is characterized by a hierarchical relation between firms, encoded in supply chains;

2. Significant parts of industrial policy center around controlling and integrating lower value-added functions;

3. The means of containment and coercion are softer in the physical world of supply chains

Data

This paper draws from an original dataset of 16,413 corporate earnings calls from 4,501 listed firms. It has global coverage of all 2016-2024 earnings calls that talk about geopolitics and related terms.

The database also tracks info on sector (NACE & NAICS codes), geography (HQ location), ownership (e.g., %institutional ownership & %state ownership), and market cap.

From the earnings calls, I extract sentence triplets (N=24,604), which are the main data source.

Methods

To extract meaningful information, I annotate the earnings calls statements with simple dictionary-based measures and a more advanced method involving large language models.

The dictionary-based approach replicates D’Orazio et al. (2024)‘s study. It uses a simple fragmentation index that looks at fragmentation keywords (e.g., ’deglobalization’, ‘reshoring’, ‘decoupling’). My data coverage encompasses more earnings calls and disaggregates them at the sector level.

The LLM-based approach sends the triplets to a large language model (e.g., ChatGPT, Claude, Llama) with the instruction to annotate the label based on a pre-defined coding sheet (I have methods slides to cover your questions):

1. Geopolitical headwinds

2. Geopolitical tailwinds

3. Geopolitical choices

4. Holding strong

5. No geopolitical sentiment / neutral

Earnings calls and global corporate decision-making

All earnings calls with statements about ‘geopolitics’ (or related terms) since 01-01-2016. Source: S&P’s Capital IQ.

Absolute sentiment distribution

Relative sentiment distribution

Fragmentation index (absolute)

Fragmentation index (relative)

Fragmentation index by sector

Geopolitical sentiments by sector (relative shares)

Restructuring from below

The focus on bringing in lower value-added but geopolitically critical parts of the value chain (raw materials processing, manufacturing) clearly comes through in the sectors affected and in the policies we see emerging.

Restructuring from around

But how effective are these policies?

Conclusion

• To know what is happening to globalization, we must go beyond a macro-lens. A firm-level perspective reveals:

  • (1): The geographic rewiring of production to conceal the sustained relations between geoeconomic blocs;

  • (2): The reorientation of firm strategies to capture profits or mitigate losses connected to these shifts;

  • (3): The unexpected consequences connected to government policies aimed at restructuring global supply chains.

• Corporate responses break down according to sectors, and according to their geopolitical sensitivity, rather than low/high value-added.

For future research, two things will be crucial:

• The role of (trade) imbalances and concentration of ownership and control in networks

• More research needed to understand the ‘plumbing’ of the global economy, beyond work done in finance (think of: fiber optic sea cables, satellite communication, shipping lanes, ports)

Appendix I

system_msg = f"""
    You are a research assistant to a social scientist. You will be provided with texts from corporate earnings calls 
    that mention 'geopolitics'. \
    Classify the following text into one of the given categories: {categories}\n{definitions} \
    Only include the selected category in your response and no further text."
    """
messages = [
    {"role": "system", "content": system_msg},
    {"role": "user", "content": review}
]

categories = ["1", "2", "3", "4"]

definitions = """
1: geopolitical headwinds. The text flags geopolitics and geopolitical factors such as war, sanctions, supply chain upheaval, and regulatory uncertainty as general headwinds that make the business environment more challenging, volatile, and uncertain. This category is about general challenges without specific actions connected to them (Example sentence: And I think that's where the closure of courts and some of the uncertainty still lingering post COVID continues to drive that uncertainty. What I would also say is that we do think that the geopolitical shifts that we're seeing occurring right in front of our eyes, as we look at today, continue to drive this focus around the uncertainty underlying these loss cost trends. So that's broadly what I would say to you.)\\
2: geopolitical tailwinds. The text flags geopolitics and geopolitical factors such as war, sanctions, supply chain upheaval, and regulatory uncertainty as general opportunities or tailwinds. This category is about general opportunities and benefits without specific actions connected to them (Example sentence: Today, global defense spending is on the rise, driven by the Ukraine war, shifts in geopolitical dynamics and the U.S. Department of Defense modernization priorities. Allison is poised to capture growth in this cycle by continuing our long-standing partnership with the U.S. Department of Defense.)\\
3: geopolitical choices. The text flags geopolitics and geopolitical factors such as war, sanctions, supply chain upheaval, and regulatory uncertainty as reasons directly imacting business strategy and investment decisions. Such decisions and strategies include, but are not limited to: supply chain diversification, de-risking, stockpiling, reshoring, nearshoring, risk monitoring, market entry/exit, complying with local content requirements, and inventory management (Example sentence: The geopolitical tensions may amplify the supply chain challenges mentioned above, which we address with our supplier risk mitigation strategy, buying key products from multiple regions and manufacturers.)\\
4: holding strong. The text states that geopolitics and geopolitical factors such as war, sanctions, supply chain upheaval, and regulatory uncertainty do not affect business performance or strategy, or that business performance has remained strong in spite of them (Example sentence: we delivered another quarter of strong financial results despite market concerns about slowing demand, broader macroeconomic challenges and the various global geopolitical issues. In fact, indicators of demand both from customers and in the market generally remain healthy.)
5: no geopolitical sentiment. The text does not contain a clear sentiment towards geopolitics. Only use this category as an absolute last resort.
"""

Code sheet

Geopolitical Headwinds

‘Ongoing geopolitical tensions, the Russian war of aggression in Ukraine, high inflation and the corresponding decline in consumptions as well as still the COVID wave in China. All of these are reflected worldwide in an economically weak start to the year.’ (Hamburger Hafen AG)

‘For the second quarter, sales in our EMEA region declined 9%, impacted by the ongoing macroeconomic and geopolitical environment, as well as an inability to ship ICLs into 1 non-European country as a result of a country-specific product labeling change.’ (Staar Surgical Company)

Geopolitical tailwinds

While these global events are not necessarily positive for humanity, higher defense spending in the West represents a longer- term tailwind for our business. (Moog, Inc., 2022).

The additional positive on the macro side for us is the China Plus One strategy. As I mentioned earlier, we are at a very sweet spot in these changing geopolitical environment. With manufacturing, engineering and innovation being our core competencies, we also know the Indian market like the back of our hand. (KIRLOSKAR OIL ENGINES LIMITED, 2022)

In the longer-term, we see upside demand from substantial infrastructure investments going forward, increasingly driven by the green transition as well as geopolitical instability and increasing food and energy and security, which is likely to further drive tonne-mile demand for grain and coal (Pacific Basin Shipping Limited, 2022).

Code sheet II

Geopolitical Choices

And I think for BASF’s portfolio, I would say, in today’s world where you have trade restrictions, multipolar [ world ], geopolitical tensions, the best you can always have is that you are close to your customers because then you reduce risks of supply chain, or to think about the dysfunctional supply chains last year and the year before. So for that reason, we came always to that conclusion. (BASF, 2023)

But to answer your question, yes, as we try to get the maximum government subsidy and we also really look at the – how the price value for the overseas geographical flexibilities is all considered. The aim is to, one, to increase our customer trust, make them continue to work with us going forward under the geopolitical concerns. Secondly is to maximize shareholders’ value. (TSMC, 2024)

We’re needing more extra wafers. The geopolitical situation, the technological sovereignty that countries are after is driving these big investment and subsidy programs. And we also think that if we look at the announcements, the competition in the foundry space will also go up. (ASML, 2022)

The last 3 years have exposed the vulnerabilities of concentrated global supply chains, structured to operate under stable conditions and cooperative political regimes. Pandemic, geopolitical events have reminded us of the need for a more distributed set of sourcing options, ensuring reliability and flexibility in securing critical materials and equipment. Eventually, we expect reshoring to extend well beyond the areas we just discussed. (COMMERCIAL METALS COMPANY, 2023).

Code sheet III

Holding strong

We delivered another quarter of strong financial results despite market concerns about slowing demand, broader macroeconomic challenges and the various global geopolitical issues. In fact, indicators of demand both from customers and in the market generally remain healthy. (IQVIA HOLDINGS INC., 2022).

Let me now conclude with the outlook and guidance for the next year. Despite the near-term headwinds due to fluctuations in commodity prices, geopolitical uncertainties and high input costs, we remain favorably placed to navigate these challenges given our established EPC capabilities, strong order book, robust balance sheet and well-diversified business mix. We expect consol revenue to grow in excess of 15% for next year with PBT margin in the range of 5%. (JMC Projects, 2022).

Thank you for sparing your valuable time in joining us here today. The year gone by, posed several challenges to the business due to COVID-related disruptions and geopolitical disturbances. Despite the challenging operational environment, TBZ registered Y-o-Y revenue growth. (TRIBHOVANDAS BHIMJI ZAVERI LIMITED, 2023).