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Real estate

The rise of protectionism

Ibrahiim Bayaan
Director of Research, Real Estate, Americas
Gwen Busby
Head of Research and Strategy, Nuveen Natural Capital
Jordi Francesch
Head of Global Asset Management, Clean Energy, Nuveen Infrastructure
Aerial view of shipping containers and a shield icon overlaid

Protectionism seems to be increasing worldwide, with discussions of nearshoring and reshoring reaching fever pitch in recent years. Yet the value of global imports reached a new peak in 2022. What should we make of the oft-cited rise in protectionism? If countries do retrench, what does that mean for real assets?

Although global imports continued to reach new peaks relative to the size of the global economy, the exchange of goods has been stagnant since the 2008 financial crisis. Amid this conundrum, the rhetoric from political and business leaders, in developing and developed countries alike, has become increasingly protectionist. 

Figure 1: Mentions of onshoring and reshoring are on the rise

What has changed?

The pandemic highlighted vulnerabilities in global supply chains. Retailers and manufacturers, faced with surging demand for goods in late 2020 and early 2021, often faced inventory shortages due to closed Chinese manufacturing plants and delayed seaport activity alongside truck driver shortages in destination countries. In reaction, companies have increasingly considered alternatives to existing globalized logistics operations, which largely relied on China-manufactured products and shipping them around the globe for final use. 

As part of this reassessment of supply chains, Western companies have considered relocating production closer to end users by either moving factories to neighboring Canada, Mexico or peripheral Europe (“nearshoring”) or relocating production directly back to the U.S. and E.U. (“reshoring”). Such a shift may carry significant implications for logistics demand over the next several years, and investors in the logistics space may benefit from understanding the risks that a revised supply chain will have on previously in-demand locations and the opportunities a revamped network will present to warehouses in some locations. 

In many ways, the disruptions related to the pandemic were just the latest in a series of hits to global supply chains that occurred over the last five-10 years. Like the pandemic, many of these supply chain disruptions were caused by natural or environmental events. For example, the 2011 earthquake and tsunami off the coast of Japan in 2011 led to the Fukushima nuclear disaster, crippling automotive supply chains for months as factories were forced to shut down. Geopolitics has also been the source of cracks in the global supply chains, with events like the Arab Spring in 2011, the U.S.-China trade dispute in 2018-2020 and most recently the war in Ukraine altering global trade patterns.

Consequently, companies have become more cautious in creating globally integrated supply chains. Global trade (exports plus imports) as a percent of global GDP has largely stalled since the global financial crisis (GFC) after a 30+ years of rising globalization (Figure 2). 

Figure 2: Global trade and the share of Gross Domestic Product (GDP)

What does the future hold?

While data up to this point suggests international trade remains an important part of supply chains, there is mounting evidence these trends may be a catalyst for deglobalization, shifting production to domestic and regional locations. Reshoring has been popular among politicians since the GFC because of the potential job creation opportunities. World governments have enacted a variety of measures such as tax credits, subsidies, carbon pricing and regulation to incentivize reshoring efforts and foreign direct investment in domestic manufacturing over the last 15 years.  

In the U.S., interest in reshoring production surged following the CHIPS and Science Act and the Inflation Reduction Act. In the E.U. the Covid €2 trillion NextGenerationEU and a raft of subsidies for car batteries, green technology and semiconductor manufacturing are moving in the same direction. 

In Asia, Japan introduced the Economic Security Promotion Law, aiming to make the country less dependent on China, while China is working on economic decoupling plans, with some notable success in accelerating its own chip design and manufacturing capabilities. 

Unlike previous periods where reshoring job announcements were floated, the most recent surge in announcements has been followed by an equally impressive jump in construction spending on manufacturing plants and facilities, which have more than doubled since mid-2022 in the U.S. alone.  

Table: Impact of protectionism in different sectors

Real estate

The retooling of global supply chains will not reduce the demand for logistics space, but rather shift trading patterns with a greater emphasis on regional and domestic networks. 

Coastal markets in Northern Europe as well as the West Coast of the U.S. face particularly tough challenges because of how closely tied demand for warehousing space is to China-led port volumes. According to a recent report from CBRE, net absorption trends in the Los Angeles market have historically been correlated with import volume into the Los Angeles and Long Beach ports, and the downturn in absorption in late 2022 through 2023 is part the result of slumping port volumes during that time. 

Port markets may not enjoy the tailwinds that benefitted demand in the early 2000s as China took on a dominant role as the leading import source for developed economies. Much of the existing space in Rotterdam, Antwerp, Nagoya, Melbourne or Southern California have capitalized on the warehousing demand associated with growing globalized supply chains. As the world retreats from this model, retailers and manufacturers will face less pressure to expand their presence at the ports. 

Instead, regional nodes within countries and their immediate “friendly” neighbors may gain traction. Investors are best advised to analyze the flow of goods between newly expanding manufacturing locations in Europe, developed Asia-Pacific and the U.S. with existing domestic facilities and consumers. 

Natural capital

In many agricultural crop and timber markets, globally competitive producing regions with scale and productivity advantages have emerged as major centers of production, serving consumers worldwide. According to FAO data, the value of global agricultural exports in 2022 was about three times higher in nominal terms than in 2005, while the share of agriculture in total trade value increased from 6% in 2005 to almost 8% in 2022. As countries revise supply chains and seek alternative sources of crops or forest products, directly or through policy, trade flows may shift which is likely to put upward pressure on both local and global market prices.

Past periods of trade conflict and restrictive policies show their impact on agricultural producers and trade flows.

In addition to impacts on markets, higher prices for crops may have unintended, negative impacts on food security. This is because as production shifts to higher-cost or lower-productivity suppliers, we would expect global supply to decrease in the near term. The IMF reports that a 1% drop in global harvests increases food commodity prices by 8.5%. Price spikes resulting from shifting production could be a major risk to food security among vulnerable populations worldwide.

As geopolitical alignment has entrenched since the 2018-20 U.S.-China trade conflict, in the current environment a similar conflict has the potential to accelerate the fracturing of global goods supply chains into US-aligned and China-aligned blocs. Given current alignments, impacts to timber markets would depend on their location and the markets they serve. Here, we would expect:

From an investment managers’ perspective, these types of policies reiterate core investment principles, namely, diversification. Nuveen Natural Capital believes a global investment portfolio helps mitigate the potential negative impacts of tariffs and changes in global trade flows. Farmland and timberland portfolios with investments in various countries tend to be more insulated from the negative impacts of more protectionist trade policies.

Infrastructure

Globally, we see demand for local production of critical supply chain materials only increasing for infrastructure assets in the future. The Ukraine war, alongside China’s dominance as a provider of solar and wind turbines have led to a renewed focus on energy independence and onshoring clean energy supply chains. Decoupling global supply chains and an increased focus on energy security and decarbonization will drive opportunity sets, taking multiple forms across regions. 

Europe’s approach to the energy transition aims for a coexistence of solutions from outside the EU and technologies developed and manufactured domestically. The Solar Power Europe Association and the European Manufacturing Council recommended the European Commission take action to facilitate the incorporation of local supply chains into key technologies within renewable energies, specifically in the value chain of the photovoltaic solar sector. These moves support the adoption of the Net Zero Industry Act and the incorporation of strict sustainability and resilience criteria in public auctions. Installed solar energy in Europe annually has reached volumes that have allowed the consolidation of a European internal market with multiple applications and new niches. 

The EU is also taking steps to tighten control over foreign investments in strategic sectors. The energy sector, considered strategic, should be able to build an industry based on the current competitiveness of technology, even with institutional support. The strategy aims to foster economic growth and improves the overall sustainability of the energy sector. This implies integrating components, materials, and knowledge from European suppliers and manufacturers. This boost to domestic supply chains will be the basis for consolidating European technological leadership, strengthening regional economies, creating jobs and reducing the carbon footprint associated with long-distance material transport.

In 2022, the U.S. passed both the CHIPS and the Inflation Reduction Act (IRA), which collectively represent nearly $900 billion of federal funding.1  

The two aim to bolster semiconductor and clean energy components manufacturing domestically, which are poised for growth based on future U.S. digital and energy infrastructure demand. Primarily from wind and solar additions, power generation capacity is expected to rise almost 50% in the next 10 years, compared to the previous decade which only observed a 16% increase.2,3 In turn, power demand is projected to be driven by transportation electrification, semiconductor manufacturing, and above all, data centers for cloud and AI – forecast to account for 40% of electricity demand’s growth rate through 2030.4

Post-IRA, the overwhelming majority of commissioned factory investment have been for batteries.5 This is in line with expected demand, between now and the end of the decade anticipated storage installation will require annual investment of $8 billion in the U.S. and $35 billion globally.6 This highlights the need for batteries to tackle intermittency and facilitate the adoption of renewables.

In Asia, India has committed to triple renewable energy capacity to 500GW by 2030, with more than half expected to come from solar power. In line with Prime Minister Narenda Modi’s vision for a “self-reliant India,” and motivated by rocketing solar panel demand and concerns over the concentration of the supply chain in China, the government has taken steps to support domestic solar manufacturing. 

India’s focus on solar manufacturing began in earnest following the Covid-19 pandemic when disruptions to global trade exposed the risks of concentrated supply chains at a time when energy security concerns had come to the fore. The Institute for Energy Economics and Financial Analysis (IEEFA) foresees that India could become the world’s second-largest solar PV manufacturer by 2026, with enough production capacity to make it self-sufficient, and able to target the export market.

The bigger picture

Protectionism has wide-ranging implications for the structure and direction of the global economy, as well as a direct impact on investments. Rising global trade helped push down goods-price inflation, increased the proliferation of innovation and ideas, and facilitated a more efficient division of labor. Unraveling those arrangements, built over decades, could make many consumer products more expensive and slow GDP growth as well as technical innovation globally.

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1 Deloitte Insights: Executing on the $2 trillion investment to boost American competitiveness
2 EIA: Electric Power Annual 
3 EIA: Annual Energy Outlook 2023
4 Goldman Sachs Research: AI, data centers and the coming U.S. power demand surge
5 BloombergNEF: The 45X Factor: US Tax Credits Boost Industry on Home Turf
6 IEA: Grid-scale Storage 

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