Saudi Arabia’s de facto ruler prince Mohammad Bin Salman has pledged investment and trade flows to the tune of USD 6 billion into the United States. This announcement came soon after Donald Trump assumed the highest office of the country.
The point to note here is that it is not typical Current Account Deficit (CAD) funding of the United States; this huge quantum of investment is going into mostly manufacturing sector of the country (which will concomitantly impact its trade deficits).
Besides the impact on the twin deficits of the United States and thereby the US dollar, the major impact – through manufacturing will be on that aspect of globalization that impinged negatively on the US’ political economy and inequality/equality as measured by the Gini co-efficient. Going under the broad rubric of ‘reshoring’ (contra off shoring) of production, the Saudi investment – in a bellwether one - will have multiple consequences.
One, based on the metric of the efficiency of capital employed and other relevant parametric values, manufacturing will get a boost in the US. This will potentially reverse the hollowing out the working or blue-collar classes in the country.
Traditionally the blue-collar classes were bastions of the Democratic Party of the United States. But these were orphaned by the ‘politics and economics of globalization’ - the former rendering them and their bastion, the Unions, marooned and the latter offshoring production in the quest for the rate of return. This led to an attrition of these classes from the Democratic Party and formed the ‘base’ of Mr. Donald Trump.
The 47th president of the United States addressed the concerns and spoke to the fears of the working classes of the United States, laying the blame onto a narrow globalist elite of the United States. This resonated with the base who handed Mr. Trump a resounding victory in 2024. Now, Mr. Trump is living up to his pre-poll promises of recalibrating the US economy by bringing manufacturing back to the country (or reshoring).
The question is: Will reshoring aid the US economy? What will be its implications and consequences? It all depends on the nature of this reshoring. Manufacturing is a value addition chain activity defined by inputs, outputs, intermediates and so on - all mediated and transformed by the ‘black box’ of the firm, with either vertical or horizontal production with backward or forward linkages.
This happened across countries in the apogee of globalization; now given reshoring it will happen nationally in the US. One outcome will be increase in output and employment in the manufacturing sector in the US. But what will be the nature of this manufacturing?
Will the United States be making widgets and for who? Given the contemporary nature of manufacturing and its value-added nature, the form and nature of this in the US will be high end zone. And its output, either must be absorbed by the country’s domestic market and the surplus exported. This has trade deficit/surplus implications for the country and the world at large.
How are other countries to adjust to this development? There can either be trade wars or readjustment by focusing on a quasi-autarkic mode of trade and industry. Will the question be this diminish global welfare and how can other countries respond? One way could be through intra-regional trade and more intense competition in the quality of production and products.
This trend analysis is a broad one. What will be the implications and impact on Saudi Arabia?
For this West Asian country caught in the cross hairs of cross cutting mega trends – geopolitical, economic and political - and which is seeking to wean itself from commodity export like oil diversifying its economy, what is in it for it? In the main, the country’s announcement is an eminently political one; it obviously desires to keep Mr. Trump’s America in good humor.
In a region defined by a political whirlwind post October 7, 2023, US support at a range of levels must have been deemed by Saudi strategists as essential. Helping and aiding Mr. Trumps agenda would fit in this schema.
Is help in the country’s security, political and defense needs by the US the only quid pro quo that Saudis would be asking? We don’t know. But, in the least, the Saudis must make a trade deal out of this. One way would be to seek US technical assistance and technology transfer commensurate with Saudi needs and absorptive capacity.
Otherwise, the announcement and its follow up would constitute a massive one-way capital flow. All in all, the larger and the broader implication of the Saudi announcement is that it appears to be a major shot in the arm of reshoring and thereby propelling deglobalization further. This may, in the grand scheme of things also be the prelude to 21st century mercantilism.
How will this pan out and denoue no one knows? But what can be said with certainty is that ‘we live in interesting times.’
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