External Forces and Trends
The New World Order and its Implications for Global Trade
There can be little doubt now that 2022 will be seen as a watershed year for geopolitics and the global economy. This time last year, commentators were still predicting a ‘Roaring Twenties’ of economic growth. At the January World Economic Forum in Davos, the global business leaders surveyed put ‘Geoeconomic Confrontation’ at a distant 10th on their list of severe global risks. Only 15% of the respondents ranked it a severe threat in the next 2-5 years. A month later, Russia invaded Ukraine and the world changed.
Historian Eric Hobsbawm famously argued that the 20th Century didn’t really start until 1914, the Edwardian Era having been an extension of the 1890s. When future historians debate the point at which the 20th Century gave way to the 21st, they may make a similar argument for 2022. It has certainly become clear that much of what we have taken for granted over the last 30 years has gone. The coming decades will look very different.
The last half of the 20th Century saw unprecedented economic growth for the advanced western economies. Per capita GDP grew faster than at any time in history. The democratisation of the former communist countries and the trade liberalisation of China brought a massive increase in workers, resources, and markets into the global market system in what economist Charles Goodhart described as the largest ever positive supply shock. Firms could now do business in areas that had previously been off limits. Companies outsourced many activities to cheaper jurisdictions and a system of global just-in-time supply chains was built. The “Washington Consensus” – with its falling tariffs, taxes, and regulation – created the most favourable environment for international business in world history. Global trade increased, resting on the rarely challenged assumption that it would always be possible to move things around the world at speed.
The shine began to fade with the 2008 financial crisis, after which the advanced economies never recovered the productivity gains and economic growth seen in the second half of the 20th Century. The assumption that things would get back to normal faded as the 2010s wore on. The disruption of Donald Trump’s trade wars, a newly assertive China and the distraction of Brexit for the EU, challenged the global economic order. At the end of the decade economists were already talking about ‘synchronised stagnation’. The post-Cold War economic order was already under strain but the geopolitical order that had underpinned it was shattered by Russia’s invasion of Ukraine and with it, 30 years of assumptions about globalised business. The Golden Arches Theory, that no two countries with a McDonald’s would fight each other, was debunked in the most brutal way. The withdrawal of McDonald’s from Russia in 2022 was as symbolic as its arrival in 1990.
The war in Ukraine triggered a rapid re-ordering of priorities both for governments and for global corporations. Geopolitical and military concerns came to the fore again. The FT’s Philip Stephens says that the focus is now on security and on resilience. “Always secure” trumps “just in time” and offshoring is being replaced by ‘friendshoring’ – the sourcing of supplies from countries deemed to be friendly.
The stance of international economic organisations changed abruptly too. The FT’s Martin Sandbu sees economic thinking at an inflection point. Remarking on the IMF shift in policy, he believes “the return of the activist state is now the establishment’s house view.” Governments are taking a more interventionist approach to business, especially where they believe that strategically important industries may be compromised.
This re-prioritisation of strategic and security concerns over those of economics and business reflects a view among many western governments that the risk of geopolitical conflict during the coming decade has increased. The more assertive stance adopted by China under President Xi is of particular concern. US-China relations deteriorated under Donald Trump’s presidency and have shown little improvement since Joe Biden’s election. China has signalled its intention to challenge US hegemony and sees no reason to be bound by a system of global trade designed in Washington. Even if this rivalry does not manifest itself in open military conflict, it does heighten the risk of the world splitting into competing geopolitical and economic blocs.
The economic growth and trade liberalisation of China has been one of the most significant features of the world economy in recent decades. It was the largest single contributor to the ‘positive supply shock’ described Charles Goodhart. Any reversal of China’s openness to trade is likely to have a detrimental impact on the world economy. A China less sympathetic to western firms would make life more difficult for global companies. As VW’s former CEO Herbert Diess remarked, “China probably doesn’t need VW but VW needs China a lot.” A geopolitical realignment would also cause significant problems for those companies with commitments in countries where disputes with the West might escalate.
According to some commentators, these fears may be overblown. In an in-depth report in the FT piece on 10 January, based on several months of research, James Kynge, Sun Yu and Xinning Liu argued that China is re-prioritising economic growth and is therefore reconsidering its support for Russia and looking to repair some of its relationships with western governments. The level of critical argument from well-informed commentators triggered by the piece only goes to show how difficult it is to read China’s policy. That such a significant player in the world economy appears so mercurial is another indicator of the volatility of geopolitics. Whatever China’s government does will have a significant impact on global trade. It is likely that they will keep the rest of the world guessing for some time.
In this new world, companies can no longer take geopolitical stability as a given. Doing business globally will be more difficult. International supply chains, access to markets, and supply of labour have all been affected. We can no longer assume that it is safe to do business almost anywhere and that markets and company assets are secure. This is a world in which the need for resilience in the face of hard geopolitical realities will impose heavy costs on business, especially in relation to supply chains (as John Plender remarked in the FT). This may not signal the end of globalisation, but the flow of world trade will now be mitigated by geopolitical and security concerns. The high tide of globalisation has passed.
This geopolitical upheaval comes at a time when the economic challenges facing the world’s economies are of a scale and complexity that most of us have never seen before. The 2020s will see working age populations start to shrink in many advanced economies – and some emerging ones too. It is likely that the labour shortages that have hampered the post-Covid recovery of the advanced economies will become a recurring feature of the 2020s.
More frequent climate events will compound the disruption to trade caused by geopolitical instability. Governments can ill afford to let up on the push for Carbon Net Zero, and it is unlikely that their electorates will let them. But this brings its own challenges. As Sky’s economics editor Ed Conway puts it: “If net zero is going to happen we need to re-do the industrial revolution all over again. It’s hard to express how big a deal this is.” The fact that many of the materials needed for a transition to a low carbon economy are in politically volatile regions of the world only emphasises the scope for disruption and the interconnectedness of the challenges facing businesses.
To gain some informed understanding this complex interaction between geopolitics and global business, PARC has brought together two commentators with complementary areas of expertise. We will be joined on 23 February by Mike Martin, Research Fellow in the Department of War Studies at King’s College London and a former British Army Officer, and Alan Beattie, World Trade Editor of The Financial Times and formerly an economist at the Bank of England. Both speakers will provide critical insight into the challenges faced by business in navigating geopolitical risk.
This event, on the eve of the first anniversary of Russia’s invasion of Ukraine, will help us to bring some essential perspective on the new world geopolitical order and its implications for businesses.
UPCOMING CRF CONFERENCE:
UPCOMING PARC EVENT
The New World Order – and its Implications for Global Trade
Thursday 23 February, London and Online