This article focuses on three over-arching megatrends and their implications for the global trading system and cross-border investment flows.
The first of these are the geopolitical tensions that we have all been living with now for several years and which really exploded into very public view under the presidency of Donald J Trump.
The second is what – quoting Donald Rumsfeld – I refer to as “known-unknowns”, since these concern technologies we are already familiar with, but which we have yet to grasp the full implications of.
The third is something I’ve chosen to address under the Pareto Power Law principle, which basically describes large asymmetries in things like causes and consequences, or the distribution of wealth. As such, this construct serves nicely to illustrate the third and final megatrend I want to discuss here, which is growing inequality.
Geopolitical Tensions
Geopolitics and Rising Mistrust
Current geopolitical tensions are likely to persist over many decades, not just between the US and China but also other large regional powers, such as the EU and Russia as well as India and Japan, as the post-WWII order and the Washington Consensus are replaced by a new or altered paradigm.
Because many of these actors are nuclear powers, they have a strong incentive to avoid escalation and thus to keep any tensions simmering at the level of so-called low-intensity or “grey zone” area conflict, meaning restricted to cyberspace, the economic and monetary sphere etc.
Another important facet of these geopolitical tensions is that the rise in techo-nationalism and thus autarkic strategies in advanced technologies, will likely grow and, somewhat sadly, also limit international collaboration and thus ultimately, innovation.
The benefits of international cooperation and economic integration over the last seventy years have been so great, that these should ultimately be sufficient to limit the extent to which decoupling will be allowed to go.
Implications for International Trade
Implication 1
More countries will enact various restrictions on cross-border data flows, either under the guise of national security or data sovereignty with implications for data-intensive cross-border trade in services and products.
Implication 2
The increased frequency we have seen governments invoke the national security exception will continue, as the scope of what falls within it continues to grow in the eyes of policymakers and politicians.
Implication 3
Restrictions on the export of dual use goods and strategic components like semiconductors, as well as critical minerals, will continue to expand as governments try and exploit these powers to hobble competitors.
Implication 4
Investment screening procedures, already the subject of tightening in many countries, particularly for strategic sectors, are likely to grow, and this because governments are expanding their own notions of what economic sectors need to be protected from whom.
Known Unknowns
Blockchain
This is a technology we are all familiar with, at least at a passing level, and the number of potential use cases run into the hundreds, if not thousands. But as yet, the broad-based adoption of this technology remains confined to a few cryptocurrencies, the most well-known of which is of course Bitcoin.
Quantum Computing
This is another technology rapidly growing in prominence. But apart from disrupting encryption of secure communications, it’s not clear what potential this technology will have. Most experts concede, however, that quantum computing will be a real game changer, rendering conventional computing completely obsolete.
Advanced AI
This is another disruptive, general purpose technology that is already starting to have a big impact on the way firms and indeed entire economic sectors work. But the full extent of how disruptive this technology will ultimately be is still a matter of speculation by many experts. The only thing experts do agree on is that it will be massive.
Low-Earth Orbit
The Low Earth Economy is a key threshold technology that will be absolutely fundamental to enabling all kinds of low-latency remote wireless technologies, the most important of which is likely to be autonomous vehicles. But experts disagree as to how quickly this technology will become ubiquitous and how far-reaching its impact will ultimately prove.
Implication 1
Technological advances in the real world will continue to stay ahead of the governments’ abilities to negotiate and ratify international trade and investment agreements to govern them.
Implication 2
Strategic competition and mutual mistrust will limit governments’ willingness to cooperate or integrate economically with all but a few of the most trusted allies
Implication 3
Mutual suspicion between countries will be reinforced in a negative feedback loop that will further hinder the ability of firms to make their own decisions on where to locate R&D and thus investment.
Implication 4
The regulatory fragmentation this will cause and the costs and complexity of complying with different countries’ rules will favor big and well-resourced players to the detriment of smaller entrepreneurs and SMEs
Pareto power law
In the technology space, we can clearly see the emergency of winner take all dynamics, where the vast majority of the value created in the digital economy is captured by a small number of big platforms.
There are glaring problems with the distributive nature of the gains from trade, with winners and losers suffering vastly different outcomes. Labour market inertia prevents losers from being able to quickly adapt to the new competitive environment and start becoming winners.
The losers from globalization quite rightly feel disenfranchised economically and have started to shout the loudest, producing movements and seismic political shocks like the Tea Party, Occupy Wall Street, Brexit and the Trump presidency.
All of this creates a broad-based backlash that makes it harder for political leaders to forge ahead with closer economic integration, even if the rationale for doing so, hasn’t actually changed: it’s still makes good economic sense to do so. But electorates are less willing to concede this point today than they have been perhaps at any time in recent history.
The size of the constituency pressing for further trade and investment liberalization will continue to shrink. This is especially true as businesses become more attuned to consumer sentiment on this point and choose to lobby quietly for a stabilization of economic relations and also financial support to relocate production closer to home where this is seen as a political priority.
Resolving big collective action problems at the multilateral level will become harder, especially as trust between major powers continues to deteriorate. This is bad for a whole range of large collective action problems that need addressing, but particularly for the institutions and functioning of the rules-based international order.
And because of this, the rules-based system will increasingly become subject to arbitrary actions and decisions by big players. This is bad news for small and middle powers, since the law of the jungle only favours the apex predator.
And as the multilateral rules based order weakens, this will lead to a rise in increasingly fragmented approaches to international cooperation, a phenomenon that Pascal Lamy the former WTO Director General predicted would occur under the mantra of “variable geometry”.
Key Take-Aways
Those who support the rules based order must show the courage of their convictions
It’s time to stand up for the rules, and not play favourites on the basis of such nebulous concepts as “like-minded” partners or “values-based” economic diplomacy.
Sticking with or reverting to the status quo is simply not an option
Countries, firms and individuals need to learn to adapt to a fast-changing reality, and those who can do this, i.e. those who prove the most agile and resilient, are going to be the most successful.
The COVID-19 pandemic has shown the value of basic bureaucratic competency
The various phases of the COVID-19 pandemic to date have been a stress-test for governments and demonstrated the value of basic bureaucratic competency
Read the e-book or download the PDF
Watch my lecture on this topic
Get in touch
Have something you want to share with me?
Use this contract form to send a message.
Thanks in advance for getting in touch!