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Looking beyond the horizon, it is without doubt that the global economy will undergo significant structural change. Over the coming decades we will witness the development of new industries, the changing of trade patterns, evolution of the skill requirements in the workforce and shifting valuations of the factors of production. There is a quagmire of information about the future direction of the global economy and the current and possible future state of geopolitics. Trade wars have reentered the common vernacular in 2018, and the rise of populist politics and policies, and a polarisation of visions for the future particularly in developed economies make distilling this information even more difficult. From the death of NATO to the emergent status of China, the Asian Century and Africa Rising, the future of the EU and the inevitable black hole of possibilities and implications of the ‘Fourth Industrial Revolution’, it is difficult to tell what the future holds. CIFS recently published a report exploring the future of trade and the global economy, the following is a short synopsis of some of the trends we think you should be paying close attention.
The geopolitical landscape and global economy will primarily be shaped by three key factors over the next few decades; 1. The power shift from West to East, 2. The increasing fragmentation and regionalisation combined with emerging regional powers and 3. The 4th Industrial Revolution (4th IR).
A look at the numbers tells us that the Asian century is undeniably upon us. The Chinese economy is already the largest global economy in GDP (PPP) terms, and if current growth rates remain constant (China – 6.7 percent, US – 1.6 percent, 2016) then China will surpass the US in real terms in 2027. India is also forecast to harness its potential through sheer mass of population. The US National Intelligence Council concludes that India could surpass the US in GDP, military spending and technology by 2045. By 2030, the UN forecasts that the world population will have reached 8.5 billion; no less than 5 billion of these people will live in Asia. The Western nations in the South Pacific of Australia and New Zealand have braced for the Asian Century with countless public white papers and policy institutes. At the same time, the South China Sea has become an obvious global intersection point for China to test its emerging military might against the established global protector. However, the global power shift from East to West has beckoned for decades. First we counted down the years until Japan would surpass the US economy, but the story of their economy over the past 20 years tells us how wrong we were. The new Elephant and Dragon are in the room, both poised to surpass the US, but will they?
It is interesting to note that those nations predicted to have the largest economies of the world in the future, will have relatively small GDP per capita due to their large population bases, a historically uncommon outcome. The reaction of these populations to wealth distribution may become a significant factor in addressing global inequality.
Regionalisation broadly refers to large or regional powers choosing unilateral strategies to promote relationships and solve trade challenges. Regional trade agreements have spread rapidly within the WTO framework. The increasing regionalisation of trade and proliferation of regional trade agreements chips away at the integrity and power of the existing global trade framework (inadvertent or not) and diminishes the role of international institutions such as the WTO. It is useful to imagine hypothetical regional spheres, with Asia and South-East Asia of particular interest for the aforementioned reasons. The rise of the multipolar world will be fostered by four factors: 1. Increasing protectionism and trade barriers, 2. Disappearance of labour arbitrage opportunities, 3. Production moving closer to consumption, and 4. The rise of consumer demand in emerging economies. The regionally different implications of climate change may also be a significant factor in shaping future trade flows, particularly with regard to food security.
China will obviously be a significant regional and global player in any fragmented or globalised world. To imagine the vision of Chinese-led globalisation (Easternisation), one does not have to look further than the One Belt One Road policy. More than 60 countries with a combined GDP of USD 23 trillion (around 30 percent of global GDP) and a combined population of approximately 4.4 billion (62 percent of the global population) are included in the plans for the project, which include a USD 54 billion land route from Xinjiang region to Gwadar, Pakistan creating an economic corridor through Pakistan (a fact not lost on India). Currently, there appear to be few obstacles that could prevent this ongoing extension of reach and influence. The Western World appears to have hedged its bets wrongly on the premise that with capitalism a liberal democracy must follow. Despite China having opened its economy in some ways to embrace global capitalism, the country still maintains what can only be described as a statecontrolled centralised economy. While most Western leaders havenot explicitly endorsed or supported the project, they have also not countered it (despite President Obama’s efforts through the TPP) or offered a different vision. President Trump has instigated the trade war, but the long-term effects of this will not be known for some time, and any short-term wins are clearly likely to only benefit the US, leaving other nations to consider where they fit in to the jigsaw puzzle. With the death of the TPP, the US has abandoned many of the Pacific Rim nations who sought a counterbalance to China’s extending reach. A telling indicator of the future geopolitical sphere will be if China begins advocating its political system and ideology through this project, reflecting a shift in US-China relations towards something more like the US-USSR relationship.
A core underpinning of this geopolitical reality is that no single power will be the guarantor of international political and economic order, as has been the case since the end of the Cold War. Navigating the future balance of power will become increasingly challenging for most countries as the competition is more intense among old and newly emerged giants as compared to the unipolar world. Governments in certain regions will be pressured to ‘back the right horse’, which will greatly test diplomatic relations particularly in more volatile regions, such as the Middle East and South-East Asia.
To consider the alternative to this multipolar, fragmented world, consider the power of technological diffusion. Arguably the globe has crossed the point of no return in regard to globalisation, the internet is most definitely here to stay and what it facilitates is a global platform for empowerment of citizens through the access to and exchange of information. While censorship through attacks and regulations on free speech and a free press impact this, as an individual I’m still able to use platforms to see content and information that once I would have never thought possible with the Arab Spring and recent social uprisings in Iran as examples. While these may not have yet led to the rise of democracy as idealists may have hoped, when we look at the future and consider globalists vs. nationalists or free trade vs. protectionism, we should remember that the globalised world we live in may be beyond the point of being dragged back to nation states behind a wall, even if one succumbs to the temptation of building a physical one. The alluring basis of protectionist populist policies is easy to understand: protect local jobs and tax foreign companies. Studies tell us that in the long-term such policies promote inefficiencies with higher costs for consumers. The Brexit vote will result in the world’s fifth largest economic power leaving the single largest multilateral trade bloc, and the America First platform has attacked NAFTA, TTIP and the TPP. If these political trends continue they present a significant threat to the overall reduction in trade barriers and increasing access to global markets that has been observed since the GATT. We may already be witnessing the emergence of this trend: from 2008 – 2016, G20 countries introduced 1,600 new protectionist measures and only removed 400.
A significant factor that will increasingly shape the future relationship of jobs, trade and economic growth is the 4th IR. Increasing automation and developments in machine intelligence will be decisive forces of the new global economy. It will likely lead to an even greater shift in the power of capital over labour, and may go so far as to fundamentally change labour as a factor of production dependant on just how high automation is able to climb up the skills chain. Automation will also make China’s example of an illuminated path out of impoverishment a dark tunnel that will no longer have merit for third world nations to pursue. That is to say that the value of cheap labour may not continue to be what it once was, and that is something China is aware of as it consolidates itself against the possible implications of the 4th IR through its Made in China policy, which emphasises the importance of new technologies and services being at the forefront of it’s export-driven economy. Further, increasing automation means that we expect trade patterns to shift away from finished and intermediate goods, towards raw materials. Increasing automation and supply security prioritisation will support further localised production or reshoring.
Clearly the future is not clear. Maintaining the status quo seems less likely in the coming decades. Additionally, the argument of the greater good and static economic thinking seems to be falling on deaf ears, with a return to populist rhetoric and leaders elected on that narrative. It is hard to hypothesise with any conviction about the impacts these developments may have. One Belt One Road may be a snapshot of the changing architecture of international trade.
These profound movements foster a number of uncertainties that diminish the veracity of predictive economic analysis. Identifying the facilitators and obstacles for the future, and the metrics and measurements by which to observe them, is of the utmost importance.
For more information about CIFS membership and access to the New Age of Trade report, please go to www.cifs.dk.