GED blogpost series on globalization scenarios

The global economy is experiencing a period of rapid upheaval. Technological advances and growing rivalries are tugging at the world’s power structures as major economic players engage in a geostrategic competition. The United States, China, Europe, and other ambitious actors must align their economies to reflect the emerging realities. The Covid-19 pandemic, moreover, is giving this development both a unique dynamic and an indefinite outcome. What the world order will eventually look like remains completely uncertain.

Against this background, the Bertelsmann Stiftung in cooperation with the Fraunhofer Institute for Systems and Innovation Research (ISI), the Federation of German Industries (Bundesverband der Deutschen Industrie, BDI,) and representatives from business and politics developed five scenarios on what the future of globalization might look like.

In the last couple of weeks, we have dedicated blog posts to four of them, focusing on their economic aspects and implications for European and German businesses. This post outlines the 5th scenario, before we will have a closer look at the general implications for policy-makers in the EU and Germany in a another article at the beginning of 2022.

The full study on Globalization Scenarios including their complete versions and details on the methodology is available here.

The scenarios are an invitation to think strategically what implications the various scenarios could mean for the future of globalization, German and European companies, as well as for politics in Europe.

Scenario V: Reformed Multilateralism

Globalization is not what it used to be; the world is becoming more regional. Nevertheless, the US, China, and Europe compete to reform global governance.

Graph: Globalization

What happens in this scenario:

This scenario resembles the global order in the first decade and a half of the 21st century, even if the international balance of power and economic weightings have fundamentally shifted. The democracies in Europe and the US coexist with China, autocratically led by the Communist Party, in a mild, non-aggressive systemic conflict.

All actors make an effort to cooperate and to find solutions on a multilateral level. Yet their negotiations, in terms of both objectives and results, are less ambitious or all-encompassing than they once were. Many governments have difficulty gaining political support in their own country for the agreements concluded through multilateral channels.

Multilateral institutions (UN, WTO, etc.) are largely reformed in keeping with the wishes of China and the US, thereby losing their former influence and ability to shape developments. The reform of multilateral organizations thus itself becomes part of the US-China power struggle. This is where the superpowers design the global model that they intend to use to cooperate in the future.

The EU is given extensive powers by its member states so that it will be taken seriously as a global player. Alliances between individual actors on the world stage are formed on a case-by-case basis; there is no guarantee of set partnerships.

World trade

Since multilateral institutions such as the WTO have been weakened, the global economy is also less open than it once was. World trade is characterized by many regional free trade agreements and polylateral arrangements.

Global supply chains are again being organized more regionally. It is generally accepted that states have significant influence since the post-reform WTO no longer offers an overall regulatory framework. At the same time, however, the WTO can intervene more strongly in some areas than it could at the beginning of the 21st century. Yet it is no longer realistic to expect the global economic order to develop into a comprehensive rules-based system.

Economic policy

China steadily continues its efforts to catch up in the area of technology so it can become the global market leader in key industries. Beijing pursues its objectives through a strongly state-capitalistic economic policy. Targeted industrial policy measures become preferred instruments that set a framework while achieving regulatory aims.

In light of the distortions in the Chinese market, Europe seeks responses that do not jeopardize relations in general and allow the EU to continue its economic engagement with China. The US, in contrast, relies heavily on export controls when trading with China, arguing they are necessary for national security.

Technology and innovation

Europe defines technical sovereignty in the area of critical infrastructures and key technologies as an essential challenge and invests extensively in its own innovations as a result. Attempts are made on the international level to develop common rules for key technologies.

New multilateral organizations are one option, through which negotiations can be held on the dividing lines between critical and non-critical technologies. Yet fierce global competition and widespread uncertainty make it more difficult to get all major players onboard when international cooperation is needed.

Norms and standards

The US and China spar over who will set the world’s norms and standards. Since the globe lacks uniform specifications, different markets and spheres of influence develop their own product requirements. The EU loses its once leading role as standard-maker and increasingly becomes a standard taker. Accepting standards from third countries also becomes more challenging. Standardization ends up being a tool that the US and China use to exert political influence in other parts of the world.

Natural resources

International trade is fiercely contested, as is the sourcing of raw materials. China tries to dominate Asia and Oceania in order to secure its own supplies. Not becoming dependent on China is the Western bloc’s top strategic priority. Rare earth metals that are predominantly found in China are an important trump card for Beijing. International agreements and trade policy concessions made to the Chinese are meant to ensure access for the rest of the world, even in times of crisis.

Climate protection

Global cooperation focuses on climate change. All major powers work together to develop market-based tools that can reduce the impact of climate change, such as carbon pricing. Those who are technologically competitive in this area have a considerable advantage over other players.

The EU successfully establishes itself as a pioneer here. Other countries use its taxonomy for classifying investments by degree of sustainability as a template for promoting their own sustainable business practices.

Implications for European and German businesses

Reformed Multilateralism is the preferred scenario from the perspective of the German economy. The willingness to cooperate on all sides minimizes the risks of new trade conflicts and other crises. This gives companies a stable foundation for strategic planning and investments.

Large parts of German industry depend on having a healthy European market at their disposal as the basis for their success. Accordingly, policymakers are expected to strengthen the European single market, so that businesses can continue to operate smoothly should there be a worsening of multilateral relations.

Many companies take advantage of the general commitment to multilateralism to expand their international activities and networks. Other Asian markets grow more attractive since they offer, in addition to higher sales, the possibility of reducing dependence on the Chinese market.

Risks:

Reformed Multilateralism is not set in stone, which is why underlying conflicts or new geopolitical developments can unsettle the equilibrium of this preferred order. Yet even with multilateralism flourishing, China’s strong state-capitalistic economic policies remain a challenge to which Europe must find a response if it wants to avoid becoming more dependent. This is especially true since such dependence could be detrimental to the competitiveness of European companies not only in China itself, but also in other parts of the world.

Opportunities:

Reformed Multilateralism’s opportunities can especially be found behind the many doors that open for German companies in this scenario. Partnerships can be more easily implemented around the world, since there is less political distrust of other players. This provides European businesses with greater leeway, especially since the multilateral environment promotes flexibility and creates room for growth.

Disclaimer:

The scenarios merely suggest events that might occur; they do not provide definitive predictions of the future. They describe which happenings are conceivable and which are probable, and illustrate how policy makers and businesses could potentially respond under the various conditions.

Read Scenarios 1-4 in our series: The international order in transition