The international order in transition – What will the world look like tomorrow?

GED blog post 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 uncertain 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.

We will dedicate a blog post to each of them in the coming weeks, focusing on their economic aspects and implications for European and German businesses. In the final post, we take a closer look at the implications for policymakers in the EU and Germany. 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 about what implications the various scenarios could mean for the future of globalization, German and European companies, and politics in Europe.

Scenario II: Multiple Blocs

The EU asserts itself next to the US and China as the world’s third major bloc. Other blocs are possible, for example, under Russia’s leadership.

What happens in this scenario

This scenario assumes that the world is divided into multiple dominant blocs. And while these power centers interact with each other, they are clearly demarcated from each other: The democracies in the US and Europe face off against autocratic China, where the Communist Party has a monopoly on power.

These political systems compete aggressively against each other over which form of governance is more effective, on the one hand, and over which can offer its citizens more prosperity, security, and opportunities.

In the 2020s, through a great deal of close cooperation, the EU has managed to establish itself as a meaningful player on the global stage, finding its own self-assured role between both superpowers. By closing ranks politically, the EU has gained relevance globally, allowing it to formulate and more easily assert its economic and political interests.

Enjoying a favorable image in the global community, the EU positions itself as the “likable third” in the triad of major powers, between China’s dictatorship and the internally divided US. At the same time, the Europeans feel a much greater affinity with the US than with China.

World trade

The formation of blocs has weakened the multilateral system. Global institutions, such as the United Nations (UN) and the World Trade Organization (WTO), have become pawns caught up in geopolitical conflicts and have thus lost influence and meaning.

The WTO, therefore, plays a minor role in trade policy decisions. Regional free trade agreements shape global trade instead. Some agreements attest to a high level of integration; others set only minimum standards so that trade is possible at all.

These discrepancies harbor new potential for conflict between the dominant blocs and the rest of the world. This, in turn, increases the threat of direct or indirect military conflict. All blocs spend large amounts on defense, investing heavily in conventional weapons and in cybersecurity.

Economic policy

Given that the rival blocs can use their own technologies and trade to exert power, all players are careful to reduce their mutual economic dependencies. Since the US and China go it alone pursuing national policies in many areas and thus distorting global competition, the EU is forced to do more to protect its markets.

Technology and innovation

Industrial policy moves to the center of national and European economic policy, accompanied by heated discussions about the EU’s markets’ openness, reciprocity, and investment screening. Thanks to a consistent industrial policy, the EU succeeds in creating “EU champions” in several key sectors.

The main intention is ensuring independence in the area of high technologies: Self-sufficient solutions are meant to forestall the threat of dependence on another bloc. Thus, technology becomes a major geopolitical factor and essential to the blocs’ negotiating power.

Natural resources

Raw materials are highly contested (race for self-sustainability). It is not so much the global market that guarantees access to resources as political alliances. Elsewhere in the world, individual states try to establish themselves as strategically important players.

Norms and standards

Norms and standards play a crucial role here: All three major blocs try to dominate in this area or set their own standards, which they then apply to their own economy and allies.

Climate protection

Since there is no multilateral intermediary to guide the process, the three blocs cannot agree on a globally coordinated climate policy. For the most part, climate protection now only consists of fragmented, regional measures. Instead of actively combatting climate change, actors in many places are only concerned with adapting life in their own region to changing climate conditions.

Implications for European and German businesses:

A world with multiple blocs is not a desirable scenario for European companies. The conflict between the US and China drives world events, sometimes to a greater, sometimes to a lesser degree, but it is always present. An escalation could occur at any time, with serious economic consequences. In a turbulent global economy, the EU stands for reliability, rule of law, and effective mechanisms for conflict resolution.

For many globally active European companies, the EU thus remains a robust home base where they consolidate key parts of their value chain and generate an important, if not necessarily the largest, part of their sales.

For German firms, both the US and China remain important markets in this scenario, if often difficult. At the same time, the development of new growth markets in Asia and Africa has a stabilizing effect on the business activities of German companies.

Thanks to a nexus of bilateral and multilateral trade agreements, global trade and investment continue to flow relatively smoothly, as does the exchange of talent. However, companies must invest more to adapt to local conditions, making them strive for greater regionalization.

Risks:

The choice of possible cooperation partners is greatly reduced. Supply chains become more complex due to regional regulations. Only if the EU succeeds in opening up new markets will supplies continue to flow from other blocs. The increased importance of being supplied from the EU results in marked price rises for many companies.

Opportunities:

Companies also see opportunities in this scenario, above all in Important Projects of Collective European Interest (IPCEI), since they promote the creation of valuable networks. Successful collaborations on the EU level strengthen the bloc’s independence and resilience.

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 policymakers and businesses could potentially respond under the various conditions.