Seven Challenges to Globalization…

Rise of geo-economics threatens world economy!



26 February 2015 – The world is witnessing a rise in ‘geo-economics’ that could lead to the unravelling of the world economy, according to new report produced by the World Economic Forum’s Global Agenda Council on Geo-economics. ECFR Director Mark Leonard has been invited to chair this group, and oversaw the development of this report (see the World Economic Forum’s official press release

Mark Leonard said: “As tensions between great powers rage, global businesses feel like pawns in a game over which they have little control. Political risk is no longer just instability in the developing world or avoiding war-zones.The global financial system has become a battleground that affects every company from Audi to Lego and McDonalds to Zara.Sanctions, consumer boycotts, preferential treatment for national champions, and the creation of gated markets can see long nurtured investments disappear overnight. Corporate leaders must speak out for open globalization, as well as hedging against the brave new world of geo-economics”.

The report was written by a group of 20 leading thinkers and practitioners around the world. Among members of the Council are heads of central banks, former IMF board members, former finance and foreign ministers, heads of multinational consultancy firms, senior bankers and a former US deputy trade representative.

The new publication from the World Economic Forum suggests that with great powers reluctant to risk nuclear war, the main global battlefield between major powers is economic rather than military. Sanctions are taking the place of military strikes, competing trade regimes are replacing military alliances, currency wars are more common than the occupation of territory, and the manipulation of the price of resources such as oil is more consequential than conventional arms races.

The report finds:

1. The vacuum left by the failed WTO talks is being filled by a surge of pan-regional, regional and bilateral trade talks. These are accelerating the multipolarisation of the world and creating competition among regional blocs far beyond trade. Global norms are now less likely to be agreed upon than are regional ones, resulting in regulatory agreements that favour incumbent ‘national champions’ and large regional powers at the expense of their weaker neighbours.

2. The use of sanctions is increasing. Sanctions allow stronger countries to dominate weaker countries though at the cost of hurting their own businesses and giving business opportunities to a ‘third party’ country that maintains relations with the country that is being targeted.

3. The re-emergence of state capitalism after the financial crisis is turbo-charging competition between governments, who are using standard setting to change the rules of the road in crucial sectors and industries to benefit their national champions. There is also a risk Central Banks will be pressured by domestic politics into going beyond their mandates to advance state interests.

4. The relative winners of this geo-economic battle are likely to be the US/
EU governments who maintain sufficient leverage over the global economy to be able to make sanctions bite; and China, whose companies benefit most from government support in global markets, and who benefit when Western firms are barred. The biggest losers will be western companies and smaller states without leverage over larger regional neighbours, international institutions and companies that cannot rely on the support of large states.

So what can the world’s states do to prevent geopolitics from unravelling the globalization of the world economy and its systems of governance? What are the main risks to industry and business and what can they do to mitigate them? These are the questions that the Global Agenda Council on Geo-economics tries to answer in the report, by mapping out seven challenges of geo-economics for companies, governments and campaign groups. Among its recommendations are that business becomes a strong advocate for trade liberalization and foreign investment, which diminishes protectionism and incentives for conflict.

The Seven Chapters of the report look at the following themes:

a. Economic warfare: Powerful states are looking to project power through their influence over the global economy and through their control over multinational corporations.

b. The geopoliticization of trade talks: Current major regional talks are likely to accelerate the multi-polarization of the world resulting in increased competition among regional blocs far beyond trade.

c. State capitalism 2.0: The re-emergence of state capitalism after the financial crisis is also turbo-charging competition between governments for power and influence.

d. Competition for gated markets, not natural resources: Competition between states in the geo-economic era will be driven by a quest for markets rather than national resources, impacting producers of natural resources.

e. The survival of the biggest and hollowing out of the periphery: As global leadership breaks down, regional hegemons are empowered and, in turn, are better equipped to box in countries in their peripheries.

f. China’s infrastructure-driven alliances: China has massively increased its foreign direct investment and loans to countries where it seeks to enhance access to commodities.

g. The decline in oil prices: After three years of unusual stability around $100 a barrel, oil prices fell steeply in the second half of 2014, dropping from $115 a barrel in June to around $60 by December. Download the full publication

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