The global trading system is under strain. After failing to reach agreement at the seventh ministerial meeting of the WTO in Stockholm in 2008, the Doha round is abandoned and the world falls into a “spaghetti” of bilateral trade deals. Protectionist pressures rise. The US Congress slaps big tariffs on Chinese imports. EU farmers demand “their borders back”. China scraps all agreements respecting intellectual property rights and floods the world with counterfeit products.
What would this mean for the global economy? What impact would it have on your business? Participants at Davos are happy to talk about the forward march of globalisation. What would happen if it went into reverse?
To discuss this scenario some 30 business leaders, trade ministers, and economists are gathered in a room in Davos. In spite of the relatively small number (fewer than the organisers had hoped for), the group includes an impressive collection of the world’s decision-makers – although quotes cannot be attributed to individuals so as not to inhibit free discussion.
Using a technique known as “back-casting”, participants consider how the world got from there to here. The idea is to stimulate collective thinking about where the strains lie in the system, in what ways companies are vulnerable, and how business leaders and government officials can pre-empt these risks.
Four smaller break-out groups discuss the likely outcomes for the US/Nafta, the European Union, China/India, and the developing countries in the South. At times, the group dynamics are sticky as some participants seem wary of unbuttoning themselves in front of their peers, who are in some other contexts antagonists. After 45 minutes the groups reassemble to discuss their conclusions.
Pasting imaginary newspaper headlines on the magnetic boards, the groups describe how their regions would respond. The EU group is startlingly upbeat. They suggest that the EU would not wait for a relaunch of the WTO but would unilaterally liberalise their trade regime “as a favour to ourselves and the best way to stimulate economic growth”. The Common Agricultural Policy would be reformed to protect people rather than production. EU member states would agree to spend 5 per cent of GDP on research and development. A Marshall plan for Africa would be launched. Chinese car manufacturers would be encouraged to invest in some of the poorer regions of Europe. The WTO would be reinvented.
“What are you smoking?” was the response of one of the other participants. “With your analysis, bring on the trade crisis,” said another.
The US/Nafta scenario was far bleaker. The headline Fortress America was posted to the board. US politicians would erect barriers to trade and peoples to protect US jobs, but seek more bilateral trade deals. Companies that outsourced to India could be heavily taxed. Mexico would drop labour standards laws to compete with low-cost Asia. Business supply chains would be hugely disrupted. The final headline: the US president loses his job.
In the China/India group, the participants forecast a further crackdown on internet traffic in China, growing regional tensions in south Asia, and economic dislocation. But the more optimistic interpretation was that these countries would realise the virtues of a multilateral world and try to put the trade jigsaw back together again with the help of other important developing nations, such as South Africa.
The South group thought it possible that the developing nations would club together to form a South-South trading area. There could be moves to establish a new set of trading norms rejecting the hypocritical values of the North. The rights of northern investors in southern markets could be abrogated. But some participants argued that this system would be unlikely to endure for long. The divergences between countries within the southern bloc could be just as great as those currently separating the North and South.
All the groups were then asked to focus on what the consequences could be for businesses operating in these areas. How could you operate in this kind of a world?
Speaking for the China/India group, an Indian businessman suggested that regional companies could design cheaper and lower performance products targeted at developing markets to compensate for the loss of US orders. But companies could suffer from a shortage of capital and renewed efforts would have to be made to prise open northern markets.
From the US/Nafta perspective, businessmen argued that it could be a return to the world of the 1960s and 1970s when companies operated on a more regional basis. But businesses would have to build in far more flexible sourcing arrangements in different regions pushing up prices. They also suggested that Nafta and the EU might be drawn more closely together and a bilateral deal might be negotiated with India, considering the interdependence on IT. They thought it unlikely that Congress would pass legislation penalising outsourcing. “There are many foolish ideas that make it through the legislative process, but this one looks both foolish and unworkable,” said one businessman.
The “board” of corporate Europe promised a massive increase in R&D spending and a heavy investment programme in the developing world to signal that it wanted to co-operate. Strenuous efforts would also be made to break down the US trade barriers given they would surely be porous and – perhaps – unsustainable. “Prohibition did not work either.”
Some of the participants thought the initial scenario was improbable: the interdependence between different regions is so great that self-interest would push global actors back towards renewed co-operation. But all seemed to agree that if the system did break down it would take time to rework it. In the meantime, it would be wise to let off some steam rather than rushing into a crazy deal.
A consensus also emerged about the importance of Brazil and India as “swing countries” in today’s world. They both play an enormous role in bringing together the developed and the developing world.
Some participants also contrasted the can-do spirit of business leaders with the too-hard attitude of policymakers. “On a business level the world is going in a good direction. At the policy level it is not,” said one academic economist. “The difference between the two is captured by a saying by Winston Churchill. An optimist is someone who sees an opportunity in every threat. A pessimist is someone who sees a threat in every opportunity. The business world is working on the first premise, the policy world on the second.”
Jagdish Bhagwati, the economist and author of In Defence of Globalisation, said that the exercise had only served to highlight the virtues of a rules-based multi-lateral trading system. In an anarchic trading environment, the strong would be more easily able to exploit the weak and welfare protection could be ripped up. “We live in a highly competitive world. But if there is chaos it will be even more competitive. Anarchy in the global economy would create a more brutal Hobbesian world.”