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Horizon Scan with predictions and insights on seven geoeconomic trends

China’s rise, US-China strategic competition, Russia’s aggression against Ukraine and its broader political consequences, or the effectiveness of multilateralism are among the key geopolitical factors in world affairs today. How they evolve is crucial for global governance and cooperation, as well as our future prosperity.

In times of such geopolitics, countries are challenged to recalibrate their view of global affairs and update their policy choices. The UK, for instance, in its new foreign policy strategy from March 2023, notes that “today’s international system cannot simply be reduced to ‘democracy versus autocracy’”. It goes on to identify the UK as a “middle-ground power”, part of an “expanding group” of countries not wanting “to be drawn into zero-sum competition”. In April 2023, the EU’s High Representative Josep Borrell adds his non-binary framing of global politics, stating “we must accept the reality of the advent of a more multipolar world”.

So, what becomes clear is that geopolitics brings both systemic as well as single-actor political challenges. This horizon scan focuses on the specific aspect of power politics by economic means, or geoeconomics, sketching out seven geoeconomic dynamics that influence global business and finance, and thus global growth.

Policies to ‘Indigenize’ Strategic Technologies

Efforts to build up domestic capacity threaten to create trade distortions

The US, China, and the EU are engaged in a new industrial policy arms race, in pursuit of leading-edge domestic manufacturing - especially in technologies considered strategic such as high-performance computing, artificial intelligence, biotech, and clean tech. In addition to defensive measures like tariffs or export controls, many governments have also adopted positive measures such as subsidies, public investment, or incentives for private investment; the EU’s New Industrial Strategy for Europe, for example, aims to develop industrial ecosystems with critical supply chains that are re-, near-or friend-shored.

Global Trade Alert data shows that in 2020, the first year of the pandemic, the use of corporate subsidy instruments increased by over 230%, in the US by a factor of 4, in the EU by a factor of 2. Between 2008 and 2021, the three dominant trade blocs accounted for 75% of all subsidy awards - testament to their role as lead markets for technology, often tied to the build-up of domestic capacity. Under the US’ CHIPS and Science Act and the Inflation Reduction Act, for example, subsidies are only granted for production in the US or a “friendly” country. Such policies can be a viable driver for domestic innovation, economic growth, and jobs. But their inherently non-globalist, onshore logic also creates inefficiencies, overcapacities and trade distortions.

The US Vision of a like-minded ‘Techno-Industrial Base’

New-type trade initiatives are accelerating global trade fragmentation

Under the Biden administration, the US has launched efforts to cooperate and coordinate with like-minded partners on economic and trade policies outside of traditional free trade agreements by taking a multi-geometry and functional-policy approach, composed of three concentric circles: First, the US-EU Trade and Technology Council (TTC) has been set up as a dialogue forum to coordinate policies that are “based on shared democratic values” on emerging tech standards, critical supply chain resilience, and research collaboration. Second, the Indo-Pacific Economic Framework (IPEF), which includes 14 partners in the region, seeks to coordinate policies on trade, supply chains, clean tech, infrastructure, and taxation. Third and akin to a narrower version of IPEF, the Joint Statement on Cooperation on Global Supply Chains and the Minerals Security Partnership each convene numerous partners to collaborate on supply chain resilience.

The TTC recently released a set of jointly-defined “transatlantic technical recommendations” on electric vehicle-charging infrastructure, as part of an effort to lead standard setting in global electric vehicle value chains, likely leading to splintered technical standards. Though still mostly aspirational, and with some partners likely engaging rather for pragmatic reasons, these new-type trade initiatives are making progress on the US’ vision of a “techno-industrial base” shared only with select partners - accelerating global technology trade fragmentation.

High-Tech Decoupling is Real, but ‘Small Yard’

A defensive approach to high-tech engagement is reflected in the trade numbers

US policy on high-tech trade with China has seen three broad iterations: a broad and confrontational approach focused on trade asymmetries and national security (such as an FDI screening); a defensive, “small yard, high fence” way of more closely regulating potentially critical high-tech engagement; and a more offensive and strategic approach to “foundational” tech, where the US seeks to “maintain as large a lead as possible” (Jake Sullivan) both by investing in domestic industrial capacity and keeping China technologically “at bay”. In addition, the US significantly expanded its export controls by targeting specific entities, end-use types, and goods with US tech content. The semiconductor and telecom sectors have been most targeted (~40%), followed by artificial intelligence and advanced computing (~20%), aerospace tech (~10%), and advanced manufacturing (5-10%), with biotech and green tech emerging as the next policy priorities. Semiconductor decoupling is also reflected in the trade numbers; the US’s chip-related exports to China fell by 29% in 2022. Overall, EU-China tech trade has seen much less policy-steered decoupling, and is focused on dual-use issues and “de-risking” trade dependencies.

The IMF calculates that such technology-related decoupling has the potential to damage key economies like the US, China, the EU, India, Japan or Korea to the tune of 5% of GDP. Based on OECD TiVA data analysis, the extraterritorial application of these US instruments primarily impact Germany, Japan, the UK, Italy and France – all with a high share of US tech inputs in their exports to China. As the latest development, the EU and the US are each considering the adoption of an outward FDI screening instrument to prevent unwanted transfer of technology to designated countries.

Global Choke Points and Supply Concentrations

Global supply imbalances will lead to more targeted policy responses

Until recently, inter-dependencies in global trade flows were seen as an efficiency-enhancing division of global labour, and the significant concentration of global supply in a few countries was not per se seen as problematic. In 2021, among the 5,223 products of global trade as classified by the Harmonized System of the World Customs Organization, more than half of global supply was concentrated in a single country for 659 products – ~70% more than in 2002.

Among these 659 products, organic chemicals was the category within which most showed such a high degree of single-country dependence, followed by electrical machinery and equipment, and then man-made filaments. China’s dominant role is clear in the numbers – 418 products were highly dependent on it as source of export in 2021, followed distantly by the US (29 products) and India (21 products). This current geo-economic reality following decades of globalization is foreboding more policy responses by countries to strengthen economic security in the future, and more reconfigurations of corporate supply chains.

‘Neo-coupling’ and Trade Deepening

New trade deepenings have substituted for slow China-US trade growth

The era of global commerce that followed the 2008 financial crisis has been characterized as “slowbalization” of goods trade. While US-China bilateral trade growth has significantly decelerated to a mere 1.6% p.a. since the beginning of the trade war in 2018 (vs. 8.4% EU-China or 8% China-World), both countries – due to intensifying strategic competition –have achieved some “trade deepenings,” or “neo-couplings” with third-party trade blocs.

The most noteworthy of these have been between both China and the US (separately) with ASEAN, and China with the Gulf Cooperation Council (GCC) and the Mercosur countries. The EU, on the other hand, while continuing to focus on China, has markedly intensified its trade with Central Asia and African Union countries. Between 2018 and 2022, total trade between China and Saudi Arabia nearly doubled from $63 billion to $116 billion, total trade between China and Brazil grew from $111 billion to $171 billion – largely due to trade war related diversions (soy exports to China) and Bolsonaro’s isolation form the West –, and total trade between the US and Vietnam leaped from $61 billion to $147 billion.

Neo-coupling has therefore been a “substitute” dynamic of rapid trade deepening, discontinuing pre-existing slow trade growth - creating new business realities and new trade integration potential, either due to, or despite geopolitics.

New Governance Needs for cross-border data flows and digital trade

Some approaches to cross-border data flows have created a fragmented landscape

Data has quickly become a key element of global economic development. An illustration: China’s official accounts for 2022 attributed 41.5% of the country’s GDP to value creation from the digital economy. Yet, many countries are establishing regulatory hurdles for cross-border data flows - for reasons of privacy protection, consumer protection, and national security. According to the World Bank’s 2021 World Development Report, most European countries have adopted a “conditional transfers model,” while China, Vietnam, Indonesia, Nigeria or Kazakhstan have pursued a so-called “limited transfers model” – the most restrictive approach to cross-border data flows. Tellingly, China’s procedure for approving cross-border data exports, required when sending certain types of important data to a third country, is so complex that only half of such applications filed by companies domiciled in Shanghai with the local regulator have been deemed complete and eligible for handover to the national bureau for review. By way of contrast, the updated US-Mexico-Canada trade agreement removes restrictions placed on data flows within North America.

As extension to domestic cross-border data regulation, the Asia Pacific currently sees competition for setting the plurilateral rules of digital trade: with the US-led IPEF (14 countries), on the one hand, and the China-influenced RCEP (15 countries), on the other hand, while China has further applied to join both the CPTPP and the DEPA. Exemplary frictions in setting these digital trade rules are that the Chinese side sees domestic computing facilities and disclosure of source codes as conditions to trade, while the US for instance strives to avoid liability of digital platforms for third-party content and a potentially discriminatory digital services tax.

Connectivity and Cross-Border Strategic Cooperation Platforms

China’s Belt and Road spurred a new type of competition

Connectivity may be the often overlooked “macro” dynamic, capable of creating new realities for business and diplomacy, which became a new strategic theatre of geo-economic competition when China’s Belt and Road Initiative (BRI) was announced in 2013, capturing global imagination due to the scale of its aspirations. The BRI is China’s policy-led attempt to create a multi-dimensional cooperation platform with third countries and regions - aiming to build connectivity with the Chinese market around the six dimensions of infrastructure, policy coordination, trade, people-to-people, finance, and industrial cooperation.

In response, Japan (with its Quality Infrastructure Investment Partnership), the EU (with the Global Gateway Initiative and EU-Asia Connectivity Strategy), and the US (with the BUILD Act) have each launched their own connectivity initiatives - some also “mini-laterally,” such as Japan and India’s Asia-Africa Growth Corridor, or the G7’s Partnership for Global Infrastructure and Investment. Total financing of the BRI is announced to reach between 1-3 T USD in the mid-term, while the combined “Western”-led connectivity initiatives also reach above 1 T USD (ca. 1.06 T). The ASEAN region has emerged as one of the key geographic “hotbeds” for these initiatives. However, as lower income countries face the highest debt payment level in 2023 since 1998, connectivity initiatives are also getting their reality check.


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