GED 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 entirely unclear.

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.

Each week, we dedicate a blog post to a scenario, focusing on European and German businesses’ economic aspects and implications. 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 III: Permanent Crisis

The US and China are locked in an ongoing conflict. Europe is crushed between the two.

globalization scenarios

What happens in this scenario

In light of Europe’s weakened state, the US and China are the world’s sole superpowers and thus shape global developments. Each bloc views the other as an adversary. American democracy is in crisis, as is China’s one-party dictatorship.

Driven by escalating concerns about domestic stability, the rivals develop an increasingly strident “My country first” mentality – and the effects are felt around the globe. Democracies come under pressure from internal conflicts, unstable governments, populism, nationalism, and other extremist movements.

Each superpower uses any available means to draw third states closer, for example, to position them as representatives of its interests vis-à-vis its rival. It can no longer be assumed that multilateral structures will produce universally useful solutions, such as for climate change, migration, or the dismantling of tax havens.

The multilateral structures, such as the UN or WTO built up over decades, are in danger of collapsing altogether. Even the EU is at risk of disintegrating. Coming to an agreement becomes more onerous because member states value loyalty to the superpowers over European unity. Taking Brexit as their cue, other countries leave the European alliance.

World trade

The Chinese and American economies have undergone a chaotic and now largely complete process of decoupling. Trade regions are fragmented, global trade conflicts are becoming more intense. The WTO has become completely ineffective. Countries everywhere struggle to negotiate bilateral or regional free trade agreements, which are difficult to finalize and ratify.

Economic policy

China and the US pursue an aggressive “My country first” policy in all areas of the economy. Their industrial and innovation policies are driven by security concerns that lead them to introduce export controls and blacklists and ban foreign firms’ investments.

China’s state capitalism centers the country’s development strategy on the country’s state-owned enterprises (SOEs). The private sector is increasingly forced into the role of subcontractor and incubator. Regulators try to nurture powerful Chinese champions through industrial policy initiatives like “Made in China 2025” and state-led mergers.

In contrast, the US deploys an aggressive industrial policy to strengthen its private businesses to benefit politically from their role as ambassadors and bridge-builders in other global regions. In this scenario, meanwhile, the EU fails to develop a coherent industrial policy.

Technology and innovation

The EU’s economy is not capable of producing European champions. European countries must rely on the US and China to build critical infrastructure and are thus completely dependent on the superpowers. Caught up in this meshwork of relationships, European companies are even forced to share their achievements with China or the US as part of unequal collaborations.

The US maintains its leading role over China in this constellation, for example, semiconductors development. Its closer proximity to European attitudes affords it easier access to European innovations, which improves its position vis-à-vis its rival.

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

The US and China are engaged in constant conflict over raw materials from third countries. Some countries are able to exploit the Big Two’s urgent need for resources to transform themselves into new strategic players. The permanent tug-of-war over raw materials obscures ecological concerns.

For example, efforts to find and drill for oil above the Arctic Circle take place at breakneck speed to prevent anyone else from getting there first. Even third countries see securing new sources of raw materials as an opportunity to expand their own sphere of influence, and they join the fray as a result. European nations find themselves dependent on the US and China through myriad complex ties when it comes to their own supply of raw materials.

Climate protection

Climate protection vanishes from the international political agenda. The EU does not succeed in realizing its climate protection goals; the New Green Deal fails. China tries to use climate protection to score points politically. In reality, it only takes adaptive measures, such as securing its own food supply by purchasing land in third countries.

Implications for European and German businesses:

The ongoing crisis is the least desirable scenario for virtually all companies. Worsening conflicts lead to reduced economic output on a global scale. Even though the burdens vary significantly depending on sector, size, or many other factors, almost all businesses are confronted with new challenges that overwhelm some of them, threatening their very existence. They must contend with shrinking markets and struggle to secure supplies in the fragmented global market.

The EU remains an attractive market first, but due to rising political tensions outside and inside the bloc, it starts disintegrating and loses its attractiveness as an investment location. The result is a decline in economic output, which has a negative impact on consumption and sales and curbs the business sector’s innovative power. The European market shrinks and becomes less relevant.

German companies attempt to remain present in all markets, developing new strategies to that end, for example, to meet demand in South East Asia from China. Regionalization results in sizeable revenue losses and thus a strategic focus on fewer regions. Cross-border trade declines, regional self-sufficiency gains in importance.

Risks:

In this scenario, companies are prudent when making decisions. Without effective supranational institutions, trade disputes and armed conflicts become much more likely in many parts of the world. Uncertainty and instability force businesses to disengage and wait. Companies face the constant threat of getting caught between the two fronts and being hit with sanctions imposed by one side or the other. Reliable planning cycles are virtually impossible.

Opportunities:

The “Made in Germany” brand remains a reliable factor even in the World in Permanent Crisis scenario. The quality of their products and their world-leading know-how in developing numerous industrial components give German companies the opportunity to assert themselves vis-à-vis the rival superpowers. Germany’s Mittelstand often produces specialized solutions that make it indispensable to the US and Chinese economies

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.