Fourth Industrial Revolution

A prediction for globalization in 2018

The strategic challenge of the next decade is navigating a world that is simultaneously integrating and fragmenting

The global economy is performing well - but there is a darker side Image: REUTERS/Max Rossi

Paul Rawlinson
Global Chair, Baker McKenzie
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Fourth Industrial Revolution

This article is part of: World Economic Forum Annual Meeting

We recently forecast that 2018 will be a bumper year for M&A and IPO deals, thanks to improved global demand, continued momentum in stock markets and an uptick in global trade. The big risks to this outlook include unpredictable US trade policy, problems in the US bond market and a dip in China's economic growth.

These projections and the related risks are reliable markers for the state of globalization and relative market growth forecasts. But duelling forces dominate the picture they reveal: collaboration against competition; connection against protectionism; inclusion against rejection; transparency against privacy. The intensity of the conflict is striking. The push to innovate, digitize and connect like never before is counteracted by a fierce compulsion to retreat to simpler times.

A couple of years ago, our former Chair Christine Lagarde described a world where the global economy was increasingly integrating, but where the global political system was fragmenting, in part because of a backlash against the disruptive effects of globalization, and its perceived winners and losers. This has come to pass on a scale nobody predicted. Its inherent tension has manifested less as outright combat, and more as friction.

Over the last decade, opportunities and forces unleashed by technology and globalization have accelerated, ushering in the Fourth Industrial Revolution. Innovation has created new business models, disrupting incumbents. Corporations strive to remove friction from supply chains and service delivery. However, governments, regulators, incumbent players and societies react to disruption with friction. Complex forces are at play.

How do you tax digital products properly on a global basis? Can you allow new business and employment models to evolve while preserving the social contract? What are the implications of so-called digital monopolies for competition? How do you reward innovation while facilitating social mobility? What does the new workforce look like, in light of these changes?

We are seeing a shift to multi-speed globalization. The strategic challenge of the next decade is navigating a world that is simultaneously integrating and fragmenting. Stock markets have set new records and economic volatility has fallen to historic lows, while political shocks on a scale unseen for generations have taken place. Seemingly contradictory realities do co-exist.

Despite Brexit and the rise of President Trump's "America First," the global economy is still doing remarkably well. China's GDP growth is clipping along at 6%. While the UK economy is a little weaker, the Eurozone is seeing a rise in household spending and business investment. Key measures of world trade, such as container shipping and air freight, are growing at their fastest rates since before the global economic crisis.

However, there is a darker side. While globalization has strengthened the world economy as a whole, two-thirds of all households in 25 advanced economy countries saw their incomes stagnate or decline between 2005 and 2014. Over the past five years, the UK has seen economic growth and falling wages. The disparity of wealth distribution is getting worse. And despite huge efforts to raise awareness of the role of women in the modern economy, their equal economic empowerment still seems a distant dream. These contradictions are acutely felt.

Statistics like these that have allowed politicians to exploit economic resentment. This typically results in protective policies such as imposing higher tariffs on imported goods, restricting the flow of cross-border data, clamping down on immigration, and calling for a return to traditional values, which is often code for social and economic protectionism.

I do believe that globalization is a force for good, both personally and as the chair of a global international law firm. I do not think a retreat into protectionism is the answer, although I understand the criticisms of globalization and the deep frustration of those whose daily lives have not improved. We must better address these issues. A concerted effort towards more sustainable governance of the global economy is overdue.

Political events have certainly been shocking. But the underlying economic fundamentals remain strong. Indeed, Baker McKenzie's most recent Global Transactions Forecast predicts that deal activity will continue to accelerate to near-record levels in 2018.

Could a further spike in populism bring all this crashing down? The impact of the US taking a more protectionist stance on global transaction flows means that in 2018, global M&A levels could fall by up to a trillion dollars and IPO activity by half, our analysis shows. The threat of a hard Brexit and NAFTA collapse also remain real risks to our relatively optimistic predictions.

But we also model an upside risk scenario, in which we see economic activity improving faster, the Chinese economy expanding at a rate not seen for the last few years, a benign policy environment in the US and continued expansion in the Eurozone. In this scenario, corporate activity hits record levels in 2018 and 2019. US tax reforms will provide a stimulus for growth. We are optimistic that this second scenario plays out more strongly than the first.

I foresee globalization fragmenting, but not halting or beginning a full-scale retreat. Markets, countries and people are simply too well-connected for that. We are more likely to see erratic progress - a step back followed by a step forward. More pauses, more delays, and more bilateral than multilateral treaties.

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Fourth Industrial RevolutionGlobal CooperationFinancial and Monetary SystemsEquity, Diversity and Inclusion
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