A period of change in the international system is destabilizing assumptions about global order. Last year’s Global Risks Report argued that the world is becoming not just multipolar, but also “multiconceptual”. This chapter further examines how changing power dynamics and diverging norms and values are affecting global politics and the global economy.
The chapter begins by outlining how normative differences increasingly shape domestic and international politics. It then highlights three trends with the potential to trigger disruptive change: (1) the difficulty of sustaining global consensus on ethically charged issues such as human rights; (2) intensifying pressure on multilateralism and dispute-settlement mechanisms; and (3) states’ increasingly frequent use of geo-economic policy interventions.
No room for nostalgia
It should be no surprise that a multipolar world is also more multiconceptual: as global power is diffused, there is more room for divergent values to shape geopolitics than there has been since the end of World War II. After the bipolar Cold War gave way to unipolar US power, some argued that the battle of ideas was over and Western liberal democratic norms would, in time, prevail globally. That was a bold claim then and it looks like hubris now. In today’s world, narratives of gradual convergence on any set of overarching values look unconvincing. Values seem to be a source of division rather than unity, not just globally but also within regions and countries.
Nostalgia is an inadequate response, especially as previous decades were hardly risk-free. The imperative now is to understand the changes that are happening and learn how to safely navigate the challenges they entail. After a period of globalization that has deeply integrated many countries, reconfiguring relationships is unlikely to be easy.
States, individuals and markets
Values-based tensions are manifesting in different ways in different places, creating new fault lines within and between countries and regions. But they have common features: control, and the role of the state. Many political leaders and communities feel they have lost control—whether to internal divisions, external rivals or multilateral organizations—and, in response, they look to strengthen the state. Because notions of power, security and self-determination are so politically fundamental, clashes may have less scope for compromise than when differences involve more technical issues.
Domestically, key tensions include the following:
- States and individuals. The balance has tilted from individuals towards states.1 In this context, the idea of “illiberal democracy” has gained currency.2
- States and minorities. Politically, rising majoritarianism means voting is increasingly a winner-takes-all contest between polarized groupings. Culturally, identity politics have become increasingly contentious, with national majorities in many countries seeking greater assimilation (or exclusion) of minorities.
- States and markets. The scale and power of multinational businesses has fuelled growing opposition to globalization in many countries. Elsewhere, states are taking a stronger economic role: almost a quarter of the world’s largest firms are now state-controlled, the highest level in decades.3
- The role of technology. New technological capabilities have amplified existing tensions over values—for example, by weakening individual privacy or deepening polarization—while differences in values are shaping the pace and direction of technological advances in different countries.4
Globally, key pressures relate to how states interact and tackle cross-border challenges:
- Multilateral rules and institutions. Strong-state politics makes it harder to sustain multilateralism. As further explored below, this has been most evident so far in the shift in trade policy from global frameworks overseen by the World Trade Organization to state-led regional initiatives and bilateral deals.5
- Sovereignty and non-interference. The protections for state sovereignty in the UN Charter appear more resilient than the interventionist norms of the 2005 Responsibility to Protect principle. In the digital era, efforts to promote (or disrupt) political values in other countries have become increasingly contentious.
- Migration and asylum. The international movement of people has emerged in recent years as a fault-line issue in many countries. Demographic trends—such as those illustrated in Figure 2.1, which projects changes in the relative populations of Africa and Europe—will drive inter-regional migration in the decades ahead.
- Protection of the global commons. Climate change, outer space, cyber space and the polar regions are aspects of the global commons that are already or could increasingly become a source of international tensions.
Figure 2.1: Wave of Change
Relative shares of combined Europe/Africa population
Source: World Population Prospects 2017. https://population.un.org/wpp/
In the context of rising geopolitical competition and weakening multilateral institutions, debates revolving around these pressures have the potential to be destabilizing and even to foment conflict. A more hopeful prospect is that the current flux in the international system instead will lead in pragmatic, open and pluralist directions, but even then a difficult and risky transition lies ahead.
REUTERS/Jean-Paul Pelissier
Shared goals amid divergent values
In a world of disparate powers and divergent values, it is likely to be more difficult to make progress on shared global goals. Such progress requires two things: aligning on substantive priorities for action, and then sustaining coordination and collaboration. The example of climate change shows that, even when the first is possible, the second can be challenging: broad consensus was built up over decades, culminating in the signing of the Paris Agreement in 2015—but evidence on implementation is mixed, and even full implementation will not be enough to prevent damaging levels of global warming.
Challenges related to the Fourth Industrial Revolution will evolve rapidly and coordinating a response may be complicated when they touch on fundamental values. Chapter 4 (Going Viral) discusses how emerging biotechnologies are blurring the lines between humanity and technology: for example, it was claimed in late 2018 that gene-editing tools had been used to create genetically modified babies. Whether countries each chart their own course on such research or instead align around shared ethical principles to craft international restrictions could have important implications for the future of humanity.
Migration and cross-border tax policy are among other global issues that are both ethically charged and subject to divergent state interests. However, the most acute challenge may be posed by human rights, which have become a litmus test for the changing role of values in the international system.
As geopolitical tensions and competition have intensified, human rights have been increasingly politicized.6 The complex global picture that is emerging in that area—nominal alignment on shared values, marked differences in interpretation and implementation, fragmented approaches to multilateral institutions—is a microcosm of the wider role of values in the international system. An optimistic scenario sees the kind of flux that is evident around human rights as an opening for states and other stakeholders to find better ways of doing things. However, values divergence means that it will be difficult even to align on what “better” means in this context. As sketched out in one of our Future Shocks, it is possible to imagine a tipping point is reached where states simply abandon ideas—and institutions—that limit their autonomy.
Multilateralism under threat
Political leaders have increasingly asserted the primacy of the nation-state in the international system and sought to weaken the constraints placed on national autonomy by international agreements and multilateral institutions. Defenders of multilateralism point out that this fragmentation risks creating blind spots, undermining global stability, and limiting the capacity to respond to cross-border challenges.
The current multilateral architecture has been criticized in rising and legacy powers alike. In some rising powers, critics argue that the international architecture is too firmly shaped by the post-World War II balance of power and values, and has failed to evolve to reflect subsequent global transformations.7 In economic terms, for example, in 1950 the United States had 27.2% of global GDP and China 4.6% (on a purchasing power parity basis); in 2017 those figures were 15.3% and 18.2%, respectively.8 Such shifts in the economic centre of gravity create demands for institutional change. Meanwhile, in some legacy powers, critics argue that multilateralism is a costly drag on their freedom to manoeuvre.
Multilateralism can be weakened in numerous ways. States can withdraw from agreements and institutions; they can intervene to block consensus; and they can adopt a selective approach to upholding norms and rules. Multilateral institutions can also experience a gradual process of disuse or disregard. Arguably, the cohesiveness of the multilateral system could be weakened by the creation of new parallel structures, but it is also possible that increased institutional density could bolster the resilience of the system.
Fragmentation risks creating blind spots, undermining global stability, and limiting the capacity to respond
International dispute resolution is an area of particular concern, so far manifesting especially in relation to trade. For example, if the appointment of new judges to the WTO’s Appellate Body continues to be blocked, a key dispute-settlement panel could cease to function in December 2019, when there will no longer be enough judges on the panel to issue valid rulings.9
Dispute resolution is a crucial part of the architecture of international commerce, and the system is already changing—its centre of gravity is shifting from the West to Asia. For example, in late 2017 the China International Economic and Trade Arbitration Commission (CIETAC) introduced its first international arbitration rules, and in mid-2018 China established two new international courts to handle commercial disputes related to the Belt and Road Initiative.10 Controversy has escalated in many countries over investor-state dispute settlement (ISDS) procedures, which allow foreign investors to rely on international arbitration processes rather than the local legal frameworks of countries in which they have invested.11 If cross-border trust is eroded by geopolitical competition and diverging values, creating mutually accepted dispute-settlement mechanisms may become increasingly complicated.
REUTERS/Edgar Su
Worsening trade relations
Trade is the arena in which the broader implications of a more multipolar, multiconceptual world have so far played out most clearly. Trade relations between China and the United States rapidly worsened during 2018. There were positive signs in the final months of the year, raising hopes that a normalization of relations will follow, but the pace of the earlier deterioration highlights how quickly risks can crystallize and intensify in this area.
In early 2018, on the recommendation of the US International Trade Commission,12 President Trump announced “global safeguard tariffs”—the first time this provision had been used since 2001—totalling US$8.5 billion on solar panel imports and US$1.8 billion on washing machine imports. The United States later cited national security when imposing tariffs on steel and aluminium imports, and on three occasions it increased China-specific tariffs related to intellectual property and technology disputes.13 These US steps drew counter-measures from China, and the stand-off soon threatened to cover all goods trade between the two countries.14
The potential costs of deepening trade tensions were highlighted in October 2018 when the International Monetary Fund (IMF) revised down its global growth projections for 2018 and 2019 by 0.2 percentage points. The IMF expects growth to slow in the United States from 2.9% last year to 2.4% in 2019, and in China from 6.6% to 6.2%. Any slowdown in global growth will add to the headwinds for developing countries, which already face rising interest rates and, in some cases, domestic political stresses as well: in September, as US bond yields picked up, investor nervousness had pushed emerging market equities into bear-market territory.15
Economic policy—long seen as a means of mitigating geopolitical risk by embedding powers in mutually beneficial relationships—is now frequently seen as a tool of strategic competition. For example, the US Department of Commerce’s strategic plan for 2018–22 states that “economic security is national security.”16Each side in the worsening stand-off between the United States and China last year blamed the other for eroding bilateral relations,1718 and domestic political factors have not always been conducive to compromise between the two countries. Their current relationship is such that a rapid unwinding of protectionist measures cannot be ruled out, but some analysts have warned about more fundamental challenges. It was not only among rivals that global trade conditions worsened in 2018. US trade relations with its allies also saw unexpected volatility. Ahead of the meeting of G7 leaders in June, the United States imposed tariffs on steel and aluminium imports from the European Union, Canada, Mexico and others.19 Threat and counter-threat followed, between the United States and the European Union in particular: President Trump talked of imposing a 20% tariff on vehicle imports from the European Union; the European Commission hinted at global countermeasures totalling US$294 billion, around one-fifth of total goods exports.20 The uncertainty put strain on European car makers, some of which were already under pressure from US-China trade tensions.21 In a rapprochement of sorts, President Trump and European Commission President Jean-Claude Juncker agreed in July to work towards reducing tariffs on both sides. And in October, a revised trade deal between the United States, Mexico and Canada was announced to replace NAFTA: the USMCA (the United States-Mexico-Canada Agreement).22
Almost all of the high-profile trade disruptions that were threatened or imposed in 2018 relate to exports and imports of physical goods. But a growing proportion of global trade consists of services—digital services in particular. As digital flows have increased in economic importance, so too have data localization provisions that require businesses to store data in the country where they are collected rather than on company servers located elsewhere.23 Localization rules have been justified on numerous grounds, from privacy and intellectual property to national security, policing and tax. Critics argue, however, that governments’ expressed reasons for restricting data flows are often a pretext for what amounts to protectionism designed to inhibit cross-border digital trade.24
REUTERS/Yannis Behrakis
Investment tensions
The past year’s developments in foreign direct investment (FDI) are arguably even more significant than trade tensions. As discussed in the 2018 Global Risks Report, outward investment has become more associated with geopolitical positioning. As a result, caution towards inward investment is growing. Because FDI creates economic facts on the ground in a way that trade flows do not, this is an area where increasing geo-economic competition could sow seeds of tensions that take years to grow and years more to resolve. Western countries in particular have been sharpening their power to block investments in strategic sectors, particularly emerging technologies—raising the prospect of a partial unwinding of globalization in investment, as in trade.
In August 2018 the German government announced a reduction in the threshold at which foreign investments can be blocked.25 It had earlier instructed a state-owned bank to acquire a 20% stake in an energy infrastructure company to prevent its acquisition.26 This is not the first time that a European government has sought to restrict inward investment. In 2005 France notoriously fended off PepsiCo’s mooted acquisition of dairy producer Danone.27 Then-Prime Minister Dominique de Villepin lauded “economic patriotism” as the foundation of global competitiveness.28 That language prompted a backlash at the time, but it resonates today—though European wariness now focuses on Chinese rather than US takeovers.
This wariness has intensified since the cutting-edge German technology firm Kuka was acquired by a Chinese company in 2016. In 2018 the United Kingdom released a 120-page policy proposal that would increase government power to block foreign acquisitions,29 while France published draft legislation increasing the number of sectors in which foreign acquisitions must receive prior ministerial approval.30 Technology firms are a particular focus for investment screening because their significance goes beyond the economic: the dual-use nature of many new technologies means their acquisition could have national security implications.31
In December 2017 the European Commission proposed EU-wide measures to control non-EU investment into EU companies, as only 12 of the 28 member states have screening mechanisms. One reason for EU concern is that many decisions need member-state unanimity, creating vulnerability to foreign leverage in individual member states. In September 2018 European Commission President Jean-Claude Juncker called for more foreign-policy decisions in the European Union to be made by qualified majority voting instead.32
The US Department of Commerce’s strategic plan states that “economic security is national security”
The United States also introduced legislation in 2018 to improve the screening of investment into 27 sectors, including semiconductors and telecommunications.33 In 2017 India tightened the rules for foreign businesses operating in power transmission.34 Australia has repeatedly tightened its inward investment rules in recent years, and in 2018 announced further restrictions on investment in electricity infrastructure and agricultural land.35
China is travelling in the other direction, albeit from a very different starting point. According to Organisation for Economic Co-operation and Development (OECD) data, China has significantly reduced its restrictiveness to FDI in recent years, but nevertheless it remains among the world’s most restrictive countries (see Figure 2.2).36
Figure 2.2: Opening Up?
OECD FDI Restrictiveness Index (0=open; 1=closed)
Source: Organisation for Economic Co-operation and Development (OECD). https://data.oecd.org/fdi/fdi-restrictiveness.htm
Note: The index covers four main types of FDI restriction: foreign equity restrictions, discriminatory screening or approval mechanisms, restrictions on key foreign personnel, and operational restrictions.
While in 2018 China announced further cuts to its “negative list”—of sectors into which foreign businesses are prohibited from investing, or in which they can operate only as part of a joint venture with Chinese entities37—many sectors that would generate interest from foreign investors remain on the list.38 As with trade, if the climate for cross-border investment flows continues to worsen it will hamper global economic growth and risk creating a vicious circle in which economic and geopolitical tensions aggravate each other. The data already point to a sharp fall-off in FDI in 2017, despite other macroeconomic indicators being solid. This trend continued in the first half of 2018 (see Figure 2.3).39
Figure 2.3: Going Down
Global FDI inward flows (US$ billions)
Source: Organisation for Economic Co-operation and Development (OECD). http://www.oecd.org/investment/statistics.htm
If this were to be sustained, it would leave many states—particularly smaller or weaker ones—having to make painful choices between securing investment for growth and maintaining fiscal control and strategic independence.