Think Tank

International Trade and a Changing World Order : Redefining Business

As the ongoing trade wars demonstrate, geopolitics now holds primacy over business performance. Organisations find themselves exposed to external risks in ways unseen in decades. The rise of nationalism – in America, China and Europe, among others – is a major contributing factor, and tariff hikes are the most tangible sign of this. Yet, tariffs are only a small component of the broader narrative around global value chains. To start with, America and China are engaged in a deepening, hybrid ‘cold war’ – one made complex by strong inter-dependence on investment and trade, but also by a growing rivalry centred around technology. The Made in China 2025 initiative seeks to promote 10 hi-tech sectors – including AI, robotics, aerospace, and autonomous vehicles – and to secure both human capital and cutting-edge technology, including in microchip development. It will, however, continue to attract counter-measures, such as export controls, and even sanctions. For its part, China is responding to Donald Trump’s tariff hikes by targeting, with laser-point accuracy, the types of goods (e.g., soybeans, cranberries, nuts) that are produced in states loyal to him and his party. As the war escalates, it may even get Chinese bloggers to start boycotting brands like Starbucks and KFC – a very potent weapon, indeed. More broadly, if the late 1980s was the golden age of offshoring, technology and regulation are now moving things in the other direction, towards near-shoring, or even next-shoring (i.e., local production closer to markets, and the clustering of industry and ecosystems). In this environment, there are no guarantees that globalisation will not start to get reversed, or that the trade war will not spill over into deeper conflict.

Tariffs and NTBs

While tariffs are the most visible form of the current backlash against trade, non-tariff barriers (NTBs) have a much bigger impact. Going forward, they will prove even more disruptive. Essentially, NTBs are non-monetary barriers, usually built around rules and regulations that demand compliance. These might include health and safety norms, technical specifications, or rules on upfront deposits, or having to use only specified entities as importing channels. UNCTAD lists over 350 categories of NTBs, such as anti-dumping duties, quotas, voluntary export restraints, and export licensing requirements. Classifying goods as having dual-use technology – for instance, the parts, sub-components or software that go into certain consumer electronics may be considered strategic, because they can be ‘weaponised’ – is a critical NTB. The Trump administration is now looking expand the list of dual-use technology by at least 1,000 lines, impacting everything from infrastructure to medical devices, and even toasters and telephones. It will also add cost and complexity, especially where certain suppliers, sub-contractors or strategic partners lack the sophistication to meet such requirements. For instance, the US only recently lifted a ban on mobile manufacturer ZTE, after imposing a USD 1.4 billion fine on it for knowingly selling goods to Iran and North Korea - and then trying to cover it up. This impacted not only ZTE, but also its suppliers, some of whom were on the verge of going out of business. As today’s technology ‘cold war’ intensifies, there will be many more such cases.

New NTBs are also coming up in the digital economy, including a wave of data localisation laws in countries such as Indonesia, Vietnam, Thailand, and India. Stricter data privacy laws, including Europe’s GDPR, will also be a major impediment, fragmenting and disrupting trade flows, and possibly limiting the growth of blockchain. For example, if a blockchain contains an EU citizen’s private data, the new law says that unless the person has granted for the data to reside there, it must be expunged from the database. However, this goes against the very structure of the blockchain, in which data tends to get ‘trapped’. There will, of course, be market-driven solutions, including applications that ring-fence certain data, but they will take time to evolve.

Three Scenarios For the Evolving Trade Landscape

Going forward, the global trade landscape will be shaped by several distinct sets of forces, which give rise to three alternative scenarios: ‘Fair trade’, ‘China Inc.’, and ‘Unilateralist’.

The ‘Fair trade’ model
Despite the US withdrawal – for now – from the Trans Pacific Partnership, the remaining 11 nations are pushing ahead with the now-renamed CPTPP. Countries like Singapore, Japan, Australia and Vietnam are keen to complete the deal, and even Malaysia, which had to concede many points during negotiations, is pushing ahead. What makes the deal so attractive is that it really is the ‘gold standard’ for 21st century free trade agreements (FTAs). It took 9 years to negotiate, but addresses most of the issues around globalisation, including data privacy and security. It has clear frameworks and rules that are supportive of western democratic values, including sustainability (for instance, establishing end-to-end traceability in supply chains, thus allowing carbon footprints to be measured more accurately), and robust labour standards and practices. It also prioritises the role of SMEs, particularly in this new digital environment, in driving the next wave of growth. With well-defined rules of origin, and specific rules around state-owned enterprises, it creates a framework that is adverse to how China – which was not invited to join – does business. Even without the US, therefore, the CPTPP remains an attractive proposition, and one strongly linked to the ‘fair trade’ scenario. However, 20 of its clauses – such as around data privacy – have for now been ‘suspended’ under pressure from Vietnam, but will, if and when the US re-joins, eventually get reinstated.

China Inc.
The Chinese model of trade – which is really about driving China’s globalisation – will impact supply and value chains in starkly different ways from the fair trade model. Two of the major planks of the ‘China Inc.’ approach are the Belt and Road Initiative (BRI) and the RCEP trade pact, which is currently being negotiated. If nothing else, the BRI is the most successful PR campaign in history, placing China at the very centre of a new narrative around globalisation. Whether it succeeds in paving the way to Europe with Chinese infrastructure, particularly given limited Western capacity to pay, as well as China’s own, very serious structural issues (its ballooning debt and rising capital outflows), remains to be seen. The aim is to develop several economic corridors, built around both hard (roads, bridges, ports) and soft (wireless networks and electricity grids) infrastructure. China hopes to use the BRI as a valve for its over-capacity problem, creating business, among other things, for its state-owned construction and energy firms. By requiring loans and transactions to be settled in Renminbi, it also seeks to turn the Yuan into a global currency, freeing China from any sanctions-related issues. (It is precisely because such a large share of global commerce is transacted in dollars, making it possible to trace the money back to US banks, that American sanctions have such a lethal effect.) Meanwhile, it is the ASEAN countries, together with Australia and New Zealand that are driving the RCEP. The US is absent, essentially making it a ‘Chinese deal’, and unlike the TPP, it does away with such ‘non essentials’ as sustainability, data privacy, and labour standards.

The ‘Unilateralist’ model
At the opposite extreme of the ‘fair trade’ scenario are variants of ‘America First’, which eschews multilateralism and takes an ‘everyone for themselves’ approach. From this perspective, global agreements and institutions are undesirable because they make countries subservient to rules that go against the national interest. Indeed, serious discussions are underway inside the Trump administration – which has already by-passed the WTO by invoking national security concerns in imposing heavy steel and aluminium tariffs – to pull out of the WTO. If that happens, the global trading system will fragment, but at the very least, a unilateralist approach will drive up protectionism. For all the flaws with this model, it must be conceded that China has gamed the international system since joining the WTO in 2001. Its very state-centric trading practices are built around protectionism and the forced transfer of technology, all of which run counter to the spirit of the WTO. Many countries are now realising that they were mistaken to believe that China would liberalise and become more democratic, and this backlash is being felt not just in the US, but also across Europe, and in countries like India and Australia – which, for example, recently blocked Huawaei from its 5G network.

Digital trade in the 21st Century

Regardless of what happens in the geopolitical sphere, the global trade landscape will continue to be transformed by another critical factor: digital disruption. The whole world is moving to an asset-light, platform-based, digitised economy, and services related to data have become absolutely integral to economic growth. Even the smallest EM firms are now leveraging these platforms in ways that would have been impossible to imagine a few years ago: a small Rajasthani manufacturer of leather journals, for instance, sells 15-20 pieces each day on Amazon, communicates with his customers on WhatsApp, and ships his goods via DHL. Alibaba has become a one-stop shop, bringing together buyers and sellers, and acting as a plug-and-play platform for micro-finance, micro-insurance, and cloud-based analytics, providing businesses with valuable feedback loops (what is selling, and where; how to increase sales). Yet, looking beyond a surging e-Commerce sector, there has also been an exponential, 45x increase in the cross-border movement of data, from 4.7 terabytes (TB) in 2005 to 211TB in 2014. Data has become a commodity, with over USD 100 billion worth of it traded, re-traded, analysed and packaged for various purposes each year. This is arguably among the most disruptive changes in human history, and dwarves the corresponding rise in trade and finance flows. All of this will continue to affect regulation, and indeed, there is now a backlash against technology that is visible in data privacy and localisation laws. So far, technology has stayed several steps ahead of the regulators, but over the next 5-10 years, they will catch up, forcing business models to change.

What’s next for India and the global value chain?

In many ways, India finds itself in a sweet spot with respect to the global trading system. It is currently part of the RCEP discussions, but it may, in time, find itself drawn into the TPP as well. While its low labour costs are no longer necessarily an advantage, India is a huge market, though it will need to develop specific nodes and hubs that help it better fit into regional value chains. The ongoing ‘glocalisation’ of production clusters – wherein businesses move towards local models, based around bespoke markets and local supply chains – could be an advantage. (To an extent, this trend is also driven by a need to ring-fence production eco-systems, protect local interests, keep out certain ‘bad elements’, and reduce the risks arising from NTBs, including sanctions.) Increasingly, firms such as Harley Davidson are being incentivised to set up local plants in countries like Thailand, and in Europe. At the same time, the trade between emerging-market MSMEs – who act as both suppliers and end-customers – will take on a new and increasingly strategic role.

Alex CapriThis article is based on discussions with Alex Capri, Senior Fellow and Lecturer, National University of Singapore Business School, former International Trade Specialist, US Customs Service, at IMA India’s Annual CEO Strategy Roundtable in Udaipur in July 2018