The ‘Great Reset’: The global economic system will change, but not in the way WEF thinks

For two years the world has struggled to get to grips with the impact of the COVID-19 pandemic and its tragic consequences. The focus of many governments and business leaders has inevitably been on the short term political, societal, health and economic implications of the crisis. However, from the outset there were others who believed the pandemic could be a catalyst for re-structuring the entire functioning of the global economy and with it, inevitably, ‘globalization’. The World Economic Forum (WEF), the non-governmental lobby organisation under the leadership of Klaus Schwab, has led the calls for change and dubbed this proposed transformation ‘The Great Reset’.

According to the WEF, the pandemic offers an opportunity to ‘improve’ the economic system and replace it with ‘responsible capitalism’. The aspiration has three main themes:

1. The encouragement of stakeholder capitalism i.e. a system which delivers ‘fairer’ outcomes
2. Underpinning economic development with sustainability and
3. Harnessing the innovations of the Fourth Industrial Revolution (4IR).

One commentator described the initiative as refocusing the world’s economy on ‘values’ rather than ‘value creation’. A number of world leaders and former politicians have embraced the concept, including Prince Charles and John Kerry. The slogan ‘Build Back Better’ was adopted by many, including UK Prime Minister, Boris Johnson and US President, Joe Biden, to communicate their political aims which directly or indirectly have been influenced by the thinking behind ‘The Great Reset’.

In essence, the WEF is promoting a ‘triple bottom line’ approach of ‘people, planet and profits’, founded upon the new 4IR technologies and disruptive business models. According to Schwab, ‘…the pandemic represents a rare but narrow window of opportunity to reflect, reimagine, and reset our world to create a healthier, more equitable, and more prosperous future.’

Despite using the term ‘reset’, the WEF’s plans do not call for a complete tearing down of the structures on which the global economy is based. This is unsurprising as the organisation’s own stakeholders include politicians, financiers and business leaders, all of whom have a vested interest in maintaining the ‘old order’ or at least a recognisable version of it. However, the initiative has raised some important questions over the future for the global economy and perhaps most importantly whether ‘globalization’, the defining macro-economic trend of the past fifty years, is still fit for purpose.

Globalization under fire

The phrases ‘Build Back Better’ and ‘The Great Reset’ are underpinned by the belief that global economic, financial and trading systems need improvement or, in some cases, complete reform. In fact, many people believe that ‘globalization’ is no longer fit for purpose, citing a diverse range of short term and structural failings including:

• Misfiring logistics systems such as the backlog of ships at US ports and the high levels of air and sea freight rates
• The way in which many emerging markets were effectively excluded from global supply chains at the height of Covid when shipping capacity was switched to more lucrative trade lanes
• The inability to supply PPE to healthcare workers at critical periods of the pandemic
• Inequitable access to Covid vaccines across the world
• The difficulties which many small and medium-sized exporters in Asia, Latin America and Africa have found in accessing trade finance
• Trade barriers which prevent emerging market companies tapping Western markets
• Structural unemployment created by off-shoring of manufacturing jobs from the West to Asia
• The use and misuse of low cost labour including ethnic groups such as the Uighurs in China
• The role which international logistics and transport plays in the generation of carbon emissions.

At times it has seemed that globalization has been in a existential crisis due to the systemic vulnerabilities exposed not only by the pressures of COVID but other risks such as natural disasters, terrorism and geo-political insecurity. However, the greatest threat to global systems was the economic fall out from the worldwide recession of 2008-9. In the aftermath of the crisis, trade was seriously impacted and global flows of finance dried up, with many markets in the emerging world hit the hardest. Governments complained bitterly at their treatment at the hands of Western bankers and turned to an eager China to fill the investment void. This added impetus to China’s Belt & Road Initiative leading to a pivot of supply chains towards the East, long before there was any talk of a reset, ‘Great’ or otherwise.

Under fire from all sides

Globalization has been accused of fostering a world of ‘haves’ and ‘have nots’; of millions of people working long hours for meagre pay in dangerous conditions to supply voracious Western markets. Disasters such as the Rana Plaza factory collapse in 2011, in which over 1000 Bangladeshi textile workers died, helped bring this issue to the attention of global media. Despite protestations from organizations such as the World Bank that globalization has helped to raise over a billion people out of poverty, such events have created an overwhelmingly negative public perception of the ‘unfair’ consequences of globalization.

Exploitation of labour has long been a charge levelled against Multinational Corporations (MNCs), but perhaps one of the fundamental changes of the past five years has been that the benefits of global supply chains have been increasingly called into question by the governments which had previously been their strongest proponents. For example, populists, such as Republican politician Donald Trump, have challenged the inevitability of the loss of Western manufacturing jobs to Asian or Mexican markets. Whilst many consumers in North America and Europe have benefited from the lower prices that have resulted from off-shoring prodcution, it is undoubtedly the case that many workers have lost their livelihoods, with their jobs transferred to often highly subsidised and/or state-backed competitors on the other side of the world.

Indeed, in many cases, ‘global free markets’ have turned out to be anything but. MNCs have often benefited from being able to tap into these subsidies, either directly from setting up their own off-shored operations, or indirectly through a lower cost supply base. Instead of educating and training unemployed European and US workers to take advantage of a shift towards high value manufacturing or services, Western governments have allowed parts of society, especially in previously industrialized regions, to become disaffected. In the minds of many, governments and multinationals have conspired in this decline, a situation only recently being addressed by so-called ‘levelling up’ policies.

The Rise of China – the cuckoo in the nest?

What’s more, in terms of international relations, supporters of globalization have been accused of unwittingly facilitating the rise of China’s soft power. Years of off-shoring have left the West at a competitive disadvantage in terms of production facilities and know how. Moreover, China’s investment in Africa and Latin America has allowed it access, sometimes exclusively, to raw materials, many of which are critical to future manufacturing strategies such as alternative propulsion technologies. In some cases, Chinese tech companies, such as Huawei, have achieved market leading positions in the supply of electronic components, raising security fears over the potential for hostile intelligence agencies to gain access and compromise information and communication networks.

Running counter to much of the rest of the world, China’s private sector has been in retreat over the past ten years. As Thomas Cullen says in a recent analysis for Ti Insight, ‘These organisations [i.e. Chinese privately owned companies] have been characterised by a strategic marketing policy of gaining market-share through undercutting the prices of competitors in the short-term. This has been facilitated by access to capital resources from the state banking system and other state-controlled resources such as land and energy.’ In other words, they have become conduits for Chinese government policy.

This has resulted in the growth of Chinese-based global brands, such as ChemChina, Haier, Lenovo, Geely and, of course, Huawei. Many of these companies started off as suppliers to Western OEMs but have developed their own brands and invested heavily in their own technology. In doing so they have migrated up the value chain, from competing on cost to quality.

Their ambitious strategies have set alarm bells ringing in the West. Big acquisitions, such as ChemChina’s purchase of Swiss-giant Syngenta, have fuelled fear of a transfer of intellectual property to China. Again, critics would say, globalization has been hijacked by Chinese-backed corporations working to their own strategic or even political ends.

In the long run this will be counter-productive. According to Cullen:

• Countries that perceive certain industries as ‘strategic’ will seek to avoid dependence on Chinese suppliers in those sectors.
• Companies will seek to construct supply chains that rely on suppliers which are politically stable and reliable.
• Investment in assembly operations for servicing markets outside China will be less likely to be located in China.
• Assembly operations in China will increasingly be dedicated to supplying the Chinese market.

It has also become Chinese policy to capture more supply chain value by undertaking the manufacture of intermediate goods. In the ‘Factory Asia’ model, components produced across the region have typically been transported to China for final assembly. This means that Chinese manufacturers lose out on much of the value adding process, the final assembly being a low cost and commoditised undertaking dependent on low cost labour. The government recognised that for its industry to rise up the value chain it had to invest in the know how and facilities which would obviate the need to import components from competitors throughout the region – a calculated, strategic and successful move.

On top of this, the imposition under President Trump of huge US trade tariffs on Chinese imports has resulted in an ‘In China, for China’ industrial strategy. Encouraged by the country’s political leaders, consumers are purchasing Chinese-made rather than foreign goods in increasing volumes, a massive shift in behaviour from only a few years ago. This trend is particular evident in the younger demographic which takes pride in buying domestically produced goods.

These trends will result in China both becoming more self-sufficient in intermediate goods as well as finished products. However, it also increases the likelihood that China becomes increasingly excluded by Western manufacturers from their supply chains.

Unfair Criticism?

Besieged from all sides of the political spectrum, there is no doubt that global finance and trading systems are under pressure. This is despite the fact that most of the blame for the issues highlighted above cannot be laid at door of globalization. For example:

• Although the Covid vaccine has not been distributed to emerging markets as quickly as it could have been, this has largely been a result of individual government policy seeking to protect domestic supplies in the West. The development of the vaccine was facilitated by global flows of intellectual property between ‘Big Pharma’ companies as well as cross-border collaboration to source the medical peripheries such as vials and syringes. Its roll out was achieved by the coordination of complex temperature-controlled logistics on an international basis undertaken by global networks developed by the express and logistics companies.
• Again, criticism has been levelled at the failure of globalized production strategies to ensure the supply of Personal Protective Equipment at the outset of the crisis. Although there is certainly an argument that countries should maintain either a strategic supply of PPE or the capacity to manufacture it, many of the problems were caused by government policy which introduced export bans in order to stockpile domestic supplies (as with the vaccine). The ‘weakness’ of globalization in this respect, it seems, is its vulnerability to government intervention.
• Port crisis and shipping rates. At various times the container shipping industry has appeared to many as dysfunctional. Ports, especially on the West Coast of the USA, have been overwhelmed due to a lack of capacity as well as a driver and equipment shortage and this has resulted in delays and soaring freight rates. However, the chaos was largely caused by a surge in Western consumer spend driven by government stimulus packages; a lack of infrastructure investment, as well, it might be argued, by out-dated working practices. It was not an organized attempt at profiteering by the carriers working as a cartel as some have asserted. After all, most shipping lines have previously endured many years of losses.
• Whilst globalization is undoubtedly responsible for a large proportion of hard-to-abate carbon emissions due to the international transport of goods by road, air and sea, global finance and technology sectors are fundamental to many of the initiatives to reduce carbon dioxide and could ultimately be responsible for slowing global warming.

Criticism of the way in which emerging markets have been treated both throughout the pandemic and also the Great Recession of a decade earlier carry more weight. New ways of thinking and a different attitude to countries in parts of Asia, the Middle East, Africa and Latin America need to be developed if they are not to feel excluded from the global trading system.

Trade keeps on growing

Despite all the negativity and the criticism from all sides of the political spectrum, it must be noted that global trade is still growing. According to the World Trade Organisation (WTO), year-on-year trade volume growth is expected come in at 10.8% in 2021 to be followed by a 4.7% rise in 2022. Even a change of Western policy to promote diversification of sourcing strategies away from China will only have a limited impact on globalization. The focus on Vietnam and other countries in South East Asia as alternative low cost manufacturing locations to China will not result in less globalization, just a change in its structure. The creation of new pan-Asia supply networks will increase the density of upstream transport demand across the region, rather than diminish it.

That is not to say that no ‘reset’ is needed. The world has changed significantly since the establishment of institutions such as the International Monetary Fund and World Bank at Bretton Woods in 1944 and General Agreement on Tariffs and Trade (GATT), the forerunner of the World Trade Organisation, in 1947. These institutions have overseen the development of globalization, with all its attendant benefits and disadvantages, but now need to adjust to the perils and pitfalls of the market environment they have helped to create. For example, as highlighted above, China is undoubtedly using the economic and political muscle which it has been gifted by globalization to extend its influence throughout the world. What it does, and what it is allowed to do, by global institutions with its relatively recently acquired power will probably define the geo-political and economic environment of the next century.

Domestic policy is also increasingly dominated by issues related to the ‘fairness’ of globalization – although perhaps not in the way that the WEF had in mind. For many politicians and their electors, both in developed and developing markets, ‘fair’ outcomes can only be achieved by protection of markets and not from liberalization. This is to be regretted as the potential exists for value to be created for all stakeholders – but only if the benefits of globalization are shared across the whole of society. To a greater or lesser extent, Western economies have failed to pivot to a high value manufacturing model focused on intellectual capital and this has created disaffection. This, combined with the unwillingness or inability to address market subsidies and rigging (most egregiously in China but also elsewhere), is the real failure, not globalization.

A ‘Great Reset’ is already underway

So, what are the implications of a ‘Great Reset’ for the world economy? In reality, a ‘reset’ started many years ago entwined with the birth of the internet, e-retailing, the liberalization of financial markets and even the development of ship building.  Innovative and disruptive technologies (the Fourth Industrial Revolution) are already transforming the sector on many levels – automation, electric vehicles, digital market platforms, the Internet of Things, 3D printing, to name just a few. Sustainability and carbon emissions are front and central on corporations’ list of strategic imperatives although ‘fairness’ of outcome, the other WEF aspiration, will always be subjective and very difficult to measure. There has already been a ‘revolution’ – it has just taken place over several decades.

That is not to say that in the future there will not be further changes. The world’s markets will start to fragment as political, economic and security priorities unravel 75 years of liberalization. Re-shoring, near-shoring and diversified sourcing strategies will gather momentum in strategic sectors as the world bifurcates between the West and China. This trend will be reinforced by rising oil prices and the likely imposition of carbon taxes making international transport less attractive to shippers.

In summary, a good deal of the changes called for in the World Economic Forum’s ‘Great Reset’ have been underway for many years. Although useful to promote debate, bundling together many existing ideas, innovations and disruptive technologies, it ignores many of the real threats to the global economy.

The rise of China, disaffected ‘rust belt’ workers in the West, the exclusion of emerging countries from global markets, emasculated global institutions and soaring international transportation costs all risk fracturing the world into competing regional or politically-aligned trading blocs. The resultant destruction of economic value will have severe implications not least in terms of the prospects for the poorest in society but also in terms of developing technologies to address climate change.

Source: Foundation for Future Supply Chain, 03 February 2022

Author: John Manners-Bell