Bruce Mehlman November 13, 2019 [email protected] follow @bpmehlman Q4 2019

DE-GLOBAL

10 Trends Defining the New World CONTENTS

DEGLOBAL: 10 Trends Defining the New World What Unleashed Hyper-Globalization………………………..…………………………………….3 What Hyper-Globalization Unleashed………………………………………..…………………….8 Why Hyper-Globalization Ended……………………………………………………………..……..14 What’s Next: 10 Trends to Watch………………….……………………………………...... 19 1) The World: Leadership & Direction Up for Grabs 2) Major Economies: Aging Fast 3) Internet Policy: Regionalism Replacing Globalism 4) Populism: The New Path to Power 5) U.S. Politics: Anti-Globalists Ascendant 6) U.S.-China: The Great Decoupling 7) Business: Evolving Strategies for Braving the New World 8) Government Economists: Fewer Fiscal / Monetary Tools 9) Leadership: New Global Players Emerging 10) Super-Disruptors: Climate, Debt, Technology & Urbanization

2 What Unleashed Hyper-Globalization 1989-2009

3 NEW GEOPOLITICS OPENED THE WORLD

COLD WAR ENDED INDIA LIBERALIZED CHINA OPENED EU BORN

1989: Berlin Wall fell 1991: 1993: 1993: nd 1990: Germany reunified Reduced tariffs, Deng’s 2 big reforms push Treaty of Maastricht 1991: USSR ended FDI enabled privatization & opening creates EU, Euro

4 NEW POLICIES FACILITATED GLOBAL TRADE & INVESTMENT

Preferential Trade Agreements In Force 1994 1994

1993 2000

5 NEW TECHNOLOGIES FLATTENED THE WORLD Cost of International Calls Plummeted, # Internet Users Exploded

$1.00 1600

$0.90

1400 InternetGlobal (Millions) Users

$0.80 1200 $0.70

(Billed Revenue / Minute (FCC) 1000 $0.60

$0.50 800

$0.40 600

$0.30 400 $0.20

200 $0.10

Cost of an InternationalofCost Phone Call $- 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Internet Users (M) Cost of Int'l Phone Call (billed rev/min)

Sources: FCC (calls); Our World in Data (internet) 6 PERCEPTION 1990’s: AMERICA HAD ALL THE ANSWERS

MILITARILY TECHNOLOGICALLY CULTURALLY

ECONOMICALLY SOCIETALLY

7 What Hyper-Globalization Unleashed 1989-2009

8 TRADE & GLOBAL INVESTMENT SKYROCKETED Trade as % World GDP Outbound FDI as % GDP

40.0%

35.0%

30.0%

25.0%

20.0%

15.0%

10.0%

5.0%

0.0% 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Sources: UN Conference on Trade & Development (FDI); World Bank (trade) 9 GLOBAL PROSPERITY 50% 47% Global Middle Class Grew as Extreme Poverty Plummeted 45%

40%

36% 35% % World Living in 30% Extreme Poverty

25% 21%

20% % World in Middle Class Percentage of of Population Global Percentage 15%

10% 8%

5%

Sources: Our World in Data (World Bank); Brookings/Kharas (Middle Class) 10 DOMESTIC DISPARITY

Winners Taking All in a Superstar Economy

Top 1% U.S. Households Top 100 U.S. Firms’ CEO-to-Worker Avg. Share of Fiscal Income Share of Earnings Pay Ratio 84% 272x

53% 49% 22% 112x 14% 8% 25x

1975 1995 2015 1975 1995 2015 1975 1995 2015

Sources: Income (World Inequality Database); Firms (Kahle & Stultz); CEO ratio (EPI) 11 CHINA ROARED TO WORLD’S 2ND LARGEST ECONOMY

$14.0

$12.0

$10.0 GDP of China vs G7 Nations (ex-USA)

$8.0

$6.0 GDP (Trillions) GDP $4.0

$2.0

$- 1988 1998 2008 2018

Source: World Bank (G7) 12 RISE OF THE HYPER-GLOBAL CORPORATION

Tech-Enabled, Wall Street-Rewarded

Assembly

MAXIMIZING SHAREHOLDER VALUE: IP  Singapore IT  Bangalore Manufacturing  China Assembly  Mexico Tax HQ  Dublin CEO  Davos

13 Why Hyper-Globalization Ended 2010 –

14 GLOBAL GROWTH SLOWED

Psychology of Scarcity Replaced Psychology of Abundance

GDP (world % growth) Exports & Imports (World % growth) 7

5.98 6 5.17 5

4 3.64 3.28 3.02 3 2.53

2

1

0 1969-1988 1989-2008 2009-2018

Sources: World Bank (GDP; Trade) 15 CHINA DID NOT TURN OUT AS EXPECTED

What the West Got Wrong

China didn’t liberalize it became more authoritarian

Not a win-win… 2M U.S. manufacturing jobs offshored

More expansionist China seeking regional dominance

China aims to dominate tech via subsidies, bullying & theft

Market access never evened, trade barriers persist

16 PERCEPTION 2010’s: THE AMERICAN MODEL WAS FLAWED

FOREIGN POLICY ECONOMIC SYSTEM SAFETY NET

CULTURE TECHNOLOGY

17 NEW GEOPOLITICS CHANGED OLD ASSUMPTIONS

Middle East Got Harder… …And Less Essential

Aggressive Anti-Globalists… …Wielding Weapons of Mass Division

18 DEGLOBAL What’s Next?

19 THE WORLD: LEADERSHIP & DIRECTION UP FOR GRABS

Pax Sinica Pax Americana GLOBALIZED

Trade Wars end Trade Wars end

China growth slowed by U.S. growth slowed by

debt, demographics & debt, inequality & CENTRIC CHINA lack of freedom political instability

U.S. CENTRIC U.S. Trade War with allies ends, America First trade wars unite to contain China persist vs. rest of world

U.S. leads on new deals China leads global deals (eg USMCA, TPP, EU) (eg RCEP, fix WTO, Climate)

REGIONALIZED Free World United America Alone 20 MAJOR ECONOMIES: AGING FAST % Change in Working Age Population, Past & Future 1990-2019 2019-2050 (est.) US China S. Korea France Italy Russia Germany Japan 40

31.5 30.1 30 25

20 13

10 7.9 3.3

0

-2.2 -3.2 -5.8 -10

-15.2 -14.3 -20 -18.9 -20.6 -22.2 -30 -30 -28.7

-40

Source: Census Bureau Int’l Database (per Collaborative Fund) 21 INTERNET POLICY: REGIONALISM REPLACING GLOBALISM

Protect Empower Control GOAL People People People APPROACH Heavy Regulation Light Regulation State Dictates (eg GDPR) (eg Great Firewall) ECONOMIC Older Industries Disruptors Dominate Nat’l Champions IMPACT Protected (consumers / competitors Dominate (fewer startups) less protected) (limited global reach) POLITICAL Hits Nations > EC Permissionless Politics Surveillance State IMPACT (populists empowered) (government weakened) (gov’t strengthened) MEDIA Some Limits Confirmation Bias State-Dictated IMPACT (copyright, truth, privacy) (affirming > informing) Reality SOCIETAL Seeking Middle New Voices “Social Credit IMPACT Ground Empowered Scores” (free-ish speech) (both hope & hate) (less freedom)

22 POPULISM IS THE NEW PATH TO POWER

Voters Demanding Change, Rejecting Establishment

23 U.S. POLITICS: ANTI-GLOBALISTS ASCENDANT

The Big Squeeze: Multinational corporations increasingly have no political home

Center Center New Left Left Right New Right

Open Borders More Legal Immigration Limit Immigration

End Endless Wars Muscular Global Leadership End Endless Wars

Trade Deals Have Hurt New Trade Deals Sought Trade Deals Have Hurt

Vilify Elites Business & Government Vilify Elites (CEOs, Wall Street, Country Club) Partner to Solve Problems (Media, Globalists, University Club)

24 U.S.-CHINA: THE GREAT DECOUPLING

Battlefields of the New Cold War

SUPPLY MARKET TECHNOLOGY MILITARY & INVESTMENT CHAINS ACCESS RULES ALLIANCES

DRIVING U.S.-CHINA CONFLICT ENCOURAGING U.S.-CHINA COOPERATION Domestic Politics Shared Challenges U.S. mistrust of China is bipartisan Climate, Terrorism, Non-proliferation, Space China needs someone to blame for slowing growth Mutual Opportunities Technology Both benefit from trade, investment, education & research U.S. seeks to remain global leader in emerging techs China aims to make the rules for emerging techs Powerful Domestic Constituencies U.S.: Ag, Hollywood, Wall Street, Universities Divergent Values China: multinational tech, manufacturers U.S. prizes freedom, human rights China values order, collective good Mutual Resentment U.S. thinks China stealing from us China thinks US holding it back Increasing # of Potential Catalysts Hacking, Taiwan/HK, South China sea, resources

25 BUSINESS: EVOLVING STRATEGIES FOR BRAVING A NEW WORLD

The Regionally Responsive Stakeholder Replacing the Hyper-Global Corporation

Hyper-Global Regionally-Responsive Corporation Stakeholder (1989-2009) (2010- ) LANDSCAPE Liberalism rising Populism rising Abundance mindset Scarcity mindset Global deregulation Regional regulation Market access increasing Market access decreasing LANDSCAPE

Win Washington & the Need allies everywhere; STRATEGY world follows Washington no longer leads Spread functions globally Develop regional capabilities Show Wall Street Show Main Street

STRATEGY you’re global you’re local Markets value efficiency / Markets value growth / Consumers value bargains Consumers value values

26 LEADERSHIP: NEW GLOBAL PLAYERS EMERGING

Solving Challenges National Governments Cannot (or Will Not)

State & Local Officials Activists

NGOs CEOs

2 GOVERNMENT ECONOMISTS: FEWER FISCAL / MONETARY TOOLS

Fewer Workers Per Retiree Fewer Discretionary Dollars

Interest Rates Already Low… …and Central Banks Hold Too Much Avg Weighted Rate at Major Central Banks* 12 10.35 10

8 7.47 5.85 6

4 3.33

2 1.1

0 1970-79 1980-89 1990-99 2000-09 2010-18

Sources: CFRB (Worker : Retirees); Discretionary (Heritage 2016); Rates; Central Banks 28 SUPER-DISRUPTORS WILL ACCELERATE GEOPOLITICAL CHANGE

• Slower Growth • Rising conflicts over revenue (e.g. digital tax) • Search for yield inflates global bubbles

• Slower Growth • Rising conflicts over water, food, resources • Accelerating migration & refugee crises

• Disruptive Growth • Displacements driven by automation, AI, blockchain • Cyber, deepfakes, autonomous systems increase risks

• Uneven Growth URBANIZATION • Rising domestic conflicts: NYC = London ≠ Lackawanna • Higher risks from pandemics, critical infrastructure hits

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