Global Risks Insights Geopolitical Risks Long term impact of protectionism Backlash against free trade and globalization could lead to slower global growth GLOBAL RISKS INSIGHTS GEOPOLITICAL RISKS CONTENTS 2/9 GLOBAL RISKS INSIGHTS GEOPOLITICAL RISKS 3/9 Long term impact of protectionism Backlash against free trade and globalization could lead to slower global growth Since the 2008 financial crisis, growth Recent years have seen a political backlash against free trade and globalization in wealthy countries, along with a Protectionism: scenario variants in trade openness has stagnated and slowdown in export trade. While high-income states have been among the biggest beneficiaries from globalization, protectionist measures have increased. there is growing evidence of unequal benefits within countries. Many voters in the United States and Europe blame free-trade agreements for the loss of well-paying, middle-class jobs1. Risk of protectionism Brexit and President Donald Trump’s victory partly stem from this growing anti-globalism mood. Since his election, Trump has fulfilled his electoral pledge to remove the Protectionism has become an important source of concern. A spiral of retaliatory trade restrictions could undo gains from past trade liberalization. Base Case Base Case Base Case Globalism Protectionist United States from the Trans-Pacific Partnership (TPP) 2016 2018 2035 Resurgence Victory A. Discussion of protectionism B. Trade restrictions agreement, has called for a renegotiated North American GDP billion USD 82,000 87,200 141,400 25,900 -18,000 Incidence Flow of measures Stock of measures Free Trade Agreement (NAFTA) to reduce the US trade 250 - Flow Stock (RHS) deficit and is reportedly considering a 20% tariff on 300 - - 2500 200 - imports of steel and possibly other goods2. In the past, 250 - - 2000 150 - protectionism has led to more instability, including 200 - - 1500 3 Extreme Poverty 950 830 710 -22 33 150 - conflicts between countries . Other factors, such as 100 - - 100 (less than $1.90/day) 100 - Chinese curbs on foreign investment, are raising 50 - million people - 50 50 - business concerns about China’s commitment to 0 - - 0 2012-15 2016 2017 2010 2011 2012 2013 2014 2015 2016 openness. Growing China-US military tensions over Sources: Bown and Irwin (2015), Google Trends, World Bank. Middle Class 2,480 2,890 3,950 68 -54 A. Weekly average Google Trend search for ‘protectionism’, ‘trade restrictions’, ‘trade war’, and ‘import tariffs’. the South China Sea or differences over how to persuade 2017 average is year-to-date. Latest observation is May 21 2017. B. Trade restrictions include trade remedy measures. 2016 data as of October. ($10+/day) North Korea to end its nuclear weapons program could million people spill over to accelerate the trend toward more trade and investment restrictions. Source: World Bank, Global Economic Prospects, June 2017, p.26 Instability – – – 0 64 https://openknowledge.worldbank.org/bitstream/handle/10986/26800/9781464810244.pdf Donald Trump’s administration has put its main program number of countries for bolstering economic relations with China on ice as it complains about the two countries’ swollen trade Source: Our world transformed: Geopolitical shocks and risks, 2017 imbalance, and says Beijing’s efforts to liberalise its economy have gone into reverse. David Malpass, a top Note: GDP is reported as the cumulative difference between Base Case and scenario variant (in billions of economic diplomat for the administration, said in an US dollars); Extreme Poverty measures those living on 01 interview with the Financial Times on Thursday that the less than $1.90 per day (in millions of people); Middle Federica Cocco, ‘Most US Manufacturing Jobs Lost to Technology, Comprehensive Economic Dialogue with Beijing is 'stalled' Class includes those living on more than $10 per day (in Not Trade,’ Financial Times, December 2, 2016, https://www.ft.com/ millions of people); Instability is reported as the number content/ dec677c0-b7e6-11e6-ba85-95d1533d9a62. and that there are no plans to revive talks. The decision of countries experiencing higher levels of instability comes after the dialogue between the two countries in relative to the Base Case. 02 July ended without any tangible progress. The Base Case is our “business as usual” scenario. http://www.businessinsider.com/trump-steel-tariff-china-germany- Global Resurgence is a more optimistic one in which japan-global-recession-2017-6. The White House is taking an increasingly confrontational there is a renewed emphasis on global trade while approach in its economic relations, including by opposing another that is called ‘Protectionist Victory’ examines 03 the impacts of more protectionism. Dale C. Copeland, Economic Interdependence and War China’s bid for recognition as a 'market economy' in the (Princeton, NJ: Princeton University Press, 2014). World Trade Organization. GLOBAL RISKS INSIGHTS GEOPOLITICAL RISKS 4/9 Major geopolitical implications Greater protectionism leading to slower global The difference in the number of people living on growth would hurt all countries, but developing $10 or more per day between Globalism Resurgence View Protectionist victory in ones are most vulnerable. and Protectionist Victory would be more than one hundred and twenty million people by 2035, G20 countries We modeled several scenarios, including ones or roughly the size of Mexico’s or Japan’s which saw a renewed emphasis on global trade population today. which we called ‘Globalism Resurgence’ and another on more protectionism or ‘Protectionist While the rough proportion of middle- and Victory.’ Over an almost twenty years out to upper-class population in high-income economies 2035, the difference between the scenarios in remains largely the same across these scenarios, terms of global GDP is an overall $44 trillion. increased global protectionism undermines the Low-income countries are particularly hard hit, growth of a middle class in the rest of the world. suffering 8 percent drop in GDP while high-income countries would see a 5 percent drop. The probability of violent domestic conflict Greater protectionism increases in sixty-three countries in Protectionist The foregone gains seen in Protectionist Victory, Victory. The growing violent conflict is driven by $10 leading to slower global as compared to Globalism Resurgence, are felt stalling human development and government more strongly in countries that have not yet capacity in Protectionist Victory. India, Egypt, the The difference in the number been able to take full advantage of the global Philippines, and Thailand are among those that growth would hurt all of people living on $10 or economy. Africa and Central America, for experience the greatest increase in risk of example, appear the most sensitive to long-term instability under Protectionist Victory. more per day countries, but developing protectionist policies. ones are most vulnerable. With some European countries, such as those of Southern Europe, already forecast to see lower levels of growth over the coming decades in the Base Case, an increase in global protectionism on the scale simulated in Protectionist Victory could between Globalism translate into an economic slowdown. Resurgency and Protectionist Victory would be more than one hundred and twenty million people by 2035, or roughly the size of Mexico’s or Japan’s population today. Source: Our world transformed: Geopolitical shocks and risks, 2017 GLOBAL RISKS INSIGHTS GEOPOLITICAL RISKS 5/9 Worsening in China-US ties could create a risk of large scale protectionism If mutual tariffs were established and stayed in place, because of growing hostilities or a mutual trade conflict, separate spheres of Chinese and US economic activity would likely be created, rewiring current trade networks and significantly disrupting GDP REDUCTIONS FROM SEPARATE GDP USReductions AND CHINESE SPHERES from separate US and Chinese spheres supply chains. China has one of the highest participation rates in global value chains. With the rise in China’s economic importance, many countries that had been closely aligned with Western countries are increasingly reliant on Chinese trade. Over fifteen to twenty years, separate China-US Percent reduction in GDP relative to Base spheres of economic activity could result in a 4.2 or more 4.2 to 3.3 $95 trillion cumulative reduction in global exports. 3.3 to 2.6 2.6 to 1.9 Foreign-investment growth would slow globally, 1.9 to 1.2 but the United States and China would probably 1.2 or less increase foreign aid to allies and partners to shore NO DATA up ties. Source: Our world transformed: Geopolitical shocks and risks, 2017 The reduced trade would put the world on a lower Source: economic growth trajectory. Global GDP would be Our world transformed: Geopolitical shocks and reduced by a cumulative $35 trillion, leading to risks, 2017 twenty million additional people living in extreme poverty, forty-five million additional people living on less than $3.10 per day. China has one of the highest participation rates in global value chains GLOBAL RISKS INSIGHTS GEOPOLITICAL RISKS With slowing economic growth in the BRICS, the 6/9 emerging middle classes may feel stymied as their lofty Insights from the Zurich Risk Room aspirations go unmet. We used the Zurich Risk Room – a global risk analysis tool, designed to help illustrate the impact Political and institutional fragility of multivariate risks on individual countries and & risk of economic regions – to model a scenario