Rebooting globalization means integration through trade and investment flows and applying digitization
Multinationals are facing a new era of globalization, characterized by the polarized forces of cooperation and competition. This era is one of fragmented, multi-speed globalization.
To address this, global law firm Baker McKenzie has released a discussion document, Globalization 3.0 How to survive and thrive in a new era, of trade, tax and political uncertainty.
Global chair of Baker McKenzie Paul Rawlinson says, "As opportunities open for politicians to exploit economic resentment and instate more protective polices are becoming ever-common, a new phase of globalization has begun, one characterized by the push to innovate, digitize and interconnect like never before, counteracted by the fierce compulsion to retract, retreat and return to simpler times.
I believe that globalization is a force for good. I don’t think a retreat into protectionism is the answer, although I agree we need to make a concerted effort to find a more sustainable model for growing the global economy."
Baker McKenzie's recent Global Transactions Forecast with Oxford Economics predicts an uplift in M&A and IPO activity in 2018 as dealmakers and investors gain greater confidence in the positive fundamentals of the global economy.
Two alternative scenarios also modelled, however, demonstrate the potential impact of changes to trade and investment policies.
In the upside forecast, sustained growth in the Chinese economy and stronger near-term growth in the US spur global optimism, accelerated global trade and a higher volume of deal-making in key trading sectors, such as manufactured goods and internationally-traded service sectors. This would turn a good 2018 into a great one for dealmaking with 9% growth
The second scenario is based on a return to US protectionism and anticipates a far more negative outcome. In this model, the US imposes tariffs of 45% and 35% on Chinese and Mexican merchandise goods, respectively, and also raises tariffs on imports from South Korea and Taiwan, prompting these countries to retaliate with similar tariffs on US exports. In addition, deportation of illegal immigrants and curbs on legal immigrants result in a decline in the size of the US labor force at a time when the economy is close to capacity. Under these conditions, M&A activity could fall by up to $1 trillion in 2018 and around $500 billion in 2019.
Trade & Investment
The trade and investment policy landscape is becoming more complex as nations respond to the effects of globalization, cybersecurity threats, state development strategies and geopolitical risks. The status of many trade agreements is shifting rapidly, and governments are using non-tariff measures like technology transfer obligations, standards requirements, and foreign investment review rules to try to benefit their own industries and workers.
"While it’s difficult to predict concrete steps – and to separate political rhetoric from policy changes – multinational companies need to recognize that the landscape has changed,” says Mattias Hedwall, Global Chair of Baker McKenzie’s International Commercial & Trade Practice Group. “Trade liberalization is likely to become more difficult, and cross-border investment is likely to attract more attention from policymakers, advocacy groups, and the media.”
New business models, the rise of the digital economy, BEPS implementation, and national tax reform are just a few of the forces dramatically reshaping the global tax system.
"Even though countries like the US have enacted tax reform, they will need to implement it in ways to encourage investment while at the same time addressing perceived base erosion. This will likely mean that countries will continue to tweak their tax legislation, creating more tax uncertainty," said Josh Odinz,
Cross-border cooperation among tax authorities is also making it more difficult for companies to manage tax and reputational risk. To adapt, companies need to revisit their structure and operations, as well as the tax function itself.
Data Privacy & Security
The report highlights that nearly every company in the world is struggling to manage the broad range of legal and operational risks associated with data. Heightened regulatory scrutiny and more protectionist measures are making this even more challenging.
To get ready for what lies ahead, companies need to ensure they have an internal governance structure that fosters a culture of data privacy from the top down.
“The greater focus on accountability means that there will be more pressure to have board room
attention and strong privacy governance. Many companies also will have a specific legal obligation
to appoint a data protection officer,” explains Brian Hengesbaugh, a Baker McKenzie partner based in Chicago.
Labor & Human Rights
Lastly, the report reflects on the rapid development of business and human rights standards that companies must uphold under the UN Guiding Principles, which shows no signs of slowing.
“All of this is emblematic of a growing global trend,” says Kevin Coon, a Baker McKenzie partner based in Toronto. “National and local legislators are increasingly making CSR-type reporting and disclosure mandatory and holding companies accountable.”
To minimize legal and reputational risk in the area of human rights, the Baker McKenzie report suggests that corporations must first conduct a risk analysis of their current activities and operations, review or implement human rights policies and supplier codes of conduct based on the assessment, and take swift action to investigate and remedy problem areas.