INTERNATIONAL ISSUES AND HOTSPOTS TO WATCH IN 2021
BY DJ PETERSON
Four global themes to watch:
Many inequalities
Submerging markets
The Great Disturbance
Surging innovation
Three geostrategic issues to watch:
Big China
Cold War II
Europe First
WHAT IS NEW, WHAT IS CHANGING, AND WHAT MERITS ATTENTION?
In 2020, operations was strategy, local became the new global, and what was not seen on a screen was often overlooked.
The world’s largest economies—China, the European Union, and the United States—dominated business consciousness, in part because their policymakers had the greatest latitude for action on the pandemic fight, and so much was at risk. Economic forecasts proved unreliable, and the inability to travel or even go to the office constrained one’s sense of awareness, nuance, and context. Notable geopolitical developments, such as Beijing’s Hong Kong crackdown and climate-change impacts, fell off the radar or were just too much to deal with in a world of everything-fatigue.
The continuing battle to arrest the spread of COVID-19, spur economic recovery, and mitigate the collateral damage will make the business, social, and political narrative in 2021 very predictable. Near-term risk management will again dominate for the first part of the year. In an optimistic scenario of the pandemic, its attendant risks will wane in advanced economies by summer, creating an opportunity for longer-term perspective and greater global awareness to return. The mood at the end of the year could be much different than at the beginning. Yet, low probability but high-impact events (cyberwar, COVID-21) could threaten outlooks and stability again because of the world’s fragile state.
The pandemic and the associated economic and social shocks have accelerated many preexisting trends.
Given the unusual course of the past year, many geostrategic themes we identified for 2020 remain equally or more pressing for 2021: political risk in the United States, the rise of China and geostrategic rebalancing, inequality and social justice, climate change and sustainability, and innovation, especially digital transformation. And countries’ recovery trajectories and innovation’s effects on work and cities will unfold for years beyond 2021.
The pandemic and the associated economic and social shocks have accelerated many preexisting trends—what the IMF in April labeled “The Great Acceleration.” But we also see the pandemic as the Great Disturbance—like a wildfire, it is destroying while setting the stage for regeneration. Given this crowded and dynamic setting, this outlook offers an assessment of key themes and signposts to watch in 2021 and beyond.
Throughout, it will be important to ask, What is new? What is staying the same? And, What merits more attention?
FOUR GLOBAL THEMES TO WATCH
1. MANY INEQUALITIES: THE WORLD IS NOT IN THIS TOGETHER
A year ago, we added inequality to the risk register for 2020. The pandemic plus the heightened awareness of injustices along race (especially in the United States), gender, and economic strata will elevate this risk in 2021. Business leaders will need to look past headlines about near-term recovery and confront the many long-term inequalities that have been accentuated by the pandemic. While the coronavirus is global, its impacts have varied greatly by geography, sector, race, age, and income.
Inequality has also meant that vulnerable communities around the world have been hit harder by the pandemic. In India, over one-third of micro, small, and medium enterprises surveyed by the All India Manufacturers’ Organization in June indicated that they saw little chance of surviving pandemic lockdown despite government support programs—what the association decried as “the mass destruction of business.” And where schools have reopened in Africa, girls are less likely to return than boys. In June, the IMF warned that sub-Saharan African countries could see almost a decade of poverty-alleviation progress wiped out in just one year.
Figures from the IMF provide a stark illustration of how the world is not in the pandemic fight together: In 2020, advanced-economy governments spent an average of 20 percent of GDP on pandemic response, emerging markets spent 6 percent, and low-income countries spent just 2 percent of their much smaller GDPs. Acquiring vaccines and attaining herd immunity could take many emerging markets until 2024 given current procurement commitments, according to Duke University researchers.
2. SUBMERGING MARKETS: THE ECONOMIC FALLOUT OF THE PANDEMIC WILL VARY
Governments around the world in 2020 took major steps to contain the fallout from the pandemic, but the willingness and ability of many to sustain support where needed will wane in 2021. Given countries’ variation in the severity of the pandemic and expectations for recovery, business leaders should reassess the trajectory of key markets and recalibrate strategy in 2021.
According to the IMF, GDP will fall by 10 percent or more in 2020 for India, Iraq, Argentina, Peru, Ecuador, France, Italy, Spain, and Greece. The UK economy is expected to shrink by 9.8 percent—and that presumes a smooth Brexit. Pre-pandemic output levels are not expected until 2022 for the United States, Turkey, Russia, and Saudi Arabia, according to the consultancy FrontierView (see chart below). Given this, 2021 will largely be a year of stabilization.
Many major markets may experience economic detours lasting four or more years. The key determinants of a country’s outlook include its economic and governance fundamentals going into the crisis (Does the country have a reputation for sound economic policy?), economic structure (Does the economy depend on vulnerable sectors such as tourism?), and access to capital and debt financing (Can the country spend its way out of the crisis?), as well as the relative severity of its disease burden and the effectiveness of its policy response.
GDP growth in Latin America, the Middle East, India, and Africa was underperforming going into the pandemic (we have wondered for the last few years, Will emerging markets emerge?) and the pandemic has only intensified this question for many countries. But on a positive note, the pandemic has not hit many EMs as hard as expected—a phenomenon not well-understood by health experts. Still, capital flight, the collapse in international tourism and business travel, and weak commodity prices have produced powerful external shocks.
Mexico’s recent economic performance illustrates why business leaders will need to reassess their regional strategies. The country’s growth has historically tracked very closely that of the United States, given the deep cross-border integration, but its trajectory appears to be diverging. In October, the IMF forecasted that Mexico’s economy will shrink by 9 percent in 2020 compared with 4.3 percent for the United States.
The central government’s confused COVID response, ambivalence to foreign direct investment (FDI), penetration of governing institutions by criminal groups, and growing security problems have undermined business confidence and thwarted the potential lift from the U.S.-Mexico-Canada Agreement (USMCA) and the trend in supply chain localization. With such poor fundamentals, Mexico may not recover from the pandemic before 2024. By contrast, Vietnam, which has controlled COVID and is attracting manufacturing from China, is expecting to grow by 1.6 percent in 2020.
3. THE GREAT DISTURBANCE: SOCIAL AND POLITICAL RISKS WILL RISE
During the first part of the year, social unrest globally subsided as a result of lockdowns, social distancing, and curtailed mobility (see chart below). While the tide of COVID may ebb in 2021, despair and slow and uneven recoveries are likely to result in spikes in social and political risks throughout the year and beyond.
Social unrest had been rising around the world in the years before the pandemic, in part because of the inequalities discussed above as well as the influence of social media. In the United States, the catalyzation and intensity of the Black Lives Matter protests that started in late May was partially a function of acute human and economic shocks from the pandemic stacked on long-term racial grievances. The pandemic also helped catalyze protests in Belarus, Peru, and Cuba. Meanwhile, many governments—from Hungary to Egypt and India—have used the pretext of the pandemic to amass new powers to clamp down on the opposition and businesses, creating the potential for new resentments.
Slower-moving risk cascades could also emerge over the next five or more years. After the 2008–2009 global financial crisis, the eurozone debt crisis spilled out and almost broke the bloc. Likewise, the 2016 votes for Brexit and President Trump, and the yellow vest movement that erupted in France in 2018—as well as the rise of anti-globalism, extremism, and populism more broadly—can all be seen as resulting from simmering frustrations over limited economic opportunity and rising inequality after the financial crisis. Indeed, IMF researchers have found a 20 percent increase in the likelihood of social unrest in the five years following a pandemic.
Social unrest is difficult to predict, especially since we are in the middle of the pandemic. With few elections to mobilize people in 2021, it will be important to look more closely at governance trends and ask, Is a country on the right track? Are assistance programs helping small businesses and households? Wall Street–Main Street divides are a huge political risk: Massive liquidity provided by central bankers has led to unparalleled optimism in the markets and gains for the wealthy, but this cheer is untethered to economic fundamentals and social realities on the ground.
As governments face multiple challenges, attention will naturally gravitate to the private sector—most obviously for tax revenue but also to help solve problems. In the EU, this shift is a driver of the OECD-sponsored efforts to find agreement on digital services taxation and clamp down on the practice of shifting profits to low-tax jurisdictions.
4. THE SURGE IN INNOVATION WILL UNFOLD FOR YEARS
As companies adapted to the pandemic, innovation accelerated dramatically. COVID sped up the rate of digitalization of products and services around the world by as much as 10 years. The leaps in e-commerce, telehealth, the care of COVID patients, and working remotely in particular, were immense. Looking to 2021 and beyond, it will be important to ask, in what arenas will fast-paced innovation continue, and where might it have been only a short-term exception?
As 2020 comes to a close, the medical research community is optimistic about many of the 200-plus COVID vaccine candidates coursing through R&D pipelines. If successful, public health projects, like the COVAX initiative and Operation Warp Speed, will demonstrate the potential of new collaborative approaches for tackling other challenges. And a successful vaccine rollout will boost innovation in the biopharmaceuticals sector, not to mention the value of science more broadly. Insights will also be harvested and applied to adjacent fields, such as agriculture, chemicals, fuels, and materials.
The economic destruction of the pandemic has also been a catalyst, as indicated in the surge in address changes and new business formations in the United States in 2020. These may only be signs of desperation, but labor mobility and entrepreneurship are also indicators of economic dynamism. Also, loose monetary policy has generated large piles of cash for venture capitalists to deploy on what are hoped to be breakthrough companies in three to five years. In this scenario, the 2020s could be a new Jazz Age of invention, dynamism, and better living.
Or is the enthusiasm for the surge of innovation overwrought? Many changes could be better characterized as good incident response rather than innovation, so why do so many companies like to claim they are agile but require a catastrophe to push themselves into the future? After the tumult of 2020, will workers be able to sustain the fast past of change, or will they want to slow down in 2021? Will places that experienced less disruption—Taiwan, Singapore, New Zealand, China, and other emerging markets—stick with doing things the old way?
THREE GEOSTRATEGIC ISSUES TO WATCH
1. CHINA: BIGGER THAN EVER
China’s success in containing COVID enabled its economy to recover much faster than the rest of the world, and Beijing is aiming for 2 percent growth for 2020 and around 5 percent for 2021. Before the pandemic, China had the largest market for many goods—from transport to communications and electricity (see table below). In 2021, China will present even more of an outsized business and investment destination—especially compared to other emerging markets—and this will accelerate the “in-China-for-China” trend in business strategy.
Several developments bear watching in 2021. The most important is President Xi Jinping’s Dual Circulation Strategy (DCS). The DCS positions China’s future prosperity on domestic supply and demand, rather than external trade and investment, to cushion against external economic shocks from the global slowdown in trade and deteriorating relations with the West. The DCS is expected to be endorsed in March when the 14th Five-Year Plan is approved. The exact implications for foreign businesses are uncertain—an important strategy question in 2021 as the plan rolls out.
Another development is technology innovation. Amid rising geopolitical tensions with the West, Beijing’s drive for tech self-sufficiency and leadership has intensified, and this is evident in the DCS. One tactic is massive spending on the procurement and promotion of Chinese equipment, such as Huawei 5G mobile networks. A second is the lavish support of technology champions, such as Alibaba in the field of artificial intelligence. But a lot of Chinese innovation is market led.
Finally, the Regional Comprehensive Economic Partnership (RCEP) trade deal signed in November is weighted with symbolism. It encompasses 15 nations, 2.2 billion people, and $26 trillion combined GDP. (In comparison, the USMCA covers 492 million people and $22 trillion of output.) The RCEP is a step forward for investment and trade liberalization in the Asia-Pacific region, and it gives Beijing more influence in shaping those rules and norms and a platform to demonstrate its leadership globally.
Can a company win both in China and the West? As foreign multinationals seek to capitalize on the China market, geopolitical risks are rising, and one important question stands out: How can foreign businesses support Beijing’s growth and innovation ambitions without running afoul of political and brand risks in other markets?
2. COLD WAR II GOES GLOBAL
President Trump will be remembered for his confrontational stance toward Beijing, but China’s huge economic and geopolitical weight is also forcing rebalancing efforts by many other countries, and China’s emergence from the pandemic as an even more formidable superpower will accelerate this trend. In 2021, global companies and investors will have to navigate a world that is increasingly divided into two spheres with different technology platforms, security requirements, standards, and norms. Highly nuanced strategies will be required to retain a political license to operate freely in both.
China’s rightful pride in combating COVID and restoring its economy fueled nationalist hubris. While Beijing has offered gifts of personal protective equipment (PPE) and vaccines and formalized the RCEP, its assertive wolf-warrior testiness deepened in 2020, resulting in China being “diplomatically diminished” in Asia according to Australia’s Lowy Institute. Remarkably, China managed to upset relatively good relations with Vietnam, Australia, the EU, the UK, Japan, Italy, and Canada, and an October poll by the Pew Research Center found sharply deteriorating views of China around the world (see charts below).
The UK, the EU, Japan, Australia, Israel, and Canada, among others, are increasingly using national security concerns as a litmus test for approving Chinese investments. In the wake of border clashes in 2020, India put nearly 140 Chinese investment proposals worth an estimated $1.75 billion on hold. Also, the increased awareness of supply-chain dependence on China that has emerged from the pandemic has prompted Japan, South Korea, and Taiwan to create incentives for reshoring production. And the EU, in a bid to find common ground with the incoming Biden administration, is proposing a new transatlantic “coalition of like-minded democracies” to coordinate on technology policy, regulation, and standards to counter a rising China.
Meanwhile, Biden largely supports a get-tough approach on China. The new administration will work to improve the tone of the relationship, establish greater predictability, and pursue cooperation in areas such as health, climate, and the environment, but given pressures from both the left and the right, it will not unilaterally dismantle the Trump administration’s trade, investment, and technology policies. For example, China is not meeting its Phase I commitments agreed to in December 2019, but they are fully enforceable, and the Biden administration will have to decide what steps to take to ease the rancor with Beijing while not looking weak in China or at home.
3. EUROPE FIRST: DOES THE PANDEMIC MAKE OR BREAK EUROPE?
European Commission President Ursula von der Leyen articulated a Europe First stance when she took office in late 2019, but then the EU’s early COVID management demonstrated a marked retreat from European solidarity, with bans on cross-border travel and movement of critical medical supplies. As 2020 went on, though, the EU looked more resolute while the United States was divided and in disarray. The EU was on our radar in 2020, and it stays there for 2021: Everyone should pay attention to the Europe First agenda and its prospects for success.
The July agreement of the 27 member-state leaders to jointly borrow €750 billion on capital markets for pandemic recovery grants and loans to distressed countries such as Italy and Spain signaled uniformity in the face of a global emergency and reemergent Franco-German leadership on European integration and solidarity. Although it is temporary, the issuance set a precedent that will move the EU toward greater fiscal union, and the show of unity contrasts with the doubts, dithering, and division of the euro crisis about a decade ago.
Several points of the agreement will bear watching in 2021. First, will the funds be sufficient to offset the damage from the winter 2020-21 COVID surge? The European economy is heavily dependent on bank lending, and non-performing loans (NPL), which were already a drag on the banking system, are slated to rise in 2021 as government aid winds down. Brussels is looking for ways to cover NPLs to avoid a credit crunch that could threaten the recovery. If more fiscal support is needed, will Europe’s fiscal hawks remain at bay? The selection of German Chancellor Angela Merkel’s successor as Christian Democratic Union party leader in January will be a signpost to watch.
Will the decisive steps taken during the crisis look like a good deal down the road? This is not just an EU story: The United States and the UK will be used as measuring sticks.
EU leaders in December 2020 also agreed to a €2 trillion, seven-year EU budget that allocates one-third of the funds to climate and other green initiatives, and the leaders have agreed to significantly accelerate cuts in greenhouse gas emissions. For the first time, the budget includes money for common defense programs. In another first, the leaders also authorized the EU to generate its own revenue beyond member-state contributions, which could include a carbon tax, a digital services tax, and a financial transaction tax. These moves will test von der Leyen’s 2019 pledge that the EU would play a larger “geopolitical" role vis-a-vis China and the United States: A carbon tax could hit imports from China, and a digital services tax would not be welcomed by the Biden administration when both sides are aiming to improve the bilateral relationship.
According to the EU’s autumn forecast, GDP across the bloc is expected to fall by 7.4 percent in 2020, and it is not expected to recover to 2019 levels until early 2023—though several countries will be much farther behind. EU citizens have strongly supported Brussels’ handling of the pandemic and economic hardship, and Brussels has taken a decisive role in securing over 1.3 billion vaccine doses—enough for all EU residents and many more. This will build goodwill in 2021. But what will the three-to-five-year economic detour mean for political sentiment within countries and across the bloc? Will the decisive steps taken during the crisis look like a good deal down the road? This is not just an EU story: The United States and the UK will be used as measuring sticks.
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Dr. DJ Peterson is a Pacific Council member and president of Longview Global Advisors.
This article was originally published by Longview Global Advisors.
The views and opinions expressed here are those of the author and do not necessarily reflect the official policy or position of the Pacific Council.
