Why China could lead the next phase of globalization

Donald Trump is the 45th president of the United States. Among his promises are a 45% import tax on Chinese products, the cancellation of the Paris climate agreement and, as was confirmed today, the end of the Trans-Pacific Partnership trade deal.

chinafutureIf he doesn’t go back on his plans for global trade and international affairs, Trump will give room to other nations to take the lead in shaping globalization. While the US might be taking a step back from the world – a world it helped to create, to a large extent – China in particular can be expected to take on a more prominent role.

While the US is currently the world’s largest economy, in purchasing-power terms China is expected to overtake it in 2016, according to the International Monetary Fund. China has benefited significantly from globalization. Over decades, it has invested in enhancing its capabilities and built economic links with many countries. It has become viewed as an important overseas partner and investor.

This chart shows how China is forecast to overtake the US as the world’s dominant economic power by 2030, based on share of global GDP, trade and exports.

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Image: Economist

Something China understands very well is the importance of connectivity – and hence transport infrastructure – for economic growth and development. Its major development framework is the One Belt One Road initiative with its two pillars, the Silk Road Economic Belt and the 21st Century Maritime Silk Road. This development project involves a territory equal to 55% of global GDP, 70% of the global population and 75% of its known energy reserves. “The investments will involve about 300 projects extending from Singapore to Turkmenistan,” reports Reuters.

One building block of One Belt One Road – also known as OBOR – is the Regional Comprehensive Economic Partnership (RCEP). This China-driven alliance will comprise Australia, New Zealand, China, India, Japan and South Korea – as well as the ASEAN region. In 2014, ASEAN was the seventh-largest economic power in the world. It was also the third-largest economy in Asia, with a combined GDP of US$2.6 trillion – higher than all of India.

China on the world stage

On the African continent, China is lending billions towards large-scale infrastructure investments, again part of OBOR, and particularly in transportation. One of its flagship projects is the Standard Gauge Railway in Kenya. There’s also the development of deepwater ports in cities such as Dakar, Dar es Salaam and Djibouti. These are likely to become industrial hubs, following the model of China’s development of the new Cameroonian deepwater port of Kribi.

The Russian Trans-Siberian Railway (TSR) is at the origin of rail transportation between Europe and Asia. Recently, Anthony Cuthbertson wrote in Newsweek that Vladimir Putin may be envisaging a Hyperloop Silk Road. This could present an alternative to the planned construction of 64,000 kilometres of rail tracks that are intended to strengthen existing pathways between the east and west. CRRC Corp, China’s largest maker of railway equipment, was in talks for a potential investment in Hyperloop One, the company behind the idea, Bloomberg reported earlier this year.

Meanwhile, China is launching an $11 billion fund for Central and Eastern Europe, targeting investments in infrastructure and high-tech manufacturing, among other things, both in the region and beyond. Supply-chain operator DB Schenker started running weekly block trains between China and Germany as long ago as 2011. Four years later, the first train carrying containers from China arrived in the Rail Service Centre freight terminal in the Port of Rotterdam.

With the New Development Bank (NDB), the Silk Road Fund and the Asia Infrastructure Investment Bank (AIIB), China has prepared itself for responses to major financing needs – within and beyond the Belt and Road area. This shows some similarity with the Marshall Plan, the US support plan that helped to rebuild western Europe after the end of the Second World War.

With the US pulling out of the TPP, as Trump has indicated it will, China holds an advantage. The binding agreement, which connects Asian countries to North and Latin American nations, has been perceived by many as an obstacle to China’s reach and a way to solidify US alliances with other nations in the Pacific region. Other Asian countries with high export potential, such as Malaysia and Vietnam, are expected to benefit significantly from TPP, while countries that did not sign the agreement, such as the Philippines, risk losing out. This could have a disruptive effect on the region due to trade and investment diversion.

So far, China has faced scepticism and criticism for its international activities. Many have questioned its development in Africa, for example. But China could yet regain a level of moral authority; it could lead the global climate adaption effort if the US pulls away, for instance. It has already warned Trump against backing away from the Paris climate deal.

What’s in store for relations between the US and China? For a start, there may be tough negotiations over the US import tax on Chinese goods. If both nations find the right balance, they will not only avoid a global trade war, as in the 1930s when the implementation of the Smoot-Hawley tariff act intensified nationalism around the world, but they could also move their bilateral relations to new grounds.

Whatever happens, if the US pulls away from globalization, China stands ready to fill the gap.

This blog was originally posted on the World Economic Forum Agenda.

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Why border controls won’t protect Europe against terrorism

In mid-December, people and families all over Europe and in many parts of the world were gearing up to celebrate Christmas, one of the most important events in the Christian calendar. But on 19 December 2016 at 20:02 local time, a hijacked truck veered into a traditional Christmas market next to the Kaiser Wilhelm Memorial Church in Berlin. Twelve people were killed. Four days later, the suspected perpetrator was shot and killed by police on an Italian plaza in Sesto San Giovanni, a suburb north of central Milan.

bordercontrolsOn the same day, ISIS extremists released a video of the perpetrator, filmed recently in Berlin. His name was Anis Amri. Having pledged allegiance to the group, he suggested that the Berlin attack was vengeance for coalition airstrikes in Syria.

Amri was from Tunisia and had arrived illegally in Italy in 2011. The New York Times reported that after he had showed signs of radicalism, Amri was classified as a terrorism risk in 2014 – one of a group of a few hundred individuals only – before making his way to Germany in 2015. In Germany he had been under covert surveillance for more than six months. Italy and Germany had failed to deport him due to a lack of cooperation by his home country.

After the Berlin attack, Amri had travelled for three days and 1,000 miles across Europe. A train ticket found on his body showed he had come from Chambery in France via Turin. European right-wing politicians, including Marine Le Pen, the leader of French far-right National Front, and Nigel Farage, the former leader of the UK Independence Party, responded by demanding an end to the Schengen agreement, a historic deal signed by five European countries in 1985, which had led to the creation of Europe’s borderless Schengen Area.

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Are borders ever the answer?

Few national borders are absolutely impermeable, and controls may fail due to fake and stolen documents. The Chicago Tribune reported that in 2015 around 170,000 people escaped detection at the US border with Mexico and 200,000 eluded capture when adding those who entered by sea. This is barely half of people who entered the US illegally. The wall that made Berlin one of the most difficult places to cross the border could not stop illegal crossings. The wall only reduced the number of escapees to 868 per annum during the 1970s and to 334 per annum between 1980 and 1988.

Aviation security measures are considered most tight in the world of travel and transport – but two passengers were able to board Malaysia Airlines Flight 370 on stolen passports. The Berlin suspect had used at least six different aliases under three different nationalities, reported the Daily Mail.

The threat often lies within: “Not one Paris attacker has been identified as a Syrian refugee”, Mashable wrote. All people named in connection with the Paris attack of 13 November 2015 were French or Belgian citizens who held European passports. The BBC reported that on 23 December 2016, Australian police detained six men and a woman – four Australia-born. Three are suspected to have planned a Melbourne Christmas Day terror attack which Australian Prime Minister Malcom Turnbull called one of the most substantial pots to have been disrupted in recent years.

According to Eurostat, it is estimated that the European Union’s citizens aged 15 or over made 1.2 billion tourism trips in 2014, for personal or business purposes – 25.1% were to destinations outside the country. Labour markets would also be affected: 1.7 million people cross European borders every day to get to work. Waiting and inspection times at the borders would need to be factored into the prices of goods, as well as the required changes to the highly cost-optimized just-in-time concepts – largely applied in the automotive industry – and the efficient goods supply out of European distribution centres. Consumer prices would rise due to the forced slowdown, necessary adjustments and increased logistics costs. Many products would disappear from supermarkets – at least temporarily. The Bertelsmann Foundation warns that reestablishing permanent border controls in Europe could produce losses of up to 1.4 trillion euros over 10 years.

A united Europe

The current terrorist threat requires collaboration across all European countries, the use of advanced technology and a common European anti-terrorism strategy. Instead of investing time, money and energy in individual and isolated efforts to protect each country, Europe could be made much safer through consolidating budgets and other resources to better protect the outer borders of the EU and leverage advanced digital technology. The most effective way would be for all European countries to unite under one strategy – for example in a “homeland security alliance”. There is little chance that European countries with long and highly permeable coastal borders can manage the protection challenge alone. The effort cannot be shared but needs to be concentrated where needed.

The potential measures range from increasing EU security forces at the southern European borders to identifying and registering new arrivals; introducing waterproof authentication checks for example at train and bus ticket booths. The digital age brings solutions that allow smooth travel and fluid transport while also ensuring the highest level of security.

The exchange of security-relevant information should be mandatory. Country authorities need to be able to authenticate every individual and check for security risks. Facial-recognition software on surveillance cameras, which is available yet still rudimentary in many places, needs to be improved.

Blockchain technology – which can ensure the authenticity of goods – will possibly help in future to track the origin of freight. The transport of weapons and explosives would become significantly difficult. Manufacturers have already started to use blockchain technology to confirm the authenticity of luxury goods. The AMBER alert, a child-abduction alarm system that distributes alerts via TV and radio as well as emails and text messages, could be transformed into an effective measure to put the entire European population at the disposal of its own security system.

Even the most secured borders have proven to be permeable. And borders cannot stop local-born and locally operating terrorists. Political leaders need to explain why digital and coordinated European measures are better suited to protect the lives of European citizens and visitors than the reinstallation of intra-European borders.

The situation demands an act of solidarity across all governments in Europe. In its own interests, the private sector is required to support this effort. Leaders could leverage the current threat as a historic chance to unite Europe under an urgently needed common security vision and execution plan.

Image: REUTERS/Vincent Kessler

This blog was originally posted on the World Economic Forum Agenda.

The world is building fences. Here’s why we should worry

Long forgotten seem the walls, fences and barbed wires at all borders. Therefore, the understanding of the benefits of open borders might be fading. Of course, with terrorist attacks and waves of migrants concerns are rising. However, I wish that we are mindful and clear about the effectiveness, consequences and cost of the new global disintegration tendencies.

Fences

In December 2015, the BBC wrote: “EU border security becomes new mantra“. Not only Europe but larger parts of the world are going through a phase of increasing disintegration: the Brexit referendum, discussions about the exclusion of Greece from the Eurozone and the beginning of the construction of fences along the green borders of barrier-free Schengen.

Near Schengen, on 14 June 1985, the picturesque town in Luxembourg, five European countries signed the agreement which led to the creation of Europe’s borderless Schengen area. In light of mass flows of migrants seeking asylum in Europe, Hungary blocked migrants from onward travel to the rest of Europe and constructed a four-metre-tall fence along sections of the border with Serbia – a country not part of the Schengen area.

Also, Austria has begun building an anti-migrant barrier across the Brenner Pass at the Italian border. Putting an end to hope on one side and reducing fears on the other. However, it’s not only in Europe that countries are raising the bar. US presidential hopeful Donald Trump wants to build a wall at the Mexican border. Increasing fear of terrorists in the US has led to the reintroduction of a visa for “certain Europeans“.

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Image: The Economist

Click here to see other regions in the Economist’s interactive map

The hidden cost of disintegration

What would be the impact of reestablishing barriers? Citizens would face long-forgotten burdens: the northern Europeans, for example, would experience long traffic jams at the Brenner Pass on the way to the holiday destinations in the south. Labour markets would also be affected: 1.7 million people cross European borders every day to get to work. Consumer prices would rise due to the forced slowdown and necessary adjustments along the supply chain. Waiting and inspection times at the borders would need to be factored into the prices of goods, as well as the changes required to the highly cost-optimized just-in-time concepts – largely applied in global manufacturing in the automotive industry – and the efficient goods supply out of the distribution centres. Many of the products made available by bilateral and multilateral agreements would disappear from supermarket shelves.

Disintegration would affect the competitive position too. Europe, for example, might find itself in a very disadvantaged situation given that Asia is continuing to integrate. What if TTP arrives and Schengen leaves? There might also be explosive geopolitical risk involved, with Crimea, Ukraine and new Chinese islands in the South China Sea heating up the debate. As new fences go up across Europe, what tensions could result from countries such as Spain, Italy and Greece being left more or less alone with new waves of migrants?

How effective are visas and border controls?

Looking back: how safe has the world been with more barriers? Did borders protect Italy from the onslaught in the 1970s of the Red Brigades, Spain from the ETA, Germany from the Red Army, and France from GIA? Did borders protect the US from attack on 9/11? How effective have been the high metal fences and walls, barbed wire, alarms, anti-vehicle ditches, watchtowers, automatic booby traps and minefields along the inner German border from 1945 to 1990? The threat often lies within: “Not one Paris attacker has been identified as a Syrian refugee”, Mashable wrote.

Tightening up security

The world has experienced decades of advancing global integration. Increasingly open borders and many trade and investment partnerships have strongly contributed to the prosperity and wealth of people and nations. International organizations and agencies have not only supported global growth but also established institutions in charge of dealing with the risks of reducing national barriers. Organizations have developed international ties and many platforms of collaboration to fight crime and terror have emerged.

Interpol – the International Criminal Police Organization – has strong links with Europol, the organization coordinating the local police forces across Europe. Within countries, ministries and agencies are increasingly working together. Germany, for example, has established the GTAZ – the Joint Counter-Terrorism Centre – an autonomous authority and co-operation platform used by 40 internal security agencies.

The private sector has launched initiatives to protect staff and assets against terrorism and other threats across the globe. Since the attacks of 9/11, security measures have been tightened. Today, individuals and companies are checked against the sanction lists of the US and Europe. Employees appearing on the lists are no longer allowed to be paid a salary, and companies are excluded from doing business. Though, as the Panama papers show, we have not yet closed all the back doors.

Battle on the internet

Social media helps terrorists organize itself and recruit new fighters. On the other hand, the FBI uses internet surveillance software like Carnivore to identify and stop attacks. Organizations such as the Search for International Terrorist Entities are scanning propaganda material and training manuals, and sharing the insights with other organizations. Technology trumps. The internet has the potential to flatten borders while reducing risks. The more people are active on the net, the better economic value can be extracted and (potential) terrorist activities monitored. Which also does not come without concerns and complexities – as the discussion between Apple and the FBI shows.

Governments have the obligation to protect citizens and the right to control borders. However, what are the effects of the potential disintegration on citizens, migrants and the economy? The Bertelsmann Foundation warns that reestablishing permanent border controls in Europe could produce losses of up to 1.4 trillion euros over 10 years.

We need to understand and be mindful of the impact of our decisions on the economy. All the same, should we apply economic reasoning to a decision on whether or not to offer a helping hand to people in severe need?

Image: REUTERS/Marko Djurica

This blog was originally posted on the World Economic Forum Agenda.