Globalisation scenarios: Challenges for Companies

There are increasing signs of a growing decoupling of the world economy into economic blocks. Even after the end of Donald Trump's presidency, the USA is defending its geo-economic interests with robust means. The emerging economic power China is pursuing its economic goals abroad more and more obviously, for example through its Belt and Road Initiative. In 2021, the largest free trade zone in the world was created in Asia with the “Regional Comprehensive Economic Partnership” - RCEP for short. Nevertheless, the future of globalisation is by no means preordained. Will the conflict between the power blocks USA and China continue to intensify? Will the EU succeed in establishing itself as a strong block in its own right? Or will the global balance of power remain more or less as we have been used to since the turn of the millennium? Together with the Bertelsmann Foundation, the BDI worked out five possible scenarios for the future of globalisation. German companies were then asked what each globalisation scenario would mean for their business activities over a period of ten years.

Will the global economy break up into several blocks?

The focus of interest was not the question of which scenario would become reality. There are good arguments for and against each of the five scenarios. Beyond all probabilities of occurrence, the interviews focused on the question of what each scenario would mean concretely for the companies' business. But even if probabilities of occurrence were not the actual topic, one prognosis became clearly established in the course of the interviews: The future of globalisation will be more conflictual than its last 30 years.

Would German companies be prepared for a world economy in blocks?

German companies have an eye on global geo-economic developments. Some large companies have special departments for this. Family businesses are also often internationally oriented and can draw on cross-generational experience when dealing with global developments. The possibilities to react to a fragmentation of the global economy depend on many factors, first and foremost on the industry. Suppliers could react to decoupling by producing separately for each economic block locally (nearshoring), possibly at the expense of production in Europe. If the entire world market is no longer available for sales, however, production could become unprofitable for some companies, for example because high research expenditures can then no longer be recouped. One thing is clear: a decoupling of the global economy would be painful for German industry.

Which future scenario of globalisation would be most advantageous for German industry?

German industrial companies are innovative and globally competitive. They are therefore most likely to benefit from globalisation with open borders and clear rules for all market participants - only then can they be successful. This would be the case in a future in which the major players commit to binding trade rules (“Reformed multilateralism” scenario). Unfortunately, however, we have to assume a future in which the USA and China work towards the demarcation of economic areas without adhering to global rules of the game. The future for German industry looks bleakest in a scenario in which a weakened EU would have nothing to oppose the systemic adversaries USA and China on world markets (“world in permanent crisis” scenario). More advantageous in a conflict-ridden future would be a scenario in which the EU can successfully establish itself as a third bloc on the global stage (“world in several blocs” scenario).

Will globalisation and global supply chains be turned back?

Businesses are preparing in many ways for a possible de-coupling of the global economy. Options for action for companies include the separate development of research and production capacities per economic region (nearshoring), the relocation of business units to other economic regions or the focussing of production, supply or sales on the European home market (regionalisation). For most companies, however, focusing on the European market is not a realistic option from an economic point of view. For example, in some sectors the growth markets are located entirely or predominantly in other regions of the world (such as the IT, electronics or automotive industries). Moreover, in many sectors it is not possible to produce without low-cost supplies from overseas without losing international competitiveness. A regionalisation of production or extensive “deglobalisation” is not to be expected for any of the scenarios.

Can Europe keep up in the global competition for business locations?

Europe can claim decisive locational advantages: Market size, skilled labour potential, infrastructure and a stable regulatory framework. Even in a scenario in which the USA and China are increasingly engaged in systemic conflict, Europe has the fundamental opportunity to assert itself as a business location and international player on the world stage. The prerequisite, however, is that the EU rapidly expands its capacity to act and that European integration continues to progress. German companies place great hopes in a strong EU as a guarantee that they can remain loyal to their home location. A strong EU could act as a player in global governance, significantly influence developments in the World Trade Organisation (WTO), negotiate advantageous trade agreements and act as a geopolitical player. An EU that is unable to act, on the other hand, risks being pulverised by the other major powers. In such a scenario, there is a possibility that corporate activities will turn to the strong global economic blocs.