A rise in global protectionism stemming from a backlash against free trade and globalization could have significant impact on economic growth, poverty levels and the potential for military conflict, according to a new report from the Atlantic Council and Zurich Insurance Group.
The report, “Our World Transformed: Geopolitical Shocks and Risks,”examines best-, worst- and base-case scenarios for global protectionism and other geopolitical trends and the potential impact for businesses and the world at large.
The report is a collaboration between Zurich, the Atlantic Council and the Frederick S. Pardee Center for International Futures at the University of Denver. The Atlantic Council is a nonpartisan organization that “promotes constructive U.S. leadership and engagement” in international affairs.
The report warns that companies that benefit from global trade may be forced to restructure their supply chains and develop business continuity plans that anticipate disruptions to their manufacturing and retail operations.
In its globalism vs. protectionism scenarios, the report finds there is a cumulative difference in global economic output of $44 trillion by 2035. With protectionism, GDP is 8 percent lower in low-income economies by 2035, than if globalism enjoyed a resurgence.
High-income countries would see a five percent drop.Also, the estimated proportion of middle- and upper-class population in high-income economies would likely remain about the same whether protectionism or globalism take hold, however increased global protectionism would undermine the growth of a middle class in the rest of the world, according to the authors.
In recent remarks, Evan G. Greenberg, chairman and chief executive officer of Chubb, expressed his concerns about protectionism. The CEO said current political trends favoring protectionism over globalization are “worrisome” and he called for political leaders to speak out on the benefits of global trade to the U.S. He also criticized attacks on immigration as “misguided populism.”
Middle East, Food & Water
The Zurich-Atlantic report also looks at the risk of conflict in the Middle East and the likely impact on global energy markets and the implications of water and food scarcity globally and regionally.
“We are in a period of geopolitical uncertainty, which can create a volatile business environment for companies connected to global markets, whether it is as a multinational corporation with overseas manufacturing and retail facilities or a regional operation with global suppliers,” said Bryan Salvatore, head of Specialty Products for Zurich North America.
The report examines what would happen if Mideast tensions escalated to large-scale conflict and how that could disrupt global energy markets and force businesses to seek alternative energy sources. Again, global supply chains could be affected, as rising oil prices would increase transportation costs. In the worst-case scenario, 23 million more people would be living in extreme poverty.
Water & Food Scarcity
Regarding water and food scarcity, the report addresses extreme weather scenarios in which there is too little water producing a drought and too much water bringing flooding. Extended droughts can inflict the most damage on agriculture production and, therefore, result in food shortages, which can often lead to regional conflicts. In the base-case scenario, global water withdrawals are forecast to increase by 14 percent above current levels, and many of the most affected countries lack resources and good governance to implement solutions.
Even in those countries with more means to cope with water shortages, economic growth is constrained, particularly in the manufacturing and agricultural sectors, according to the report, which suggests that companies should consider implementing a water-management and conservation plan to minimize water use and develop sustainable solutions.
“There’s no question that the world is facing an increasing number of interrelated global risks,” said Fred Kempe, president and CEO of the Atlantic Council. “From a potential trade war with China to an energy crisis from the Middle East, this report quantitatively models these uncertainties and helps decision-makers understand the risks so that they can do their best to effectively manage and, wherever possible, avoid them.”
David Anderson, head of Credit & Political Risk at Zurich North America, said that geopolitical risks are interrelated and, therefore, need to be looked at holistically in the context of other risks. He said understanding the connections between different kinds of risks is a vital step in managing them and avoiding surprises.
“Those risks are, by their nature, difficult to shape, because they are driven by forces beyond the control of companies or single governments,” Anderson said. “Nevertheless, in view of the growing geopolitical volatility, companies need to examine the disruptions that could be mitigated.”
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