Rebooting globalisation means integration through trade and investment flows and applying digitisation
Multinationals are facing a new era of globalisation, characterised by the polarised forces of cooperation and competition. This era is one of fragmented, multi-speed globalisation.
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 globalisation has begun, one characterised by the push to innovate, digitise and interconnect like never before, counteracted by the fierce compulsion to retract, retreat and return to simpler times.
“I believe that globalisation 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 labour 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 globalisation, 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 recognise that the landscape has changed,” says Mattias Hedwall, Global Chair of Baker McKenzie’s International Commercial & Trade Practice Group. “Trade liberalisation 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 and transfer pricing implementation, as well as national tax reforms and increased tax litigation are just a few of the forces dramatically reshaping the global tax system.
Stephan Spamer, Head of Tax at Baker McKenzie in Johannesburg says, “Cross-border cooperation among tax authorities is also making it more difficult for companies to manage their tax and reputational risk. To adapt, companies must revisit their structure and operations, as well as the tax function itself, and seek to mitigate these risks. Specialized tax advisors with experience in international and cross-border tax and litigation will prove invaluable to multinationals as they negotiate the myriad of tax laws and regulations affecting businesses operating across the world.”
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.
Darryl Bernstein, Head of the Technology, Media and Telecommunications Practice at Baker McKenzie in Johannesburg, notes, “Legislation around data protection and privacy in South Africa is awaiting imminent implementation. The Protection of Personal Information Act, 2013 (POPIA) was enacted in 2013 and once implemented, it is expected to change the way businesses approach the protection of customer and employee data and how they will have to report on data security breaches. POPIA was enacted to bring South Africa in line with international data protection laws by regulating the processing of the information of natural and juristic persons and placing more onerous obligations on “responsible parties” that process such information.
Labour & 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.
Johan Botes, Partner and Head of the Employment & Compensation Practice at Baker McKenzie in Johannesburg, says, “Businesses face pressure on various fronts in respect of employment practices. Research shows significant levels of shareholders are raising issues pertaining to diversity, workplace equality, employment rights and sustainability. Globally we’ve seen an increase in legislation providing greater protection of worker rights. Trade unions are using collective voice and muscle to address social-economic issues ranging from pay gaps, to disruption caused by demands for a mobile workforce, and worker classification in the gig economy. Multinational businesses that understand this rapidly changing employment landscape and can evolve quicker than their competitors will have a significant advantage in managing legal and reputational risk.”
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.
Full report here: http://insight.bakermckenzie.com/globalization