Will value-based alliances replace the rules-based order as the new north star of global trade?

By Falco Weidemeyer, EY Global Turnaround and Restructuring Leader

Attitudes toward globalization and global free trade have changed significantly over the past months.

The trading relationship between the US and China has been deteriorating for some years and has recently seen an increase in new policies that will curtail trade. Germany, on the other hand, which has spent five decades building close economic and trading ties with China, is now reconsidering that key trading partnership. ?

Companies across the world have benefited from the opening of markets and the ability to shift operations to whichever country made the most financial sense. But the days of increasingly free and open markets are gone, and a new regime based on shared values has emerging to replace it.

The EY Geostrategic Business Group recently published a report ?that examines the likely paths forward over the next five years into this emerging world for trading across borders. While the outcome is uncertain, my own view of the most likely outcome is “friends first,” which is an environment characterized by strong geopolitical alliances, with trade and capital flows moving relatively freely among allies, leading to companies “friendshoring” key operations and supply chains. The alternatives to friends first are globalization lite, Cold War II and self-reliance reigns.

Four possible scenarios for 2027:

Source: EY - The CEO Imperative: Prepare now for the new era of globalization

Recent policy announcements show a hardening of attitudes toward totally open global free trade by the liberal democracies in Europe, North America, and Asia. The US has just announced new export controls, including measures to cut China off from certain semiconductor chips made anywhere in the world with US tools, vastly expanding its reach in its bid to slow China’s technological and military advances. And in Europe, the European Commission issued new proposals to ban the marketing of goods made with forced labor. As drafted, the new rules would apply to both imported goods and goods made in the European Union and will significantly impact supply chains and ecosystems, as well as creating more risks for companies that do not fully investigate or understand their global operations.?

However, it is not just in these countries that attitudes are changing and hardening. The Shanghai Cooperation Organisation (SCO) recently agreed to take steps to increase the use of national currencies in trade between their countries. The group, which comprises China, India, Russia and Pakistan alongside four Central Asian states, announced a "roadmap for the gradual increase in the share of national currencies in mutual settlements.” This reflects fears among this group arising from the financial and banking sanctions imposed on Russia after its invasion of Ukraine in February.

China is also accelerating policies to boost self-sufficiency, especially regarding technology, but it is also looking at a far wider range of industries that could be vulnerable if barriers to trade heighten.

CEOs recognize what is happening and are beginning to act. The EY CEO Outlook Pulse – October 2022 survey found that 95% of respondents are already taking proactive steps and had altered their strategic investment plans strategic investment plans due to geopolitical tensions. Responding companies are reconsidering their global operations and footprint. Regulatory uncertainty, especially in relation to technology and other strategically important industries, and trading tensions across blocs add to the complexity.

The Survey of over 750 global CEOs have taken a variety of actions in response to heightening tension, planning ahead to navigate these increasing challenges.

Source: EY – CEO Outlook Pulse – October 2022 survey

While it is hard to imagine global corporates without global supply chains and global sales markets, it looks increasingly unlikely that the current setup will remain unchanged. Environmental, social and governance (ESG) criteria and geopolitical risk mitigation aspects will force companies to reset their global footprint. The emerging values-based alliances will drive this forward.

In a friends first scenario, which could be called an axis of ethics, countries that share common ESG values will coalesce in tighter ecosystems. Each will increasingly apply formal and informal sanctions, by consumers/customers or by regulations, on companies to incentivize trading with and investing in “friendly” countries while avoiding adversaries.

CEOs and boards need to prepare now for the future of globalization. Managing the uncertainty over how geopolitics will evolve in the next five years is a challenge. But CEOs and boards cannot wait for clarity before setting their future strategy. Rather, they need to act now to make strategic decisions that position their company to flourish during the turbulent times ahead.

The views reflected in this article are those of the author and do not necessarily reflect the views of Ernst & Young LLP or other member firms of the global EY organization.