Every summer, dozens of professional cycling teams spend weeks competing in the Grand Tours. Fundamental to each team’s race strategy is for the members to ride in close proximity to each other, in what’s known as a peloton. The “drafting” effect that’s fundamental to the peloton greatly increases the riders’ speed and efficiency. But the cooperation gradually evolves into head-to-head competition, as each rider is focused on completing the race with as fast a time as possible. The most lucrative awards are, after all, bestowed on the basis of individual performance.
The peloton is a useful metaphor for today’s state of globalization. While nations are cooperating with each other in a number of areas to advance prosperity and security, there are also healthy doses of competition and unilateralism, driven by a desire to realize a variety of “rewards”: tax revenue, corporate data, foreign direct investment, and the like. To the untrained eye, it’s not always clear why nations have chosen to cooperate or compete in particular areas, nor what may lead them to alter their posture in the future. Yet their choices have profound implications for the global economic outlook and corporate activity.
Global policymakers have raised concerns about protectionism depressing global growth, and projections for total M&A and IPO activity vary significantly depending on whether nations move toward protectionism or take actions to accelerate global trade. For example, our analysis of the impact on global transaction flows of the US taking a more protectionist stance shows that rather than rising in 2018, global M&A levels could fall by up to a trillion dollars and IPO activity by half.
These cross-currents of cooperation and competition pose a challenge for companies of all sizes and in all industries since the policy ramifications can cascade far beyond the intended targets. And this legal and policy uncertainty stands in contrast to what’s supposed to be distinctive about today’s business climate, where “going global” is easier and more attractive than a few decades ago thanks to lower-cost technology and the growth of the global middle class. While these conditions still exist, they must be squared with new operating risks found at national – and even local – levels.
If the 19th and early 20th century with its UK-led unilateral liberalization represented Globalization 1.0, and the post war era with its US-led international order constituted Globalization 2.0, we may be witnessing the emergence of Globalization 3.0. In this new era, technology and existing trading and investment patterns anchor sustained integration, while national politics pull in the direction of localization.

Drawing on insights from a diverse collection of Baker McKenzie partners, this report:
+ Explores different dimensions of the cooperation and competition we see at play throughout the world in key areas — trade and investment, tax, data privacy, and labor and human rights
+ Highlights what we expect will be some of the defining characteristics of the next era of globalization and
+ Offers strategies for global businesses to navigate a rapidly evolving and more fragmented global marketplace
By providing this outlook, we aim to provide corporate leaders with a greater understanding of key trends so they can anticipate, influence, and better prepare for the changing world order.
Preparing for the next era of globalization
How we got here — the uneven state of globalization
There were two seminal political developments in 2016: the UK’s vote to exit the European Union and Donald Trump’s victory in the US presidential election. While diverse dynamics drove each development, a key factor in both countries appeared to be diminished public support for deeper international integration, reflected in growing hostility to cross-border flows of goods and people. In a commencement address before both events, then chief executive officer of GE Jeffrey Immelt provided a number of reasons for the brewing disgruntlement throughout much of the world about globalization:
“Many people feel left behind. The global economy is growing too slowly. Some workers have been displaced by outsourcing, the middle class has been squeezed and income inequality has risen to unacceptable levels. As technology and globalization race forward, people understandably fear their impact on jobs and incomes, and distrust the motives of companies and government.”1 These conditions are borne out by a number of indicators showing a toxic cocktail of prolonged wage stagnation, high unemployment, and economic sluggishness that has afflicted much of the world. + Between 2005 and 2014, about two-thirds of all households in 25 advanced economy countries saw their incomes stagnate or decline.2
+ In the US, market incomes declined for 81% of households from 2005 to the end of 2013.3
+ The economic growth rate in emerging markets steadily declined every year from 2010 through 2015. While growth has strengthened in recent years, the World Bank has found that much of the slowdown since 2014 reflects productivity declines growing out of aging populations – a significant long-term challenge for these countries.4
These figures have created an opening for politicians to exploit economic resentment, which typically results in policies aimed at curtailing competition. The wide-ranging policies can span from higher tariffs on imported goods to restrictions on the flow of cross-border data and the movement of people. While political posturing often drives policy proposals, many of which have no hope of enactment, they nonetheless contribute to a challenging environment for multinational companies.
Sources

2 http://www.mckinsey.com/global-themes/china/chinas-role-in-the-next-phase-of-globalization


4 http://www.imf.org/external/pubs/ft/fandd/2016/09/huidrom.htm
Introduction
On the one hand, the global economic system is becoming increasingly integrated through trade and investment flows and digitization. On the other hand, the global political system is becoming more fragmented amid a backlash against the downside of globalization. In this report we look at how these forces are shaping policies in four key areas — trade and investment, tax, data privacy and security, and labor and human rights — and identify how companies can prepare for the next era of globalization. Here are the highlights: International trade and investment gets harder: The trade and investment policy landscape is becoming more complex as nations respond to the effects of globalization, cybersecurity threats, state development strategies and geopolitical risks. The status of various trade agreements is shifting rapidly, and governments are using non-tariff measures like technology transfer obligations, standards requirements, and foreign investment review rules to protect their industries and workers. As a result, companies need to reevaluate their business strategies, including investment decisions, supply partnerships, and preferential duty access. In addition, as governments in key economies like Germany, the US and Australia place greater scrutiny on foreign investment, it will be imperative for acquirers to develop regulatory strategies early in the deal process to minimize delays, last-minute changes to the deal structure, and even failed transactions. Managing tax risk becomes trickier: Changing business models, the rise of the digital economy, BEPS implementation, and national tax reform are just a few of the forces dramatically reshaping the global tax system. Even though countries like the US have enacted tax reform, they will need to implement it in ways to encourage investment while at the same time addressing perceived base erosion. This will likely mean that countries will continue to tweak their tax legislation, creating more tax uncertainty. Cross-border cooperation among tax authorities is also making it more difficult for companies to manage tax and reputational risk. To adapt, companies need to revisit their structure and operations, including existing supply chains, IP ownership models, transfer pricing method selection, permanent establishment exposure, as well as the tax function itself. While regional tax managers have typically overseen local audit activity, a global view is imperative. Data privacy moves up the compliance agenda: 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, such as the EU’s General Data Protection Regulation that takes effect in May 2018, 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. This requires having adequate program controls to address key areas such as personal data inventories / records of processing activities, tailored privacy policies and notices, data breach handling procedures, and security and retention policies. Transparency requirements put the spotlight on labor and human rights: The rapid development of business and human rights standards that companies must uphold under the UN Guiding Principles shows no signs of slowing. Passing laws that require companies to be transparent about their practices related to human rights and gender pay is the latest tool legislators are using to place social expectations on corporations. To minimize legal and reputational risk in the area of human rights, 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.




Multinationals are facing a new era of globalization characterized by the polarized forces of cooperation and competition — a duality that makes for a messy business landscape.
Executive Summary
China’s GDP growth is clipping along at 6%, and while the UK economy is a little weaker, the Eurozone is seeing a rise in household spending and business investment. Key measures of world trade, such as container shipping and air freight, are growing at their fastest rates since before the global economic crisis. However, there is a darker side. Although globalization has strengthened the world economy as a whole, two-thirds of all households in 25 advanced economy countries saw their incomes stagnate or decline between 2005 and 2014. It’s statistics like this that have created openings for politicians to exploit economic resentment and instate more protective polices. This in turn has created a new phase of globalization, one characterized by the push to innovate, digitize and interconnect like never before counteracted by the fierce compulsion to retract, retreat and return to simpler times. Both personally and as the chair of a global international law firm, I believe that globalization 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. In the meantime we must help our clients contend with the new forces at play, which is what this report aims to do, focusing on four key areas: policies related to trade and investment, tax, data privacy and security, and labor and human rights. We do our best to answer the questions clients ask us most: How is this new policy, regulation or tax requirement going to affect me? How do we navigate these global opportunities and manage the associated risks? In this new era of globalization, anything can happen. Our hope is this report makes you better prepared.
GTF-ProfileCircle-Photo-Paul
Paul Rawlinson, Global Chair
Despite Brexit and the rise of President Trump’s “America First,” the global economy is doing remarkably well.
Globalization 3.0: Preparing for the next era of globalization
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