1 vaccine, 2 supply chains, 3 Internets: A new abacus for a divided world?

If the world economy gets pulled apart into different blocs, it would be prudent for Asean to take stances and make choices based on each issue, not a country.

Thu, Sep 03, 2020

ARVIND SANKARAN

https://www.businesstimes.com.sg/opi...-divided-world

IN 2005, Thomas Friedman told us that the world had become "flat"- a seamless level playing field between industrial and emerging markets operating in a large, interconnected global supply chain.

A lot has happened in just 15 years. Fault lines have appeared in a flat world. A global arms race for cutting-edge technologies, the emergence of China as a global power, strongmen politicians voted in by stoking nationalism, trade and tech cold wars, and a raging pandemic have fundamentally altered the picture.

Political economist Steven Weber, in his book Bloc By Bloc: How To Build A Global Enterprise For The New Regional Order, believes that we are transitioning into a new world order defined by "regional" blocs, dominated by the United States, China, and possibly the European Union.

Is this view extreme or within the realm of probability? If so, along what fault lines will nations regroup? Will the present vectors - the race for a Covid-19 vaccine; the twin shocks of trade wars and the pandemic on supply chains; or the estrangement of nations over tech - determine friends and foes? And, how can Asean respond?

ONE VACCINE

While a few countries appear to have effectively flattened the infection curve, others report a resurgence of the Covid-19 virus and in some countries, a more infectious strain has emerged. Experts suggest that a vaccine is the only way to effectively combat the pandemic. A global race is on to find in the least possible time, the most valuable vaccine: that can be administered once, with high efficacy, and provide immunity for a few years. According to the World Health Organization (WHO), there are 167 vaccine candidates with 29 under clinical studies and a few in advanced stages of human trials. Multi-year research has been collapsed into months and big pharma are eager to start production in parallel to late-phase trials. The frontrunners are predictably American, British and European, with China as a challenger and Russia a wildcard.

While it appears that a vaccine may be initially available between the last quarter of 2020 and the first quarter of 2021, several thorny questions need to be urgently addressed. Who will get access? How quickly? And at what cost? There are legitimate fears of "vaccine nationalism" by richer countries cornering stocks unfairly while big pharma seek patent protection and profits.

Public health advocates urge that the vaccine be free, achieving the greatest good for the greatest number. While the WHO is seeking international support for a mechanism that guarantees prompt and fair access to vaccines worldwide, implementation will throw up issues. Specialised logistics such as cryo-shipping or the need for a complex delivery device could deny access to geographies that lack the necessary infrastructure. Limited supply could force global policy makers to make tough decisions, setting off fault lines that divide the world.

TWO SUPPLY CHAINS

The twin vectors of the US-China trade wars and the pandemic have convulsed global supply chains. The deepening of fault lines can however be traced back over decades.

At the structural level, three forces have been at work. One, a shift in global demand from West to East powered by the burgeoning middle class in Asia, expected to be two-thirds of the world's middle class population by 2030.

Two, through robust investment-led cooperation within since the 1950s, Asia is increasingly producing for its own consumption and has evolved into a third regional bloc, the Americas and Europe being the other two. And finally, the offshoring of the renminbi by China, Asia's primary trading partner, has set the bloc in motion towards a single regional trading currency that powers its "financial supply chain".

A digital renminbi is slated for trial soon in Hong Kong and several mainland cities, aiming for low-cost and frictionless payments across domestic and regional supply chains.

At the event-driven level, the global production shock delivered by the Covid-19 virus has perhaps been the single biggest force. In an estimate by McKinsey, as much as US$4.6 trillion of global trade could relocate in the next five years, with supply chains pivoting to domestic production, nearshoring, or offshoring to new locations. Manufacturers worldwide face greater political pressure to grow employment in their home countries and to work with their government to ensure national health security, recently exposed as many countries looked to China for supplies of masks and respirators.

At the tactical level, there are two forces. One, China's Belt and Road Initiative has drawn emerging market nations into its orbit, creating new supply chains that serve its national interests. On the other hand, the US-China trade war and their recent estrangement over tech has forced many companies to reconfigure a contingent "China+1" supply-chain. In a recent interview with Financial Times, Liu Young-way, chairman of Foxconn, the largest Apple supplier and the world's largest electronic contract manufacturer, said he expected global technology supply chains to split into two camps: "It will be one for China and those associated with it, and another for the US and their friends."

However, creating a full ecosystem of manufacturers within two separate supply chains in a short period is near impossible. Shifting US production from China to South-east Asian countries will be challenging as many locations do not have efficient, high-capacity ports that can handle large container ships to major markets. According to experts, that could mean longer transit times for trans-shipment through Singapore, Hong Kong, or other hubs and increase costs.

THREE INTERNETS

The question about a divided Internet has always been there with tech leaders talking about a "splinternet". In 2018, former Google CEO Eric Schmidt predicted "a bifurcation into a Chinese-led Internet and a non-Chinese Internet led by America". But, has the Internet been united in the first place?

The Internet, invented in 1989 by Tim Berners-Lee, enabled the ideal of a borderless world in a way that no other technology has done. However, there is little in the design of the Internet that makes it technologically, politically and geographically borderless. The Internet is not a singular technology, instead it is a stack: the "content layer" which hosts applications we interact with; a "protocol" layer that allows computers to connect to the Internet; and "regulatory" layers such as privacy, data protection and localisation laws. As governments increasingly direct Internet governance, fragmentation can occur within the Internet stack, creating "blocs" of interoperability and drawbridges across.

Back in 2016, US trade officials accused China of using its national firewall as a trade barrier. This has ratcheted up into a full-blown tech cold war, one that could cost up to US$3.5 trillion over the next five years according to a recent Deutsche Bank report. At the heart of the matter lies the global battle for 5G technology supremacy, currently being led by China's Huawei.

The US government, accusing Huawei of violating US laws, banned the company recently from the US market, with Pentagon placing it on a list of 20 companies it says are owned or controlled by China's military.

In a parallel development, Tiktok - the Chinese social video app that has taken the world by storm - was ordered to divest its US operations to an American company, on grounds of national security. A BBC report dated Aug 6 conjectured, "If Microsoft (the frontrunner) does eventually buy the US arm, will there be three TikToks? A TikTok in China (called Douyin). A rest-of-the- world TikTok. And a TikTok in the US. Could that be a model for the future of the Internet?"

The estrangement of nations over tech includes Europe. In recent years, US big tech has faced a plethora of European regulations aimed at curbing anticompetitive behaviour, paying more taxes and taking more responsibility for illegal content on their platforms. An European court recently struck down the Privacy Shield data sharing agreement between the US and EU. According to a BBC report, as many as 5,300 companies - up to two-thirds being SMEs or startups - depend on this agreement for transatlantic digital trade. The report quoted a legal expert as saying, "What we are seeing here looks suspiciously like a privacy trade war, where Europe is saying their data standards can be trusted but those in the US cannot."

ASEAN & THE NEW ABACUS

Faced with an increasingly divided new world order, Asean countries need to make thoughtful strategic decisions about national security, technology and trade. At a strategic level, Asean must carefully respond on the one hand to the US' "Indo-Pacific" geopolitical construct and on the other hand, to China's Belt and Road Initiative. It would be prudent for Asean to not align but continue to engage both, taking stances and making choices based on each issue, not a country.

However, neutrality is easier said than done. Singapore's recent decision on 5G is an instructive example of astute navigation. The nation's biggest telecom operators chose Europe's Ericsson and Nokia as their main 5G network providers, limiting Huawei to non-core elements of the network. This is seen as pre-empting possible disruption to national infrastructure should the US deny Huawei global access to semiconductors.

In an interview with Bloomberg earlier this year, Prime Minister Lee Hsien Loong said: "If you ask us on security cooperations, certainly we are closer to the US than to China. But in terms of our trade, the Chinese are our biggest trading partner. In terms of our overall relationship, we have deep relationships with both."

PM Lee also opined that South-east Asian nations might one day be forced to choose if the world economy gets pulled apart into different blocs. The prescient view may well play out if the new abacus for a divided world does not add up.

The writer, a former retail banker and venture partner, is currently a senior external advisor to McKinsey & Company.