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Disruption and Transformation: How AI will Impact Global Trade in the Next Decade

AI

Disruption and Transformation: How AI will Impact Global Trade in the Next Decade

The use of artificial intelligence (AI) to sift through data and find areas for improved efficiency has already started to have an impact on the scheduling, safety, and monitoring of shipments from ports to railways.  Major players in the shipping market have been investing in AI capabilities and research for years, with Maersk recently opening an AI-driven automation center as a symbol of the type of disruption that can be expected in the market as the promises of technology begin to manifest.  But beyond these immediately tangible gains in efficiencies and minor disruptions that come from early applications of AI to global trade, what are the more substantive impacts that we can anticipate in the next decade?  How will trade in goods and services change?  What changes can we expect in the labor market and costs of doing business?

Trade in goods – what will stop shipping? 

Innovative ideas such as the 3D printing of clothing have moved from science fiction to science fact.  The use of 3D printing is a daily reality for designers, and the use of such technology is only picking up pace as companies respond to the criticism of how ‘fast fashion’ is unsustainable.  This is just one of the many items which may no longer be imported into the U.S. as AI and new technology create alternative production sites.  Soon it may be unnecessary to ship everything from phone cases to toys, since they can be manufactured at a continuously lower cost in local facilities or even consumers’ homes.  The use of AI will even improve yields from hydroponic and traditional farms, suggesting that many food products would no longer make sense to ship from distant locations. If AI and new technology can’t (yet) create unique products such as rare earths, new and developing tools will still have an impact on trade patterns, as they can help find untapped resources that are in friendlier locations.  With the U.S. government funding AI-based research to improve the country’s ability to produce key products such as energy storage devices, more and more of those products and the resources that go into them will be produced domestically. The bottom line is that the usage of AI and new technology over the next decade will not only bring dramatically improved logistics, it will shift what is moved from place to place as a substantial portion of goods are suddenly competitive even when produced domestically.

Trade in services – major impact from AI

From market research to IT and customer service support, AI applications are already replacing many low and medium-complexity outsourced service jobs around the globe. While there is still a strong business case for leveraging global talent pools outside of high-cost markets such as the U.S., the overall trade in services is going to likely dip as more of these service requirements are handled by AI in domestic markets.  Reinforcing this trend are increasing concerns over data privacy regimes and cyber security, which will incentivize business to keep valuable information and personnel and customer details fenced off in their domestic markets.  Generative AI is also likely to reduce royalties and license fees as customers find it easier to produce everything from wall art to new music through free applications.

How AI will impact jobs and costs

The ongoing automotive union strike and recent picketing by writers in Hollywood are both related to how AI usage and new technology are threatening traditional industry jobs.  Tensions have been simmering for decades as longshoremen and freight workers worry that automation may take over many of their tasks. These types of struggles will continue for years, but the adoption of this technology will be inevitable in the U.S. in order to stay competitive with early adopters of automation in Asia and Europe as well as low-cost labor in other parts of the world.  In the next ten years, there will need to be substantial public-private joint efforts (and investments) to cross-train workers into higher-complexity positions in recognition of this technological transformation.  

The loss of traditional jobs is clearly not limited to the logistics sector – as seen from concerns voiced from visual artists, finance experts and even attorneys that they are losing work to new generative AI tools.  The solutions to this shift in labor will also have to be broad-based, to include transforming educational systems to better prepare future employees for the working world that awaits them.  The World Economic Forum suggested that over a billion jobs will be impacted or displaced as a result of improved AI technology and that higher education needs to be changed accordingly.  However, many of the jobs that will be impacted do not require college degrees, so the real challenge is to prepare students from the elementary level for jobs that don’t yet even exist, and for an economy where many existing labor roles will be defunct.

When it comes to costs, AI’s most immediately attractive benefit is efficiency. In global trade, there will be substantially more automation of transportation and a reduction in the requirement for warehousing as forecasting models render the requirement to have supplies in backstock unnecessary.  Companies will be able to reduce staff and service costs using automation and generative AI.  However, not all costs will go down.  The expense for data centers and cyber security will potentially rise substantially as companies put more reliance on their technology tools to run business operations and sort through the universe of data necessary to improve forecasting capabilities.  Many of the savings in labor costs will likely need to be plowed into IT support and maintenance costs.  Nevertheless, AI usage offers tremendous savings in efficiencies and improved safety across all business sectors, which will drive broad-based adoption of new technology across all business sectors.

Buckle up for an interesting ride

The next decade will bring such widespread change that it can be hard to determine what path trade will wend among the geopolitical and technology changes that shape global business.  A few trends are clear, however: automation will increase, AI applications are going to proliferate into all business sectors, and only agile, informed companies will succeed in this volatile environment.  The cost of early adoption and implementation of some of the new technologies that are arising out of AI applications can be daunting, but keeping a sharp eye on developments in the market has never been more important.  Most U.S. businesses are already using AI in some form or another, and an overwhelming percentage of them intend to increase the usage of AI for everything from improving efficiency to handling customer complaints in the years to come.  When taken together with the impressive strides forward in automation, 3D printing, virtual reality tools and blockchain technology, it is crucial for companies to invest time and resources into forecasting and planning for substantial changes.  The advantage is that now they can leverage AI to do it faster and more efficiently.

Kirk Samson is a Senior Director of Business Process Management at the global consulting firm Nexdigm and a Director at the International Trade Association of Greater Chicago.

recession

The World Bank is Forecasting a Recession – Good News for Some

A global recession seems inevitable in 2023 based on a deluge of recent economic forecasts, most notably that of the World Bank, which downgraded their outlook for 2023 last week. Russia’s ruinous war against Ukraine, international inflation and continuing global trade conflicts over technology will also slow economic growth across many sectors.  Some pundits are even wondering whether developments such as ChatGPT might negatively impact the labor market.  Nevertheless, in every economic situation there are winners as well as losers, so who will potentially benefit from the global economic downtown?

Firms and technology that provide efficiencies

Businesses looking for efficiencies will be turning to global service centers as an ‘easy button’ on budget and manpower reduction.  With global services centers offering experts in finance, IT and legal at a fraction of the cost of North America or Europe-based staff, they represent an extremely impactful solution to many companies challenged by shrinking margins and unexpected inflation. In many cases leveraging global service centers in places such as India can provide a 60% or higher savings on existing staffing costs.  Improvements in technology also offer another important layer of savings and efficiencies. Technology companies that offer these services will benefit from the recession as customers are driven into their arms out of need.  While ‘old’ tech companies such as Google and Microsoft are dramatically cutting staff in the face of the economic turndown, AI-focused tech companies are in growth mode as companies seek tools to improve how efficiently and quickly they do business.

FDI flows will change to the benefit of global allies

Last summer the term ‘friend-sourcing’ enter our FDI lexicons thanks to U.S. Treasury Secretary Yellen’s comments about the importance of nearshoring/offshoring in the ‘right’ geopolitical locations to keep supply chains safe. With the U.S. and most European nations sanctioning Russia and continuing their decoupling from China, other countries are sure to see a tangible FDI benefit.  India, Vietnam, Indonesia, Malaysia, and lower cost NATO/EU nations such as Poland, Croatia and the Baltic nations should see an increase in investment from companies in G7 countries that are looking to save money, avoid export control scrutiny and diversify their supply chains away from locations that risk getting sanctioned due to their association with Russian activities or China.

Walmart and Costco have the welcome mat out

Low-cost retailers should also thrive in a recessionary economy.  Companies such as Walmart, Costco, Aldi and their global equivalents were created to support customers who are looking to stretch their dollars/euros/yens to cover necessities and they will benefit from the increased foot traffic that the recession is certain to bring.  While they may see a dip in their sales of higher-end products, staples and food products will see an uptick.  There will be increasing pressure on suppliers to these retailers to lower their margins and pricing, which brings us back again to the ‘friend-shoring’ issue.  With the dollar continuing to ride high, it’s cheaper to import many products so companies that can spread their manufacturing and production facilities outside of the U.S. will be more competitive.

How to win in a recession

Companies that can pivot to find efficiencies through technology and by taking advantage of the services and products available in the global market will thrive despite the global turndown, but only if their get it right the first time.  If the blockage of the Suez Canal in 2021 taught us anything, it is that supply chains are at the mercy of numerous factors that can crush a company that is relying on thin margins in a tight economy.  Political risk and supply chain research needs to be thorough and companies need to budget extra to ensure a diversity of sources.  The concept of ‘Just In Time’ (JIT) sourcing needs to be balanced by the reality of ‘Just In Case’ (JIC) variation in sourcing.  Businesses that are comfortable taking advantage of the global smorgasbord of shared service centers, new efficiency technology and growth and investment into safe ‘friend-shoring‘ opportunities will do well despite the recession. 

Kirk Samson is a Director at the International Trade Association of Greater Chicago, an executive at the global consulting company Nexdigm, and a former U.S. diplomat and international law advisor.

Ukraine

Five ways the war in Ukraine will change the world’s economy

The war in Ukraine is a tragedy that will continue to play out for months, with an uncertain ending as far as the sad cost in human life, new alignments in global geopolitics and the stunning damage that will be done to the economies in countries beyond just Russia and Ukraine. Even though the repercussions of this war will reverberate for decades, we can already identify some trends that will impact the global economy in the future.  As with any volatile trade and economic situation, there will be clear losers (the Russian economy), but there will also be potent secondary developments that arise as a result of this aggressive invasion of a democratic, Western-oriented Ukraine.


 

Energy Security / Renewable Energy

The U.S. and EU have spent decades wringing their hands over the Transatlantic joint dependence on oil and gas from ‘bad actors’, including Russia, Saudi Arabia, and Venezuela.  In the last few weeks, attempts to punish Russia economically have been hamstrung due to the fact that much of Europe still receives about half of its gas from Russia, an impossible dependency when it comes to confronting Russia for its illegal actions in Ukraine. While the ‘fracking revolution’ has assisted the U.S. to a certain level of energy independence, a sizeable portion of the nation’s oil still comes from unreliable external sources. The irony of Russia’s attack on a democratic Ukraine is that it might finally push the U.S. and EU to commit to a substantive, immediate and dedicated pursuit of renewable energy sources for which environmental activists and innovative business leaders have been lobbying for decades.  Renewable energy’s strongest proponent just became the national security crowd.

Defense Spending – Globally

The same national security concerns will also lead to a huge rise in defense spending from EU and other nations.  Germany’s proposed budget increase alone will be a critical shot in the arm for the European defense industry, but we can assume that other nations that have put off investments in this area were shaken by Russia’s willingness to break global norms and attack Ukraine and will respond with substantial budget increases.  Images of Turkish Bayraktar drones destroying Russian armor and video of the U.S.-made Javelin helping to stymie the 7th largest army in the world are going to change how smaller nations structure their arms inventory.  More importantly, Russia’s actions have disabused any remaining doubters of the notion that a country like Russia will ‘play by the rules’ of international law in the modern era.  If Russia can so brazenly violate their international agreements and obligations, then so can China – and that realization will have a substantive domino effect on the planning and defense expenditures of everyone from Finland to the Philippines.

Wheat and Foodstuffs – Even Greater Price Inflation

Russia and Ukraine accounted for 30% of the global wheat trade prior to this conflict. But that is not the only food product that will be taken off of the market as a result of the war – sunflower oil, corn and other key products will either be destroyed (or unplanted) as a result of the fighting or will be locked inside Russia’s domestic market due to sanctions and the inevitable tariffs.  The rest of the world will see massive price increases and shortages in certain foodstuffs.  Combined with the global surge in inflation and increasing transportation costs, many global food-producing companies will struggle to provide products that are affordable for their usual clients.  If there is a silver lining to this cloud, it is that locally-sourced products and wheat-alternatives (rice, corn, bulgur) should see a boom in demand.

Cybersecurity and Information Warfare

Russia and China have been fighting a shadow war with the U.S. and EU in the cyber realm for years, but this conflict has pushed that fight into the light of day.  U.S. and European struggles with Russian governmental and pseudo-governmental cyber strikes (from denial of service attacks to outright hacks for information and funds, as well as documented attempts to impact elections in both regions) should have the same impact on corporate and governmental cybersecurity spending as watching Russian tanks roll into Ukraine did for defense spending.  No one wants to be the easy target in this war and corporations that took some risk and saved money on cybersecurity will be scampering to close those gaps as quickly as they can.  Russian desperation to get at global fund sources in the next few months dramatically increases the risk of pseudo-governmental ransomware attacks, and the information warfare we are seeing between Russia/China and the rest of the world is astoundingly blunt (and for Ukraine, remarkably effective in generating global support).  The gloves are off.  Is your company ready to defend its business interests from cyber and information / reputational attacks?

A More Unified, Emboldened EU

The last month has been a litmus test for EU leadership, and they have come out looking much more poised and united than anyone would have believed.  Should they have taken this threat more seriously in the last decade?  Absolutely.  Have they tolerated Putin-loving populists in the EU club for years (Orban, Zeman, Le Pen, Salvini)?  Sadly, yes.  But all of that changed when Russia headed for Kyiv.  Member state leaders closed ranks and the EU turned from a reluctant bystander into ardent supporters of Ukrainian defense efforts in a few short weeks.  From an economic perspective, this more unified and confident EU will disrupt a number of patterns.  They’re likely going to be much more aggressive in nurturing and protecting their internal innovation in technology and defense.  They will redouble efforts to reduce their dependency on external energy sources (to the benefit of renewable technologies, electric vehicle innovations, the nuclear industry and even public transportation ventures).  Most importantly, they can be expected to be stronger proponents of democratic ideals in their foreign political and business affairs.  Countries (and companies) that interact with this new EU will likely find that they are much more insistent on ESG concerns and support for human rights, democratic principles and adherence to the rule of law.

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Kirk Samson is a Director at the International Trade Association of Greater Chicago.  He is a former U.S. diplomat and spent ten years as an international law advisor for the Department of Defense.

administration

The Top Five International Trade Issues Under the New U.S. Administration

After a tumultuous stretch of international trade wars and a global economic crisis courtesy of the pandemic, the U.S. has a new president directing trade policy. What can business leaders expect from a Biden presidency as far as strategies, relations with major trading partners, and the role of the U.S. in global trade for the next few years? Early indications are that the U.S. – China relationship will remain tense, but the Biden team approach in other areas will differ greatly from the previous administration. Global partners can expect a change in tone from Washington, and there are five issues which will stand out as major differences under Biden’s leadership:

Number Five: The U.S. will reengage with the World Trade Organization (WTO), which should lead to a substantial reduction in unilateral ‘trade wars’ and tit-for-tat tariff exchanges. Under Trump, the WTO was marginalized and hamstrung by U.S. policies, as the appellate body did not have enough judges to take any action on trade disputes. Under Biden, the U.S. will be an active participant in the WTO and will use the organization to bring pressure against China and other nations on issues such as illegal support to state-owned enterprises. There is still an urgent need to reform the WTO, but the new administration seems poised to jump in and push for improvements.

Number Four: Russia is in the crosshairs. The on-again, off-again political relations between the U.S. and Russia should switch firmly to ‘off’ for the foreseeable future, as Biden’s foreign policy team has already indicated grave concerns over Russia’s meddling in Belarus as well as its treatment of protestors and dissidents such as Alexei Navalny in Russia. Biden ordered an extensive intelligence review of Russia’s actions over the last few years and will likely use the results of that report to tighten sanctions on Putin’s inner circle through the Magnitsky Act or dramatically limit trade and transactions with Russian state-owned enterprises, such as the Trump administration did with Huawei and other Chinese companies.

Number Three: The UK faces an uphill climb on their eventual U.S. trade deal. PM Boris Johnson lost an ally when President Trump left office, and the relationship with President Biden will be cordial but arm’s length. Johnson is in a tough spot, as he would like to secure a trade deal quickly to bolster his post-Brexit polling numbers, but Biden’s team is focused on the domestic agenda and probably will not see a need to negotiate this before 2022. The only way to move this deal to the front burner is to offer the U.S. one or more of the concessions it has long desired – increased access to the NHS for the U.S. pharmaceutical industry, lowered trade barriers for food imports, or improved entry into the services industry in the UK.  None of these would be popular for British voters, but Biden’s trade representative will be well-positioned to insist on key concessions.

Number Two: Biden’s team has committed early in the presidency to implement a “worker-centered trade policy” and that will color all of the legislation and trade deals that his administration will touch.  The intent of the policy is to ensure that future trade deals (including any potential participation in the CPTPP) do not harm American workers by giving the U.S. market access to foreign goods that were produced by underpaid and under-protected workers.  The flip side of this approach should be easier U.S. market entry from countries with decent labor (and environmental) standards, as the administration formulates a way to preference the ‘right’ type of imports.

The number one issue that will differ under the Biden administration is a desire to improve ties and trade opportunities with reliable partners. The tension with China will remain and potentially even deepen, but the Biden administration – stocked with committed ‘globalists’ – is going proactively tie other partners (especially fellow democracies) closer to the U.S. through increased trade and investment opportunities. Outside of North America, this will benefit Japan, South Korea, Australia, New Zealand, Israel and the European Union most of all. Rather than adjustments to existing trade deals (some of which, like the USJTA and USMCA, were just recently completed), the Biden administration will look to use bilateral investment deals to promote greater trade ties with trusted partners, especially in areas such as renewable energy and defense technology.

On the outside looking in will be Saudi Arabia, Turkey, Russia and other countries that will find in the Biden administration a trade team that is willing to substantively weigh human rights abuses and the dangers of populist leaders when assessing trade deals, money-laundering regulations, sanctions and access to the U.S. market and technology. While this shift in approach and tone will not immediately push international trade traffic into new patterns, it will lay the groundwork for a transition to more benign trade policies and less regulation for businesses working with preferred partners.  The foundations of global trade will shift just enough to push some companies, already weakened and weary by the pandemic recession, into a difficult scramble to quickly move operations and find new partners.

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Kirk Samson is the owner of Samson Atlantic LLC, a Chicago-based international business consulting company which offers market entry research, political risk assessment, and international negotiations assistance.  Mr. Samson is a former U.S. diplomat and international law advisor.

pandemic

Global Trade After the Pandemic

The staggering impact of the coronavirus pandemic on world trade is still reverberating and will for many months. Businesses are struggling to adjust to the current challenges that travel bans and factory stoppages present to their firms. They are concerned about how to keep their employees safe, informed, and on the payroll in the face of a dramatic economic turndown. But once this pandemic is over, what will its lasting impact be on global trade? How will the trade environment change and how will successful companies respond?

The jury is still out

What the final economic and personal toll of the coronavirus will be to the U.S. and global economy remains to be seen. It may take several months or years to ride out the pandemic and sort out the first stage economic loss that it will leave in its wake. The coronavirus pandemic has already drawn comparisons to the 9/11 attacks and the 1987 and 2008 recessions as far as its overall impact on the U.S. and global economy. It is a uniquely painful moment for international business, especially in regards to the movement of people and products. The recent lock-downs throughout the European Union and the travel ban from Europe to the United States, for example, have no historical precedents. Much like the world looked to regulatory changes in the wake of 9/11 or the financial cascade of problems from 2008, they will again as this initial impact recedes and governments assess how they failed to prepare for this pandemic and how they can help curtail the damage of such occurrences in the future.

Worker safety and transportation screening will be promoted

Unions, companies, and government regulators are already looking at how working conditions will need to change to better protect employees who work in the global trade trenches. From airport workers to longshoremen, workers in many key industries are exposed to cargo and passengers from overseas that potentially could be carrying new diseases across borders. The potential costs of improved detection and phytosanitary procedures will eventually be passed to consumers, but these expenses will be difficult issues to negotiate for industries that have already been hammered by first the U.S.-China trade war and then the dramatic world-wide reduction of traffic flow due to the pandemic.

Much as the terrorist attacks of 9/11 and related incidents gave rise to a host of new security measures at ports and borders, the spread of the pandemic will eventually be the subject of substantial discussion, public hearings, and eventual regulatory changes.  Governments will look for systems that would help them to better screen for potential pathogens at transportation nodes, which may include longer periods of isolation for cargo, and longer lines at the airport for global travelers (not to mention more tax funds to set up these screening and control systems).

Air and cruise industries: only the strong will survive

Passenger airlines and the cruise industry will not likely recover from the economic impact of the pandemic without some substantial government assistance. Even with that financial support, both industries will face substantial challenges to get back to a healthy volume of traffic as the pandemic brought both cruise and air traffic to a standstill. Coming on the heels of ‘flight shaming’ and a wide-spread movement to reduce their carbon emissions, as well as the Boeing crashes and 737 MAX delays, the airlines were already in a delicate position. The pandemic was the knock-out punch.  In the short term, airline CEOs such as British Airway’s Alex Cruz have noted that this is a “crisis of global proportion like no other we have known.” Airlines are projected to lose as much as $113 billion in 2020 alone. Cruises have faced similar challenges, essentially given a ‘death blow’ by the U.S. State Department warning to avoid cruise ships and port lockdowns in the Mediterranean.

What will change as a result?

The economic results of the pandemic have had some additional first-tier effects beyond border safety and damage to the transportation industry. For example, commentators have already noted that the pandemic has forced us into a great virtual working experiment. Insurance companies and their clients will be looking closely into (and likely litigating over) the responsibility for losses as a result of the pandemic. Governments will look to fix the problems we are already seeing in regards to testing and readiness. But what are the secondary effects of the pandemic for businesses? How can companies position themselves to survive and possibly benefit from the changing business landscape that awaits us?

Invest in strategy and security expertise as well as sourcing flexibility

Is this the coronavirus pandemic an isolated incident? Not according to the World Health Organization (WHO), which warns that ‘global catastrophic biological risks’ may be seen on a more regular basis in the coming decades. On top of that natural risk, consider that terrorist organizations have also seen the remarkable disruption caused by the pandemic and may attempt to weaponize biological weapons. It is a risk that governments have known about for some time, but seems even more realistic now that we’ve seen a pandemic in action and the challenges that governments face in attempting to contain it.

This future risk should result in companies spending more time and energy on both corporate strategy and security. The increasingly volatile state of the global markets means that companies will need to beef up their existing forecasting and modeling capabilities. On the risk side, security of employees and far-flung assets will take on a new urgency in the wake of the pandemic. Preparing a company that can flex and adapt in volatile times will mark the difference between companies that thrive and those that go bankrupt. Many companies will also be doing a complex overhaul of their logistics and production concepts.

The US-China trade conflict, and other isolationist tendencies that will linger after this pandemic, will encourage companies to both look closer to home for their production as well as to value the benefit of having alternative sources.  Countries like Canada, Mexico or Latin America will seem more attractive after this experience to U.S. companies. In Europe, sourcing within the EU makes much more sense once the factors of reliability and local access are properly factored into cost comparisons.

The Bottom Line

This pandemic will break firms that cannot handle the financial strain of such a dramatic and abrupt downturn. Government investment and bailouts will allow some to keep their heads above water, but others will simply disappear. Those that do survive will find a different global trade environment: one that demands a greater focus on logistics flexibility and security and the ability to succeed in an international business environment that has new regulatory boundaries which will challenge ‘just in time’ concepts and put a greater value on diverse and more local sourcing. As with all challenges, this situation will also bring opportunities – companies whose products foster virtual communication in businesses and provide equipment that can identify and protect workers from biological agents will see a new surge in interest.  Global world trade will not be killed by this pandemic, but it will have a different and potentially more chaotic nature.

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Kirk Samson is the owner of Samson Atlantic LLC, a Chicago-based international business consulting company that offers market research, political risk assessment, and international expansion assistance. Mr. Samson is a former U.S. diplomat and international law advisor who lived and worked in ten different countries.

european

European Greenhouse: What Climate Change and Green Politics Mean for Business in Europe

France, Germany and the Netherlands broke 40-year temperature records this year. Traditional wine areas, such as Bordeaux, have had to accept new grape types into the area for the first time in 80 years to combat the devastating impact of new weather patterns. In Germany and other central European countries, large swaths of forest died off this summer due to climate conditions. 

This summer of extreme weather follows on the heels of a dramatic gain in Green party popularity during and after the spring European parliament elections. What does this mean for companies that do business in the European Union? How will markets and regulations change in the near future as a result of rising concern over climate change across the Atlantic?  

European voters (and consumers) and highly concerned about climate change, with many of them naming climate change as the greatest threat to world security. Equally important, there are substantially fewer people in European Union member states who doubt the impact that climate change is having on the world compared to countries such as the United States. 

In a recent poll, thirteen percent of U.S. respondents expressed doubt over the existence of climate change or that it was due to human influence. This American response was the highest level of skepticism in the developed world; double that of Germany or France, and much higher than other countries such as Spain, where polls have shown as little as 2% of the population voicing any doubt as to the reality and danger of climate change.

Why Europe having fewer skeptics matters

Extreme weather in the summer is not a new issue in Europe. The heat wave of 2003 was estimated to have killed as many as 30,000 people in Europe due to the lack of air conditioning and infrastructure to care for those vulnerable to heat strokes, such as the elderly. The heat wave that broke records across the EU this summer was even hotter. These weather changes, hand-in-hand with the sudden surge in Green party success in EU and national elections, underscore that there is both pressing concern over climate change and a willingness to prioritize it among voters. 

Without climate deniers across the political aisle to delay or weaken environmentally-oriented legislation, it is likely that the business environment will soon be dramatically changed as the EU and member state governments adjust policies and regulations to combat climate change and protect their populations from future extreme weather.

Why the ‘American solution’ won’t work and building styles won’t change

The U.S. has extreme heat on a constant basis in places like Arizona and Texas, but the classical solution – to air condition every building – will not work in Europe because energy costs are twice the U.S. average and likely to rise quickly as governments are forced to switch to more expensive (in the short-term) renewable sources. The EU’s renewable energy directive was modified in 2018 to establish a 32% renewable energy target for 2030, which will likely keep energy prices high as more investments are needed to help develop renewable sources such as solar, wave and wind energy ‘farms’.  

Logical efforts to change building materials and styles to improve the ambient temperatures for residents are near impossible to implement in established cities in Europe. Traditional building styles that are intended to save on heating costs by trapping air inside often exacerbate heat waves since these buildings cannot effectively cool. New materials and building styles in the suburbs offer energy-efficient solutions to newer areas, but traditional architectural areas in downtown Prague, Rome and Paris are poorly positioned to embrace these options. It is inevitable that air conditioning use will increase (currently only 5% of European buildings are equipped with air conditioning, compared to 90% in the U.S.) but based on electricity costs and emission reduction goals in the EU, it is only a partial answer to the extreme weather problem.  Europe must find its own solution, and this search for alternatives will open up new opportunities for innovative companies.

What business opportunities appear as Europe combats climate change?

How will consumer habits change in the face of public concern over emissions and fears over ever-worsening extreme weather? What new business opportunities can we expect to see in Europe as Green-leaning governments and climate-conscious voters bring wholesale changes to the regulatory structure of the European Union in an attempt to combat climate change? Three areas of interest jump out: new government and venture capital funding for innovation, sharply increased transportation costs which will change logistics patterns and purchasing habits, and dramatic shifts to the land use and building traditions which should open up opportunities to U.S. companies.

Innovation will be valued and funded as never before

According to the Global Innovation Index for this year, seven of the top ten most innovative nations are located in Europe, and yet the U.S. (number three on the Index) outspent Europe on research and development by 20%. That is not to say that Europe is not investing in climate change innovation. On the contrary, in 2018, the European Investment Bank committed over 16 billion Euros to combating climate change, a number which has increased each year for a decade. Over $23 billion (US) was invested in innovative new European companies through venture capitalism last year alone.  These numbers will shoot up in the years to come as governments scramble to support new solutions to extreme weather challenges and climate change. 

The EU has already announced plans to focus on battery innovation and production, and will legislate an increasing use of renewables; supporting wind, wave and solar power projects to reduce oil, gas and coal use. Cleantech and Greentech projects are surging in clusters such as Cambridge, Copenhagen and Rotterdam. But there is a need for even more venture capital, and a growing recognition that governments will have to step in and add to research and start-up funding, as well as help scale up successful companies to compete regionally and globally.

A dramatic increase in transportation costs will shift production and consumer habits

Much like in the U.S., many European companies have a tendency to source materials and production overseas to lower costs. Unlike the U.S., they have generally been able to avoid the impact of the U.S.-China trade war. However, this breather is short-lived, as the EU seems to recognize the cost of transportation to society in the way of pollution and congestion and is likely going to be forced to ramp up emissions taxes in the near future, which will impact both the external and internal movement of goods. This, in turn, will force companies to recalibrate their logistics and likely move production closer to the point of sale. 

Companies will find that supporting local production becomes more reasonable as transportation costs go up, and EU member states with lower labor costs (under 10 euros an hour) such as Latvia, Lithuania, Romania, and Bulgaria should begin to see production facilities become more competitive compared to Asia as shipping costs increase in the face of emission taxes. Companies that were previously exporting goods into Europe will find that shifting production to Europe in support of EU clients is going to become substantially more cost-friendly (with the added advantage of avoiding import tariffs, should the global trade war broaden).

Land use and building codes are going to shift dramatically

A recent international climate change report supported what European farmers already have experienced: drought and extreme heat are forcing a rethink as to what is produced in Europe and how.  Climate change activists and consumer groups are also dragging EU trade agreements into the spotlight as countries like Brazil are accused of dramatically harming the global environment through wasteful agricultural practices – in part to increase beef sales to Europe. Increasing focus on how land is used and food produced in Europe will open up opportunities for innovative producers and new products (such as meat alternatives) in the European market. At the same time, European builders of new developments are being forced by regulations and consumer sentiment to use more environmentally-friendly materials and styles. 

The U.S. Green Building Council’s LEED certification has become a benchmark in Europe as well, and U.S. companies with know-how in this area of construction and building design can find robust new markets and development and construction partners throughout the EU who will be challenged by new regulations and public scrutiny to ‘green’ up their building projects.

Environmental challenges mean new opportunities for savvy companies

Changes in consumer demands and regulations imposed from the EU to the local level will open doors for companies that can bring in new, efficient and effective products. Governments attempting to be responsive to extreme weather challenges without taxing their voting population too directly (which is what sparked the ‘Yellow Vest’ protests in France) will demand more energy-efficient products and processes from businesses. Innovative companies, ready to expand and take on new challenges, will find it relatively quick and painless to register in the European market to take advantage of the possibilities that are manifesting due to environmental and consumer changes.   

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Kirk Samson is the owner of Samson Atlantic LLC, a Chicago-based international business consulting company which offers market research, political risk assessment, and international negotiations assistance.  Mr. Samson is a former U.S. diplomat and international law advisor who lived and worked in ten different countries.

trade

How U.S. Trade Policies are Speeding the Development of a Multi-Polar Global Economy

Several years in to the multi-front trade conflict led by the current U.S. administration, the world economy teeters on the edge of a possible recession.  The International Monetary Fund (IMF) estimates that up to $700 billion in global trade could be wiped off the books by the end of next year due to the trade war.  Much of the direct loss, of course, is tied to reduced trade between the U.S. and China, but other trading regions, such as the rest of Asia and Europe, are impacted by this global slowdown.  How is this shaping future trade flows?

Of course, there are some immediate winners in this tussle between the two economic giants.  Countries such as Mexico and Vietnam have seen sharp increase in trade as businesses scramble to find new production sites that would allow them to duck tariffs. Hidden behind these headlines, however, is perhaps a more important story; the rapid development of a multi-polar global economy.

Observers wringing their hands over the U.S.-China trade dispute may have missed what else is going on in the world.  Europe has been negotiating trade agreements at a rapid clip, finalizing deals with Canada, Japan, Singapore, Vietnam, several African regions and South America (MERCOSUR) over the last three years.  Africa is launching the Africa Continental Free Trade Area (AfCFTA), a 54-nation trade block that is hoped will dramatically increase inter-African trade. After a snub from the U.S., the Trans-Pacific Partnership (TPP) was retitled the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and is now an active free trade area among 11 partner nations.  Asian countries are considering a 16-nation trade pact called the Regional Comprehensive Economic Partnership (RCEP).  In brief, world leaders are not sitting on their hands waiting for the U.S.-China dispute to get resolved.  They are seizing opportunities to trade elsewhere.

World demographics make this multi-polar trading system inevitable.  Despite the United States’ tremendous economic power, it represents less than five percent of the world population. Although it is a wealthy sliver of the overall market, that means that 95% of the world’s consumers still reside elsewhere.  Over the next few decades, rapid population growth in Asia and Africa will continue to change these market numbers, with 79% of the world’s consumers residing in Africa or Asia by 2050. The global middle class will continue to grow outside of ‘traditional markets’ and by 2030, over half of the world population will be considered middle class.  Some estimates suggesting that over 90% of future middle class growth will come in Asia and Africa. 

This dramatic surge in wealth and consumer spending power outside of Europe, the U.S. and Japan demands more infrastructure to support logistics.  China’s initiatives to help itself carve out a primary role in developing these new markets through the Belt and Road program are well known, but Europe has also jumped into the seize a piece of the action, especially in Africa, and programs to upgrade infrastructure at the state level are fueling building from South America to the Philippines. 

It’s my expectation global trade will become even more fragmented over the next decades,” notes European logistics expert Louis Coenders, owner of the Dutch advising firm De Transportheker, which has been consulting on transportation, warehousing, and global distribution since 2010 and has stressed to clients the growing importance of diversity in logistics as the world becomes multipolar.  “You cannot rely on one single source. From a risk management perspective, it’s never smart to put all your eggs into one basket. That also applies to international trade.”  Coenders further noted that the growing middle class in places like Eastern Europe, Asia and Africa will encourage infrastructure changes to bring products into these markets as consumer spending rises.  For the moment China has an edge into many of these areas, as illustrated by the first train shipments from Alibaba arriving into Liege, Belgium just last week as twice-a-week rail shipments are now sent directly from China to the EU courtesy of the improved rail system.

When the U.S. resolves its trade disputes with China (and potentially the EU, Turkey, Russia and other targets of the current administration), it will find that the unintended consequence of this long-term conflict is that the world has by necessity sped up economic exchanges, and adjusted trading systems and flows to accommodate this new multi-polar world.  While some of the trade may ‘come back’ to the United States, the changes in world population and fast-paced creation of new free trade blocks outside of North America means that other markets will seize this opportunity to deepen their trade relations and the U.S. will find itself in a more competitive and varied trading environment. This change was inevitable, but the recent trade war has sped up its development.  Agile, strategic companies will react to this market change by diversifying and partnering with colleagues in the growing markets of Africa and Asia. Those that are slow to change will find it hard to remain competitive in this brave new trade world.

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Kirk Samson is the owner of Samson Atlantic LLC, a Chicago-based international business consulting company which offers market research, political risk assessment, and international expansion assistance.  Mr. Samson is a former U.S. diplomat and international law advisor who lived and worked in ten different countries.