Letter from Davos, 2019: Trade, Trust and Trump


Every year, global thought leaders gather in the Swiss Alps to address the world’s most pressing problems. This year, the unprecedented connectedness, complication and consequence of recent global disruption registered at Davos in the form of no-shows and a consensus deficit. In what has become an annual Policy tradition, former Clerk of the Privy Council Kevin Lynch filed this dispatch from Davos to break it all down. 

Kevin Lynch

What a difference a year can make. Last year, a buoyant, synchronized global expansion set an optimistic mood at Davos, President Emmanuel Macron of France was confident that the battle against populism was turning, Britain was expected to muddle through on Brexit, President Donald Trump’s speech gave some hope that his tweet was worse than his bite, and China was still basking in the glow of President Xi Jinping’s 2017 Davos address in which he assumed the mantle of self-described protector of globalization. 

This year, Davos was searching for how to bring order to a suddenly disorderly world. The slowing of global growth, the rise of economic risks, the possibility of a U.S.-China trade war, the utter folly of Brexit, and perceived inaction on climate change shaped a much gloomier mood. “Globalization 4.0” was the nominal theme this year but, given today’s global disruptions and uncertainty the annual gathering in the Swiss Alps had limited success in developing a compelling narrative and concrete path forward.

While Davos 2018 was notable for its parade of political leaders, the pickings were slimmer this year. President Trump pulled out, citing the U.S government shutdown of his own making; British Prime Minister Theresa May was busy at home trying to explain her Brexit plans to anyone who would listen; Macron had to deal with the gilets jaunes; President Xi was occupied with a slowing economy and a trade battle with the U.S. which has ensnared Canada; Indian Prime Minister Narendra Modi was busy fighting with the Indian Central Bank and for re-election; and, Prime Minister Justin Trudeau was also missing. 

These absences were unfortunate because a splintering world needs dialogue, not isolation. They did, however, provide space for Japanese Prime Minister Shinzo Abe to make a convincing case that Japan is back, with substantive ideas to make globalization 4.0 work better in his role as G20 chair this year, and for German Chancellor Angela Merkel to forcefully argue the values of international cooperation and shared international institutions, while taking pointed swipes at Trump for undermining the postwar global architecture. Vice President Wang Qishan of China used his time at the podium to argue China’s side of the U.S.-China trade dispute, drawing a clear red line around Chinese tech sovereignty. And, the new populist on the block, President Jair Bolsonaro of Brazil, made the fascinating case that if you are unsure of him, you can have confidence in his cabinet of experienced technocrats.

This was the year for a greater diversity of voices, including business and civil society, who tackled a range of issues such as: the environment; the corporation’s role in society; disruptive technology’s impact on work and workers; and the treatment of data, fuel of the digital world. A sense of urgency around climate change and the environment was evident in the 2019 survey of Global Risks. Of the top 5 global risks identified, three related to environmental concerns (extreme weather, failure of climate change mitigation, and natural disasters) and two related to data concerns (data theft and cyber-attacks). 

While Trump was not in Davos, his tweets, words and deeds were never far from the chatter of those who were. American foreign policy was described as “more unilateral than bilateral, more bilateral than multilateral, and more transactional than strategic. Many voices argued that, while President Trump may not understand the benefits of global trade for American prosperity (the biggest winners from globalization in recent decades have arguably been American consumers and Chinese workers) and for U.S. security, he does grasp what drives populism and votes. Picking up this theme, Edelman CEO Richard Edelman argued that powerlessness (“the power is where you are not”), fear (“someone or something (robot) taking your job) and economic pessimism (only 1 in 5 Americans believe “the system is working for them”) – are all powerful fodder for populist politicians.

The push back against infotech continued again this year, with the underlying concerns — around data privacy and usage, the virtual monopolies these digital tech platforms provide to infotech giants, and the potential for systemic abuse through data manipulation — continuing to fester. Broadening the debate, new voices argued that income inequality is an under-appreciated risk from tech-driven growth, while others stressed the risks of digital inequality. Davos, like stock markets, was lukewarm on the infotech titans this year.

The enthusiasm of previous years around the potential of the Fourth Industrial Revolution is being tempered by the angst it is generating about the future of work and workers according to Rana Foroohar of the Financial Times. She presented a fascinating statistic: that 68 per cent of children currently in kindergarten will work in jobs that don’t exist today. On the increasingly urgent issue of workforce reskilling, the “war for talent” has moved from the C-suite to the entire workforce. Can we shift from a “secure job for life” mentality to a “secure career for life” culture? The basic message: if we do not respond to the scale of the reskilling challenge in the tech 4.0 world, income inequality will worsen, populism will increase and globalization will come under even more strain. 

How did Davos 2019 do in tackling its objective of shaping a new global architecture in the disruptive age of the Fourth Industrial Revolution? While progress was unsurprisingly modest, the four days of speeches, discussions and debate did surface fresh perspectives on a number of pivotal issues. To highlight just a few: 

Slowing global economy: The International Monetary Fund (IMF) unveiled its updated World Economic Outlook, with Christine Lagarde delivering a “slowing but still growing” economic message to the Davos faithful. Trade activity, business sentiment and corporate investment plans have all softened, combined with a fading U.S. fiscal boost and headwinds in China. Chances of a recession in 2019 are viewed as limited, but risks to the global economy have escalated. Paradoxically, the key economic risk was identified as politics — a U.S.-China trade war, a no-deal Brexit, a sharper-than-expected slowdown in China, and rising geopolitical tensions.

Across Western countries, according to the IMF, the above-trend cyclical growth of the last several years will fall back to potential growth rates, and that potential has declined in most countries including Canada for structural reasons. Canadian growth is expected to fall from 3 per cent in 2017 to 1.9 per cent this year and next, with risks to the downside. In the U.S., economic growth is pegged at 2.5 per cent this year and only 1.8 per cent next as the 2018 stimulus wears off and stock buybacks substitute for capital investments. Eurozone growth will manage a tepid 1.6 per cent while the U.K will be lucky to achieve 1.5 per cent, with downside risks to both in the case of a messy Brexit. Even the global growth engine, China, is expected to expand by 6.2 per cent — huge by Western standards but anxiety-inducing for both Chinese leaders and global capital markets. 

The policy toolkits to deal with today’s elevated risks are constrained by high government debt burdens and already-low interest rates, the IMF warned. In addition to strengthening resiliency to these risks, economies such as Canada face the additional challenge of rebuilding potential growth through increasing productivity and labour force growth to avoid being trapped in low-growth futures.

Trust issues: Trust is the soft infrastructure of effective economies and successful societies. Trust has been on the decline for some time but the financial crisis of 2008 marked a turning point, prompting a sharp rise in distrust. In 2018, a majority of Western countries, including Canada, registered trust deficits — less than 50 per cent of the population expressing trust in government, business, media and civil society. 

The 2019 edition of the Edelman Global Trust Barometer was a fixture of many Davos discussions. The good news is that there was a modest rise in trust in 2019 across the 27 countries that Edelman surveys, and Canada shifted out of the trust deficit group: 54 per cent of Canadians now trust our core institutions. Digging deeper into the 2019 results, the trust gap between elites and the general population is at record levels. There is also a worrisome economic pessimism in Western countries: the percentage of the general population who believe they and their families will be better off in 5 years was only 34 per cent in Canada, under 30 per cent in the U.K., Germany and France. While the media is still distrusted, there is a split emerging: trust is rising for traditional media (65per cent) but plummeting for social media (34 per cent).

For the corporate sector, a majority (56 per cent) now trust business and, not unrelated to the Davos dialogues this year, a sizeable majority (76 per cent) are looking for leadership from corporate CEOs in tackling societal problems and communicating about the values of their firms. The top 5 issues where the public expects CEO leadership include: equal pay; discrimination; retraining/reskilling in the face of technological disruption; environmental protection; and, handling of personal data. 

Globalization 4.0: trade, technology and protectionism: Trade growth has been flagging since the 2008 financial crisis while broad-based trade liberalization stalled after the Uruguay Round (1994) and China’s accession to the World Trade Organization in 2001. Regional trade agreements kept up some momentum until Trump pulled the plug on Trans-Pacific Partnership and demanded the renegotiation of NAFTA. The real game changer has been that U.S. shift to outright protectionism.

Simultaneously, we are in the midst of the creative disruption of the fourth industrial revolution. Trade and technology have always intersected, sometimes smoothly, sometimes not. Twenty years ago, the advent of the internet and advanced telecommunications facilitated the off-shoring phenomenon for manufacturing and the creation of global supply chains. Today, digitalization, big data, and AI will facilitate an explosion in trade in services including e-commerce and digital trade. Technology as well as trade lies at the heart of U.S.- China trade tensions.

The U.S.-China trade dispute is playing out on various levels, hampered by misreadings on both sides. The U.S is undergoing a fundamental and bipartisan re-assessment of its relationship with China — a shift from strategic engagement to strategic reform of Chinese trade practices to strategic competition in technology (China’s new industrial policy) —whereas China assumed that Trump was solely focused on the bilateral trade deficit and could be placated with buying a few more soybeans. The U.S. underestimated how committed President Xi was to China asserting its global leadership in many fields. Vice President Wang Qishan made it clear at Davos that innovation-driven growth is China’s strategy to improve living standards and competitiveness, and globalization 4.0 must allow technology to move freely across countries without walls. A senior IMF official worried that the U.S. will attempt to build just such “tech walls” around China. And, an influential Chinese policy advisor feared we are moving to a “tech war” between the United States and China which would be more impactful on the global economy than a trade war.

The Brexit fiasco played out in real time in Davos, with Brits in disarray and Europeans clearly tired of the whole thing. The FT’s Martin Wolf, ubiquitous at Davos, quipped that the only winner from Brexit is President Putin. 

What does all of this mean for the global trading system? There was a broad consensus at Davos that the WTO needs reform urgently to become more responsive and effective. Japan offered to play a leading role in WTO reform, with the clear support of Germany. All good, but reform of a consensus-based international organization without American leadership, or even interest, will be challenging. 

Corporate purpose: Conventional corporate governance holds that maximizing shareholder returns is the sole objective of management and boards. This “thought system” largely derives from Milton Friedman and argues that directors, CEOs, and executives are all “agents” of the shareholders and, as such, have only one duty — to maximize shareholder value. The strength of agency theory is its simplicity and clarity of purpose; this simplicity is also its weakness given the complexity of today’s business environment, the multiplicity of stakeholders and the value of maintaining public trust. A growing chorus of critics of this thinking about corporate role and purpose has moved beyond business school academics and social activists to business leaders and corporate directors. 

Global business leaders such as BlackRock’s Larry Fink headlined many discussions re-examining the role of the corporation today with respect to employees, to communities in which they operate, to the environment and to tackling climate change. Fink certainly believes the corporate purpose should be thought of as broad, not narrow. European business leaders were more united in their view of an expanded role and purpose for corporations compared to their American counterparts. One CEO, attempting to drive to some conclusion, channeled Nike: “Just do it!” 

Davos 2019 reflected the conflicting forces at play in today’s fractured world. The slowing but still growing global economy suffers from weak productivity, aging demographics, rising inequalities in income, wealth and opportunity and a worsening global environment — all of which limit its sustainability. The corrosive forces of nationalism, protectionism and populism are still alive, and need to be tackled going forward. Opposition to globalization has moved from the fringes to become a driving force of populism, and supporters of globalization have to make it work better for those it disrupts.

A key part of creating a shared future in an interdependent world is establishing the rules of the game for how globalization will work in a multi-polar world in the midst of a technological revolution. At last year’s Davos, a frequently employed metaphor attributed to John Kennedy was “the time to repair the roof is when the sun is shining.” A year has passed, clouds are gathering and few repairs have yet to be undertaken.

Contributing writer Kevin Lynch, vice chair of BMO Financial Group, is a former clerk of the Privy Council and a former deputy minister of Finance.