The Pandemic has Exposed the ‘Gray Rhinos’ of Global Trade
Michele Wucker, the author who coined the term “gray rhino” to describe obvious dangers that are often ignored, believes COVID-19 has revealed that policymakers fell far short in preparing to counter a pandemic, despite countless warnings from the public health community.
Like climate change, the pandemic was an obvious gray rhino, not a surprise black swan — a term used to describe an unpredictable event — Wucker said. Just before launching her new book, You Are What You Risk: The New Art and Science of Navigating an Uncertain World, to be published next spring, Wucker reflects on the effects of the global health crisis on the future of trade.
In Wucker’s opinion, the pandemic has created a number of new gray rhino risks related to supply chain and transportation disruptions caused as the virus shut down factories and choked global transportation webs.
Companies are newly alert to the dangers of failing to diversify their suppliers across geographic locations so that they can pivot quickly if any of their supplier factories shut down, even temporarily. Many will look to find more suppliers abroad in more locations, putting on the radar countries that were previously disregarded.
Others may look to bring some foreign production back onshore and increase automation. They are rethinking just-in-time inventory management, keeping larger stocks or prioritizing manufacturers that are closer, with more reliable transportation options.
These trends work in tandem with climate-related concerns about the carbon impact of transportation and the initiatives already in place for a more circular and sustainable economy, including in the Asia-Pacific region.
Last fall, ahead of the APEC CEO Summit that was scheduled to be held in Santiago, Chile, Wucker defended the need for economies to work together to overcome the gray rhinos of global trade. The following is her perspective from November 2019.
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Businesses and policymakers are much more prone than anyone likes to admit to obvious, highly probable challenges: the risks and realities charging straight at us like a crash of giant, gray rhinos. But decision makers who have the open minds and skills to recognize and harness the strength of high-probability, high-impact dangers are the most likely to succeed instead of getting trampled.
That is certainly true when it comes to trade, as nations struggle to navigate among calls for more cooperation and those for more protectionism. Those tensions could make it harder for economies and regions to co-create a global future that improves lives.
They also threaten to draw needed attention from three big trade gray rhinos facing the global economy: the rise of services, the impact of technology and trade’s contribution to climate change. Each one of these challenges requires global cooperation and an interdependent view of national interests.
While the geopolitical climate could make it harder to resolve these trade issues, the opposite also is true — solving them could provide practical pathways forward.
Let’s take a look at each one in turn, using a lens that considers how the wellbeing of trade partners and the planet complement the interests of individual nations.
The Rise of Services
Though much of the public conversation about trade focuses on manufacturing and agriculture, nearly 40 percent of global trade today is not in physically traded goods, but rather in services: travel, transportation, technology, knowledge, education, health, communications, and legal and financial services.
Communications technologies have enabled us to trade services over much greater distances at significantly lower cost. This has brought great benefits, but also challenges. Global trading regimes designed for manufactured goods may not fully reflect these changes. Rules of origin may not accurately take into account the services component of how — and where — goods are produced.
Research shows that services are more sensitive to how economies treat education, labor and intellectual property issues, which will require special attention as economies work to harmonize their standards.
While some services, like travel and transportation, physically cross borders, others may move virtually and invisibly over digital networks. In other cases, services cross borders embedded in the expertise of individual humans, which will benefit from new skilled migration regimes.
Many services involve new technologies that are not yet regulated. This creates the potential for a Tower of Babel if each economy rolls out its own new rules — but also the opportunity to harmonize early on.
The Asia-Pacific Economic Cooperation has begun developing a services competitiveness roadmap, including efforts to facilitate regulatory cooperation and mutually beneficial competition policy, supporting human capital and skills capacity, improving connectivity and using new technologies toward these ends.
Europe’s rollout of its General Data Protection Regulation in 2018 shows how one region’s introduction of digital rules can have a global impact, and why technology rules and standards cry out for coordination. Anyone who visits a European Union-based website will have seen the familiar prompt asking users to accept the site’s use of tracking “cookies.” But what if every region has its own requirements? We would be clicking all day long.
That leads to the second gray rhino of global trade, a subset of services: technology.
Technology
Artificial intelligence, automation and other new technologies will dramatically change the nature of trade by creating entirely new kinds of goods and services, and disrupting what is produced and where.
These technologies raise ethical and practical issues that can become major challenges across borders — or an opportunity for global conversation and cooperation.
For example, the software for autonomous vehicles must program in assumptions about the moral choices to make when a collision is unavoidable. But people in different economies have very different views about how to choose.
The Moral Machine Project at the Massachusetts Institute of Technology has surveyed millions of people about what they would do if a car crash was inevitable but posed a choice of whom to spare. The answers varied by economy and culture. In Asia and the Middle East, people were less likely to prefer that their vehicle hit younger versus older people. North Americans and Europeans were more likely to swerve away from a higher-status person. People in heavily regulated societies were more likely to save a lawful pedestrian than a jaywalker.
How should trade regimes treat those cars? Should they be programmed differently depending on where they go? Using similar logic, Malta recently began investigating the possibility of “visas” for artificial intelligence assistants to ensure that they are programmed to respect laws and customs.
While technology is increasing the speed of globalization and digital trade, it also supports re-regionalization where some goods are involved. Additive printing will make it possible to manufacture more goods closer to their target markets. This has the potential to ease political pressure over the impact of trade on jobs, while also reducing transportation costs and carbon emissions.
That brings us to our third and final gray rhino: the impact of climate change on trade and vice versa.
Trade and Climate Change
The increasing urgency to tackle climate change will inevitably affect trade. As greenhouse gas levels hit new highs, the planet has suffered wildfires, droughts, floods, increasingly intense storms and rising sea levels. Citizens, particularly of younger generations, have protested the shortfalls in government action to reduce emissions.
Investors and central banks around the world have warned that climate change poses a huge risk to financial markets, insurers, individuals and companies unprepared for the financial consequences. Regulators are pushing companies to disclose climate-related risks to their supply chains and other parts of their businesses.
Trade is part of the problem, but can also be part of the solution. Transportation made up 28 percent of the world’s energy demand and 23 percent of its carbon emissions in 2014. International transportation, which is at the very heart of global trade, makes up one third of greenhouse gas emissions.
Newfound attention to emissions inevitably will extend to trade. Greenhouse gas emissions are falling in many economies if one looks only at domestic production. But that progress reverses if one considers the greenhouse gases related to the goods they import, both in manufacturing and transport.
Some economies generate much lower greenhouse gas emissions than others to produce the same goods, according to the Stockholm Environment Institute. For example, clothing can produce anywhere from 10 to 60 kilograms of CO2 emissions per kilogram of clothing. That’s a huge range.
Many factors come into play, including the efficiency and cleanliness of the technologies and processes used, the carbon intensity of the energy that powers manufacturing or the type of feed used for livestock. Finally, the distance and type of transportation matters: ship, train, plane, or truck. In some cases, a low-carbon product shipped a long way could have a smaller climate impact than one produced with less efficient technology and driven by truck.
On climate change, APEC has begun efforts to promote clean energy and lower the carbon footprint of transportation, as well as promote trade in environmental goods. This is an important start, but much more needs to be done.
Governments are increasingly likely to adopt new policies to dramatically reduce emissions, and these will affect every part of the global supply chain. They might include new standards for fuel economy or carbon dioxide emissions, including labeling requirements and caps on carbon intensity. Likely, they will involve carbon taxes or incentives on vehicles and/or fuel. They may also include preferential treatment for environmental goods and technologies.
All of these options will affect trade flows. In a rapidly de-carbonizing world, the most energy efficient producers will have an advantage. But because they can help high-carbon economies to lessen their impact, everyone can be left better off.
Shifting the Global Trade Conversation
These three gray rhinos — the rise of services, the advance of technology and the climate crisis — can help place the global trade conversation on a foundation of shared self-interest. No one economy can solve these challenges alone.
By harmonizing their approaches to services, trading partners can find common standards that have the potential to make capital and knowledge flows more efficient. That will reduce the costs of cross-border transactions.
By cooperating to share the best technologies, while openly facing the issues that some of them pose, economies can reap the benefits and head off potential dangers. Increasing connectivity and digital access, integrating digital standards, developing and addressing standards for new technology, and promoting healthy competition are all worthy goals.
By developing smart climate policies, trading partners can de-carbonize the planet’s atmosphere much faster than if they go it alone. By tracking the carbon intensity of production and transport, trading partners can identify new ways to reduce their impact. Low-efficiency economies could get better access to cleaner technologies and goods, while efficient producers will get new markets for their products. That will change trade patterns, to be sure, but so would the supply chain and financial shocks of unchecked climate change.
Recognizing an issue is often the hardest step, and the good news is that APEC economies have already taken steps toward dealing with these three gray rhinos of trade. But one of the pitfalls with obvious dangers is that once we acknowledge them, it’s easier than most people think to drop the ball.
That’s why it is so important for leaders to do a progress check on where their efforts to deal with their gray rhino risks stand. Working with APEC partners, they can move forward with solutions to prevent the threat — or even better, turn it to their benefit.
