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Political and economic conflict, cybersecurity concerns and environmental sustainability present significant risks to global trade in 2020, according to new research by the World Economic Forum (WEF).

The forum’s annual Global Risks Report 2020, published today ahead of next week’s Davos summit of world leaders, says the overlapping threats of climate change and political tension are already contributing to a slowdown in trade worldwide.

Efforts to tackle supply chain disruption and sluggish economic growth – both accelerated by extreme weather and environmental changes – are being hampered by the increasing usage of trade as a weapon between global rivals, it says. Frosty relations between the US and China remain a concern despite signs of progress in 2019.

At the same time, businesses are increasingly wary of the threat of cyberattacks as technology plays a greater role in their operations. Attacks on critical infrastructure are identified as the fifth-highest short-term risk that businesses face.

“Global commerce has historically been a pillar and engine of growth – and a key tool for lifting economies out of downturns – but as we warn, significant restrictions were placed on global trade last year,” writes Børge Brende, president of the WEF and a former Norwegian minister.

 

1) Conflict

The report identifies political and economic conflict as a significant driver of risk, as trade is increasingly “turned into an instrument for rivalry”.

World Trade Organization data cited by the forum shows that total merchandise trade worldwide dropped 2.9% during the first three quarters of 2019 compared to the same period in 2018. The steepest declines were in Hong Kong (7.5%) and South Korea (7.4%), though above-average reductions were also reported in Germany, Italy and Japan (see figure 1).

Figure 1: Trade change Q1-Q3 (18-19)

The WEF singles out ongoing tension between the US and China as the most serious threat to trade volumes. Forecasts for global growth provided by the International Monetary Fund predict a slowdown of 0.8% in 2020 if existing trade tariffs between the US and China are upheld or if new tariffs are established, the report says.

“While progress was made in late 2019 between the United States and China towards a trade agreement, the effects of having turned trade from an instrument of cooperation to a weapon of rivalry may persist,” it says.

Economists have warned there are still significant barriers to a long-term trade agreement between the two global superpowers, and according to the WEF ongoing tensions “could cost US$700bn in lost output in 2020 – almost the amount of GDP lost by the entire European Union due to the financial crisis”.

More broadly, 78.5% of the survey’s 800 respondents believe economic confrontations will increase this year, a higher figure than for any other potential risk (see figure 2).

Figure 2: % of respondents who believe risk will increase

Those findings are at odds with the results of HSBC’s Navigator survey for 2019, which quizzed more than 9,000 firms globally. Nearly half said they were more optimistic about growth than in 2018, and more than a fifth expected growth in excess of 15%.

However, a byproduct of slowing trade due to political tension could be that countries are less able to ward off the threat of a global recession, according to the WEF’s Brende.

“We see the debt level higher than before the financial crisis in 2008,” he told reporters, including GTR, at the report’s launch in London. “We also see that trade is now decreasing globally, and we know that trade has also been the engine of growth. We see that the monitoring tools available, where in many countries you already have zero interest rates, are more limited.

“We know that because of the geopolitical tension and lack of cooperation, that it would be more difficult to get global consensus on approaches to deal with such a slowdown, [which] was the strength in 2008.”

 

2) Cyberattacks

“The current lack of global technology governance and the presence of cybersecurity blind spots increase the risk of a fragmented cyberspace and competing technology regulations,” the report says.

The NotPetya cyberstrike in 2017 brought hundreds of businesses to a halt, including food giant Mondelez. The spree of attacks forced regulators and the private and public sectors to reevaluate the impact of such incidents.

However, the report says that the proliferation of different national or regional standards, which have come about in response to attacks like NotPetya, now make it more difficult to converge into a single set of universal standards.

It warns that by 2021, damages due to cybercrime could reach US$6tn, a figure equatable to the GDP of the world’s third-largest economy.

Multilateral efforts, such as the Council of Europe’s Budapest Convention, also aim to outline responsible behaviour in cyberspace and weave together existing laws and regulations. Information-sharing efforts are attempting to centralise cybersecurity capabilities to reduce the impact of cyberattacks, the report says.

In advanced economies, cyberattacks are a top risk for business leaders. “I wouldn’t underestimate this risk, even though the centrepiece of the report is climate change,” says John Drzik, chairman of Marsh & McLennan Insight, which partnered with WEF on the report.

Geopolitical tensions can also be the driver behind cyberattacks on businesses; the blame for the NotPetya attack on Mondelez was pointed at the Russian government.

Internet of things (IoT) technology is also exacerbating cyberattack risks. The report estimates that there are already over 21 billion IoT devices worldwide, with that number set to double by 2025. Attacks on IoT devices increased by more than 300% in the first half of 2019.

 

3) Climate change

Mitigating the risk of climate change has been named in the report as the top global risk in terms of severity. This year’s findings mark the first time that all five of the top risks by likelihood – as well as four out of five of the top risks by severity – are linked to climate change.

Extreme weather events are the most likely global risk (see figure 3) and the impact that weapons of mass destruction might have is considered the second biggest risk by impact – the only non-environmental risk.

Figure 3: Risk likelihood against severity

Climate change impacts trade by distorting prices and disrupting supply chains. Most companies are ill-equipped to address climate risk, with many not yet quantifying physical climate risks in their direct operations and supply chains. Those that do are likely to be underestimating them significantly, says the WEF.

One sector making swift process with its supply chain transparency is mining, according to Peter Giger, group chief risk officer at Zurich. Supply chain transparency in the mining industry is crucial to its environmental and social governance (ESG) compliance. Other commodity supply chains, particularly food-related industries such as fishing and agriculture, could be irrevocably damaged if climate change risks are not mitigated. Fish populations could plummet due to warming seas, for example.

Drzik of Marsh & McLennan Insights says the pressure on businesses to mitigate these environmental risks are “growing and intensifying”. “Regulators are starting to require more transparency,” he said at the report’s launch. “You see that with the Bank of England requirements for banks and insurers to stress test on climate risk, and you see that with more voluntary disclosure such as with the TFCD [Task Force on Climate-related Financial Disclosures].”

Alongside extreme weather events and major natural disasters, human-made natural catastrophes are also highly likely to happen over the next few years, says the report. One recent example of this was when Brazilian mining company Vale’s Brumadinho dam collapsed, killing more than 250 people in January 2019.

“All of the stakeholder groups in business, whether investors, employees, customers or regulators are all starting to bring more attention to their decisions,” Drzik says. Business will look to tackle climate change in two ways: the first is how firms can become more resilient to climate change risks, particularly physical and supply chain risks, and the second is addressing regulatory changes, he concludes.

 

Reporting by Maddy White and John Basquill