Post-pandemic Trade & Globalization

In the latest The Big 3, Stephen Poloz, Special Advisor with Osler, Hoskin & Harcourt and former Governor of the Bank of Canada, answers our questions on the root causes of an increasingly risky trade environments and how business leaders can adapt.

1. The discussions, predictions, and daily headlines about inflation continue to no avail. What’s your take on what we’re currently seeing in the markets?
With vaccinations on the rise, a sense of normalcy is emerging but there is still a lot of uncertainty. Predictions at the start of the pandemic expected the worst recession since the Great Depression, however the opposite is now true as we debate about how much inflation we’ll see and for how long. While we haven’t spoken seriously about inflation for more than 20 years, the current situation is transitory but that doesn’t necessarily mean short-lived. Wages are rising, but profit margins are also at the highest they have ever been. Like supply bottlenecks, inflation will work itself out without the intervention of policy makers. It’s also worth more than a mention that the deglobalization trend over the past few years is contributing to increased consumer prices.

2. Thinking long-term, what will be most important economic influence or factor we need to watch? And how will its impact transpire?
The force with the greatest effect on our economy will be technology, not the pandemic. The industries where AI plays a major role will be most affected. We are currently in the early stages of the fourth industrial revolution fueled by digitalization and accelerated by the pandemic. Each industrial revolution has brought major waves of change, and each wave delivered declining prices thanks to general purpose technologies combined with competition. The resulting prolonged wave of productivity growth will apply downward pressure on inflation for at least a decade. We’ll see a K-shaped trajectory between the industries and businesses that can adapt to new, digital ways of work to stay competitive, versus those who don’t. The unfortunate but understandable confusion between the consequences of technological stress versus globalization stress on an economy will occur; business leaders will need to ensure that story is properly told.

3. What’s your principal recommendation to international businesses who are navigating this increasingly risky and complex environment?
Long-term strategies and a visionary narrative are critical to get buy-in and create necessary changes. To reshore and deglobalize will likely result in increased customer costs and possible net job losses due to increased automation. Maintaining global supply chains will require increased and strategic allocation of resources into risk management to create long-term shareholder value. Similar to other long-term investments such as patents and brands, active risk management, such as scenario planning and dedicated risk teams, will create future pay-offs. Through supply chain redundancies, building flexibility into contracts, business continuity planning, and near-shoring, companies create a wider set of possibilities and solutions with a stronger value chain. Risk is two-sided; you just need to be prepared for both sides.