Globalization may be evolving, as nations and regions reassert their regulatory powers on a wide range of issues including trade, competition and national security. The economic lessons of COVID-19 and growing concerns about climate change reinvigorated efforts to shorten supply chains, close borders, prioritize local production, and limit the movement of people and goods. At the same time, the pandemic and climate change continue to highlight the need for concerted global action.
We helped organizations around the world as they navigated the changing dynamics of globalization. Here we highlight some of the related issues we worked on in 2021.
Skepticism toward global trade agreements grows
The multilateral trading system established after World War II, first through the General Agreement on Tariffs and Trade (GATT) and then through the World Trade Organization (WTO), is under strain, in part due to rising economic nationalism in many countries. Successful new trade agreements have been regional, creating the potential for separate trading spheres, rather than an open global system. US-China competition has taken the form of escalating restrictions on trade, often outside international institutional mechanisms. An open international trading system is also threatened by countries’ exiting agreements. The most prominent example was Brexit, the UK withdrawal from the European Union, a process that continues to unfold even though the separation became official in January 2020.
Starting in 2021, goods and services moving between the EU and the UK became subject to post-Brexit rules and different licensing and compliance regimes. Bilateral trade between the UK and EU is duty- and quota-free, provided the relevant origin rules are satisfied. Customs formalities still apply, and compliance with new product regulations, including product certification, levy additional burdens on companies doing business in and with the UK.
Traditional institutions of trade dispute resolution are under pressure and national governments are increasingly taking trade-retaliatory measures outside the WTO system. Moreover, the COVID-19 pandemic highlighted the risks inherent in long supply chains and generated new pressures for trade adjustments that buttress national production.
Despite these developments, the WTO remains critical, with countries across the globe appealing to WTO standards to negotiate policy differences in areas related to climate, money laundering and foreign subsidies.
Competition policy evolves, merger filings spike and merger control tightens
Globally, merger control filings reached historic highs in 2021, with data from 25 jurisdictions showing a 42 percent increase in filings compared to the 2016 – 2020 average, and US filings hitting the highest level in the past 20 years. At the same time, more and more national jurisdictions have adopted and begun to enforce merger control and competition laws. The era when the US and the EU effectively determined competition regulation is yielding to one in which more states will influence international mergers, investments and corporate strategy through competition policy.
In the US, domestic politics continue to upend the values underlying competition policy. The consumer welfare standard, which focuses on minimizing consumer price, has long guided antitrust enforcement. But that principle has come under pressure from all angles—including from within the White House, Congress and at antitrust enforcement agencies, who believe antitrust enforcement should target public interests, like encouraging innovation, increasing job growth and advancing equity goals. While much of the discussion has focused on the tech sector, other sectors will also face challenges, as the Biden administration pushes for wide-scale changes to US antitrust laws and a litany of antitrust reform bills are pending in Congress and at the state level.
In the EU, the European Commission (EC) introduced a major policy shift in merger control with a new interpretation of its Article 22 referral mechanism. Transactions that do not meet notification thresholds anywhere in the EU may now be notifiable. The stated goal of the new policy is to bring to the EC’s attention so-called “killer acquisitions.” While the principal targets are mergers in pharmaceuticals and digital markets, the EC may apply its new practice to any transaction where the target’s turnover does not reflect its actual or future competitive potential. On the antitrust enforcement side, the EC signaled its intention to continue its recent revival of dawn raids following the build-up of a backlog due to the COVID-19 pandemic, and its willingness to investigate atypical cartels such as no-poach agreements.
FDI reviews expand
The boom in M&A that started in the second half of 2020 accelerated in 2021, with global deal value topping US$1 trillion in each quarter for the first time on record. A torrent of deals resulted from a perfect storm of activity on the part of strategic, PE and US SPAC dealmakers. The pandemic drove many companies to offload non-core divisions and acquire digital capabilities. Companies that thrived used M&A to consolidate gains. PE firms strove to deploy their massive troves of dry powder. And SPACs searched for opportunities to invest the record levels of funds they raised.
At the same time, more countries are developing regimes to analyze foreign direct investments (FDI), including mergers and acquisitions. While there remains no standalone FDI screening at the EU level, the EU continued to push for a coordinated intensified approach to FDI among Member States. Most countries that have regimes in place tightened their rules and expanded their objectives beyond the traditional scope of shielding defense and national security sectors from foreign influence.
FDI reviews increasingly include sectors related to communications, transportation and healthcare. The Committee on Foreign Investment in the United States (CFIUS), the primary body for conducting FDI reviews in the US, continued to increase the number of deals it analyzes, both from the pool of deals that officially require review and from those that don’t, but attract CFIUS attention based on their connection to sensitive sectors.
COP26 highlights the importance and challenge of global action
In November 2021, more than 190 world leaders gathered in Glasgow to attend international climate conference COP26. While the conference led to many promising decisions, resolutions and statements, its ultimate success remains to be seen.
Notable—and voluntary—commitments made during COP26 included: another declaration by the US and China, the world’s largest greenhouse gas emitters, to continue to work together on climate change issues; a pledge by more than 100 countries to cut methane emissions by 30 percent by 2030; and a promise by more than 130 countries to end deforestation by 2030. In addition, more than 450 financial institutions, with control of more than US$130 trillion in assets, committed to support the achievement of net-zero greenhouse gas emissions by 2050.
In an important development, nearly 200 countries agreed on rules for implementing Article 6 of the Paris Agreement, which established a framework for creating international carbon credit trading markets. Following six years of negotiations over the specific features of these markets, the agreement reached at COP26 paved the way for a global emissions trading platform. However, these rules require further clarification, making it too soon to tell whether pledges will translate into action.
Cryptocurrencies and NFTs drew scrutiny
Governments around the world are closely watching cryptocurrencies and other blockchain technologies, partly out of concern for how their proliferation may affect authorities’ ability to protect consumers and set effective monetary policies.
According to the Bank of International Settlements, more than 80 percent of central banks are engaged in work involving central bank digital currencies (CBDCs). This activity is, partially, a response to the rise of stablecoins, which minimize price volatility by pegging their market value to an external reference such as the US dollar or gold. By October 2021, the market cap of the largest stablecoin issuers had reached US$127 billion, representing a 500 percent increase over the previous year.
The US continued to cautiously create a regulatory framework, including stablecoins, in 2021. The Office of the Comptroller of the Currency (OCC), the prime US federal banking regulator, published guidance permitting banks to issue and use stablecoins for any permitted payments activity after the OCC’s review and approval of the safety and soundness conditions. The US Treasury Department subsequently called on Congress to require stablecoin issuers to become insured banks, and issued guidance stating that obligations to comply with sanctions apply equally to transactions involving virtual currencies and those involving traditional currencies.
The extent to which cryptocurrency is regulated in the EU varies by Member State. Spain, for example, recently enacted its first legislation on the subject.
Overall, regulators and policymakers struggled to contend with blockchain-enabled technology and its often-volatile offshoots. In July 2021, the European Union proposed a law that would apply what is known as the travel rule to cryptocurrency transactions, making them more traceable as a guard against money laundering and terrorism financing. The US Securities and Exchange Commission challenged Congress to regulate cryptocurrency to protect retail investors. The agency also launched investigations into cryptocurrency companies, with more likely to follow.
In 2021, non-fungible tokens (NFTs) also had a big year. NFTs are blockchain-enabled digital assets that represent ownership of, or other partial property right in, a unique item such as artwork or a specific seat at a concert. As their sales surged, so did the regulatory and legal challenges they present. These include ensuring the payment of royalties and issues surrounding ownership of the intellectual property that underlies the item associated with the NFT.
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