The regulatory and legal consensus that underpinned the rapid expansion of cross-border flows during the past four decades is at an inflection point.

From the 1980s on, the global flow of goods, services, data, capital and people grew at unprecedented rates. The World Bank recorded a more than a 20-fold increase in foreign direct investment (FDI) between 1980 and 2020, which drove global trade's share of world GDP from 35 percent to 58 percent over the period.

The globalized model of seamless interconnectedness, however, has come under intensifying pressure in recent years. The social and cultural impact of open borders, along with the increasing risks to national security, have dominated domestic political agendas, while the COVID-19 pandemic and wars in Ukraine and Israel have further challenged long-held assumptions about an interconnected world economy.

In a report published by White & Case, A world of clubs and fences: Changing regulation and the remaking of globalization, the Firm outlined a conceptual framework to understand this new era of interventionism in the global economy, characterized by regulatory "clubs" and "fences."

As countries across the globe have enacted new regulations to mitigate perceived threats in the global economy, those with similar values, economic systems and security priorities have clustered into clubs, where members align on regulatory priorities and strive to converge with others in the peer group. Simultaneously, new regulatory barriers, or fences, have emerged between nations in different clubs or those that identify as rivals. These fences add to the costs and regulatory burden of economic integration.

Forming clubs and erecting fences

Legal and regulatory developments sit at the heart of this shift, with policy and regulation across seven key strategic areas—trade, investment screening, tax, competition, data privacy, sanctions and financial regulation—arising as the key dividing lines in the global economy.

Here is an overview of each of these themes:

1. Trade

International trade developed in the post-WWII era under the auspices of the General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO). Through the GATT and the WTO, member states facilitated globalization by progressively lowering tariffs, broadening the scope of the "trade" they were willing to liberalize and committing the membership (which stood at 164 nations in December 2023) to the principles of most-favored nation (MFN) and of non-discrimination in trade.

Yet, even the WTO has had to concede that globalization—as we have come to know it¬—faces threats. Some of the threats come from within, as both the GATT and the WTO permitted the formation of preferential or regional trading arrangements that departed from MFN and allowed discrimination against non-members. While conceived as an exception, today more than half of global trade occurs within these preferential and regional agreements, which have created clubs of participating states within which the barriers to trade are reduced, while access from outside the club is relatively more difficult.

The ascent of new economic powerhouses, most notably China, has also spurred some countries to question the international trade rules that allowed for their rise, and to use unilateral trade action to address alleged distortions. These unilateral trade restrictions, often in the name of national security, amount to new fences in the global economy.

2. Investment screening

The world's leading economies have pivoted away from opening their borders to foreign direct investment (FDI), with governments broadening the scope and reach of investment screening measures that allow them to limit investment from rival countries on the basis of national security.

Today, at least 46 countries have regulatory regimes that allow them to screen certain inbound FDI, fencing off transactions they view as national security threats. The pace with which such measures are enacted is accelerating rapidly. Globally, between 2003 and 2015, the enactment of new restrictions averaged 20 per year across all countries. Between 2019 and 2020 alone, 50 new FDI restrictions were enacted.

The shift has occurred in both developed and developing countries, with emerging economies that once sought to encourage inbound investment putting measures in place to block certain inbound investment and reassert national control over FDI flows.

3. Tax

In tax, rather than the fragmentation of the global economy seen in many other regulatory areas, a new global club is emerging. Nations have shown an ongoing desire to work through the Organisation for Economic Co-operation and Development (OECD) to harmonize tax policy, particularly as it relates to the taxation of multinational corporations.

The OECD has secured buy-in from many countries for its two rounds of base erosion and profit shifting (BEPS) reforms designed to more effectively allocate the taxation of, and enhance reporting on, the foreign operations of multinationals and move toward a new global minimum corporate tax. The reforms aim to adapt traditional tax systems, which have focused on taxing companies according to physical location, to the digital economy and to curb tax competition and the resulting downward pressure on corporate income tax rates.

A large club of well over 100 countries representing more than 90 percent of GDP have formally committed to implement BEPS 2.0 proposals, with the potential for significant real-world impact both for businesses and for countries that chose not to participate in the OECD process.

4. Competition

More countries are choosing to assert their antitrust and competition powers to challenge global deals that could impact competition in home markets. As they do so, states' regulations are clustering in new ways.

Regions that have had minimal competition legislation—including the Middle East, Africa, Latin America and Asia-Pacific—are now ramping up antitrust frameworks. In other regions where competition law is well established, governments are deepening their laws to include additional investigative powers and cross-border reach. In some countries, competition policy is also accounting for new goals, such as environmental and labor protections.

Attempts to harmonize competition law have struggled to gain traction, leading to the emergence of distinct clubs, where competition watchdogs have adopted different views on high-profile global cases.

5. Data privacy

The number of countries with data protection and privacy laws doubled between 2010 and 2023, from 68 to 137, as governments raced to keep pace with the growing importance of personal data in the digital era. Data privacy rules are quickly emerging as new dividing lines in the global economy.

As data privacy legislation has proliferated, countries have followed three models. One group of countries has used the EU's General Data Protection Regulation (GDPR) as a blueprint, though many of these countries have not gone as far as the GDPR goes on all issues. A second approach—taken in the US, for example—involves a patchwork of privacy and data laws. Still, other countries have focused on the territorial elements of data, putting in place data localization legislation to ensure data is stored locally and can be accessed by the state.

6. Sanctions

Russia's invasion of Ukraine and the subsequent economic sanctions imposed on Russia demonstrate the power of sanctions as a regulatory fence to isolate even large economies.

The sanctions on Russia were unprecedented compared to past sanctions regimes both in targeting a major global economy and in the scope of financial restrictions imposed. Countermeasures enacted by Russia have further complicated the picture for global companies, which have found themselves caught in a catch-22 between complying with overseas sanctions and Russian countermeasures.

The G7 has proven an effective body for sanctions coordination. While the ultimate impact of the Russia sanctions remains to be seen, it is clear that countries have the willingness and ability to use sanctions as a powerful political tool, with profound impact for global economic integration.

7. Financial regulation

The expansion of regulatory regimes governing anti-money laundering (AML), climate-related financial disclosures and developing and new technologies such as cryptocurrency and AI are adding yet another layer of regulatory divides to the global economy. As countries have moved to keep up with developments in these areas, divergent approaches between blocs have emerged.

The Financial Action Task Force (FATF), a body set up by the G7 to coordinate AML efforts, has emerged to represent a global club that limits financial transactions with countries that fail to meet minimum AML standards or that present a risk to the global economy.

Cryptocurrency volatility and moves by regulators to protect investors, for example, have seen countries, including China, ban cryptocurrency altogether, while the US saw a wave of cryptocurrency bankruptcies and SEC enforcement. In contrast, some states, notably EU member states and the UK, advanced legislative agendas based on drawing clear lines around supervised and licensed crypto-asset activities, and others, such as El Salvador, have accelerated to make it a key pillar of financial systems, even issuing their own state-backed digital coins.

On climate-related disclosures, the EU, UK and some other major economies have put formal regulations in place mandating reporting on the climate risks and impact of business operations. In the US, by contrast, no federal disclosure requirements on climate have been established, with the proposals advanced by the SEC deferred given divergent market feedback. Meanwhile, at the state level, California signed three bills into law in October 2023 requiring climate-related disclosures of its businesses.

Navigating complexity

New regulatory interventionism is giving rise to a system of clubs and fences that is reshaping global business relations and making cross-border interactions more complex to understand and navigate.

The clubs and fences paradigm, however, provides a roadmap for investors and companies to understand and manage the big global shifts that are changing the way the world does business.

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