Our thinking

A world of clubs and fences
Changing regulation and the remaking of globalization

What's inside

Our report offers a new conceptual model for understanding how legal and regulatory developments around the world are reshaping global interconnectedness.


A new world of “clubs” and “fences” is emerging, in place of the relatively open cross-border flows of goods, services, capital, people and data that characterized globalization for much of the past four decades.

This report provides a new conceptual model for understanding how legal and regulatory developments around the world are reshaping global interconnectedness.

Clubs form when countries harmonize their regulations, potentially easing business activity between them. Fences are regulatory barriers that slow or block business activity, frequently between countries that compete strategically or ideologically.

This perspective is based on trends in seven legal and regulatory areas—trade, investment screening, tax, competition, data privacy, sanctions and financial regulation.

Collectively, these changes mark a significant shift in the way regulation affects global interconnectedness, with important implications for businesses, governments and the global economy.


The changing nature of globalization

Cross-border flows have increased markedly since the 1980s, supported by global policies that minimized government intervention and emphasized deregulation. In the period between 1980 and 2020, for example, foreign direct investment grew more than 20-fold, global trade rose from 35 percent of world GDP to 58 percent and average global real income grew by 120 percent, according to World Bank data.

However, new pressures have arisen that are challenging this established model of globalization. The pressures range widely from unease about the social consequences of open borders to government responses to national security threats. They have sparked a political and economic backlash with implications for law and regulation. Some governments are responding to public worries by reconsidering their commitment to open economies. Systemic shocks, including COVID-19 and the Russian invasion of Ukraine, have exacerbated these pressures and at times accelerated calls for change.

A legal perspective on global interconnectedness reveals trends and patterns that show states holding similar values or sharing economic and security concerns are often making similar regulatory choices. As a result, the laws of some of these states tend to cluster or harmonize. This clustering results in groups of states with similar regulatory regimes, which we refer to as clubs.

Between clubs, regulation differs, often in quite significant ways. We refer to regulatory divides in the global economy as fences. Fences arise where differences in national regulations pose meaningful additional costs and burdens to cross-border business activity.

These clubs and fences manifest across the seven legal and regulatory areas described below. For each of these seven areas, we assign a numerical score out of 10 to show the degree to which clubs and fences have emerged. We also give a broad indication of the trajectory of the trends. The score is based on three factors:

  • The level of legislative and regulatory action by national governments underpinning the emergence of clubs and fences
  • The degree to which international and domestic institutions have been created or are being used to reinforce clubs and erect fences
  • The real-world impact on the business environment, taking into account regulatory enforcement, compliance and changing behavior


The rise of clubs and fences in seven legal and regulatory areas

Trade: From one club to many

Globalization is often equated with the rapid advance of free trade in the post-World War II era. This was driven by both the expanding number of economic sectors and products covered by the General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO) and the growing circle of countries included in the system, notably the People’s Republic of China.

In recent years, the former global framework of GATT and the WTO has been fragmenting, with regional trade groupings assuming primary importance. The number of regional trade agreements has tripled from 97 in 2000 to 355 in 2022, and more than half of global trade now falls under a regional agreement.

Alongside the growth of regional trade agreements, countries are testing the limits of traditional trade rules through expanded unilateral trade actions. This new unilateralism is, in part, a response to China’s growing economic heft since it joined the WTO and began benefiting from the open market access this provided. National security has surfaced as one notable justification for unilateral restraints on trade.

Finally, the WTO adjudication system—a forum for settling international trade disputes—is in limbo. By the end of 2019, the Appellate Body (the highest quasi-judicial body, which functions like an appeals court) was no longer able to proffer the three members necessary to hear an appeal. Currently, there is not one Appellate Body member left, and the body has stopped functioning altogether.

Clubs and fences in trade: 8 out of 10

Significant domestic legislation has been enacted in many countries to conform their regulations to the requirements of regional trade organizations and to facilitate unilateral restraints on trade (2 points). Newly emergent regional trade clubs are often institutionalized, with secretariats and other formal organizational structures (3 points). The real-world effect of these developments is evidenced by the economic impact of the current trade conflict between the United States and China (3 points).



Investment screening: New fences impede the flow of foreign direct investment

The rapid expansion of foreign investment over the past half century enabled by the liberalization of rules governing capital flows was one of the defining characteristics of globalization. That period of openness is ending, as major economies including the US and European countries erect regulatory barriers to the cross-border flow of foreign direct investment (FDI). Governments have expanded both the scope and reach of investment screening measures, often based on a conception of national security that has been extended to include economic competition. Heightened regulation is already having tangible consequences including delaying the completion of certain transactions and barring others outright.

Between 2003 and 2015, an average of 20 new restrictions on the flow of FDI were enacted each year across all countries. After 2015, that average increased to 29 new restrictions annually, with 50 such measures enacted between 2019 and 2020 alone. Today, at least 46 countries have a regulatory regime in place to screen certain inbound FDI and have built the enforcement capacity to block transactions that they deem a threat to national security.

Countries, including Denmark and Switzerland, that previously did not have investment screening mechanisms are now in the process of adopting them for the first time. Others, including Germany and the US, have significantly expanded the scope and applicability of their regulatory systems to impose restrictions on investments in a wider range of sectors.

Emerging economies such as Brazil, India, Mexico and South Africa that long sought to promote foreign investment are also reacting, seeking a new balance that allows them to block certain inbound investments while continuing to attract needed investment flows. Many of the restrictive measures in both developed and emerging economies are targeted at China, which, in turn, has taken action to enhance some its own investment screening.

Clubs and fences in investment screening: 6 out of 10

This rating reflects the multitude of new fences being erected in investment screening. Notable legislative developments in many countries are empowering regulators to screen foreign investment (2 points), national enforcement institutions are being developed (1 point) and the changes are affecting global FDI flows from targeted countries (3 points).



International Taxation: Establishing and expanding a tax club

In contrast to the move away from global approaches in many other areas, in international taxation the pendulum is swinging the other way, with partial harmonization under the auspices of the Organisation for Economic Co-operation and Development (OECD) establishing a club of countries with shared approaches. To counteract what the OECD terms “base erosion and profit shifting” (BEPS), the OECD and the G20 nations launched a reform process to guide countries in updating their tax regulations for a globalized economy.

A first round of reforms, known as BEPS 1.0, has since been agreed upon and implemented by many countries. Among other changes, it imposes reporting obligations that aim to provide tax authorities with more information about the foreign operations of multinational enterprises that file tax returns in their jurisdiction. By 2022, 140 countries had committed to the OECD’s Inclusive Framework to address tax base erosion and profit shifting, and 100 countries have implemented new reporting requirements for multinational enterprises.

A second round of reforms, BEPS 2.0, is currently under negotiation. It is aimed particularly at addressing the unique complexities of the digital economy for a tax system that remains largely built around a physical place of permanent establishment. It also proposes new rules for a global minimum corporate tax. To date, 136 countries representing more than 90 percent of global GDP have formally committed to implement the BEPS 2.0 proposals by 2023.

Clubs and fences in international tax: 6 out of 10

The OECD has proven to be a powerful institutional driver of reform, harmonizing the international tax systems of many countries (3 points). We have also seen rapid regulatory and legislative reform as participating countries implement BEPS 1.0 reforms. While BEPS 2.0 remains to be implemented, the current political consensus in its favor suggests more national implementation lies ahead (2 points). The real-world impact of tax reform is also beginning to be seen, but its full implications remain over the horizon (1 point).



Competition: Expanding reach of antitrust introduces new complexities

National governments in many countries are actively asserting—in some cases for the first time—their authority to affect the competitive conditions of the market through competition law (or antitrust law, as it is known in the US). Several countries in the Middle East, Africa, Latin America and Asia that until recently had little or no antitrust legislation on the books are now putting in place new laws.

At the same time, advanced economies with longstanding competition laws are expanding the reach of their enforcement laws and bolstering their capabilities, including by adding new investigative powers, and expanding the extraterritorial reach of existing competition laws. They are also expanding their enforcement priorities and bolstering their capabilities. A 2020 survey of 30 advanced economies by the International Competition Network (ICN) found that, in the last decade, 29 had updated or expanded their competition enforcement to address cartels. 

The rise of the digital economy and the growth of major technology companies have challenged the underlying assumptions of longstanding competition law, causing governments across the globe to look for new approaches to apply competition law to evolving business models. Large US technology companies increasingly find themselves in the sights of competition authorities, especially in the European Union. 

Competition policy in some places is also assuming new characteristics. A number of countries have begun to incorporate new competition policy objectives that go beyond the longstanding focus on consumer welfare and include goals such as job creation, workers’ rights and environmental protection. 

Clubs and fences in competition: 4 out of 10

Significant legislative developments underpin the rapid expansion of competition law and enforcement capacity in numerous countries around the globe (2 points). While international institutions have been active in promoting antitrust reform, their work has not yet led to harmonization into distinct clubs (1 point). Recent high-profile cases, in which competition enforcement by US, UK and EU regulators has diverged, suggest that new competition fences may be emerging (1 point).



Data privacy: A club solidifies, and new fences rise

As the digital era has progressed, the prevalence of laws aimed at protecting personal data—information that relates to an identified or identifiable individual—has also rapidly increased. The number of countries with some form of data protection and privacy laws has doubled from 68 in 2010 to 137 today.

Accompanying the increasing prevalence of data protection laws is the emergence of a distinct group of countries that embrace a comprehensive framework approach to data privacy that largely originated in Europe. The EU General Data Protection Regulation (GDPR) has become a blueprint for data protection laws in some non-EU jurisdictions. Given the ease and fluidity with which data crosses borders, the GDPR has asserted an extraterritorial reach: In certain specific cases, companies based in non-EU jurisdictions may need to follow its provisions when conducting aspects of their business that touch on the European Economic Area or its residents.

Outside the GDPR, two distinct focal points in the legal and regulatory approach to data protection are apparent. The first consists of countries, including the US, that have fragmented data protection and privacy laws, with a patchwork of different regulations. The second consists of states that have emphasized the territorial aspects of data protection and privacy, enacting legislation that requires data to be stored locally, often to ensure the state’s ability to access that data.

Clubs and fences in data privacy: 7 out of 10

This score reflects the rapid development of national legislation in many countries (2 points), strong institutionalization of data protection and privacy regulations, particularly in Europe (2 points), and significant real-world impact on the movement of data, particularly from countries with restrictive data localization laws (3 points).



Sanctions: From the margins to the center of the global economy

The economic measures imposed on Russia following the February 2022 invasion of Ukraine mark the first time that broad and coordinated sanctions are being deployed in an effort to isolate a major world economy. They have significant repercussions not just for the targeted country but for the sanctioning states and the global economy.

Three features distinguish the Russia sanctions from other efforts over the past 70 years to use sanctions as a tool of coercive diplomacy. First, the Russia sanctions mark the first time such a significant sanctions package has been targeted at a major world economy. Second, a broad coalition of countries has enforced sanctions against Russia, with the G7 playing a leadership role in sanctions development and coordination. Third, the Russia sanctions are far wider in scope than those imposed in the past and include a number of novel attempts at economic isolation.

As allies have ratcheted up sanction pressures, Russia has responded with countermeasures. These measures often leave foreign companies doing business in Russia or seeking to exit the Russian market in a difficult position, where compliance with foreign sanctions may be incompatible with Russia’s countermeasures or vice versa. In short, in response to the growing fence created by foreign sanctions, Russia has been building a reciprocal fence of its own.

Clubs and fences established by international sanctions: 8 out of 10

Rapid legislative and regulatory developments have facilitated the sanctions packages against Russia (3 points). Institutionalization of the sanctions on Russia remains limited given the lack of a UN consensus. That said, the G7 has emerged as an effective sanctions coordinator (1 point). The real-world impact on the business community has been highly significant (4 points).



Financial regulation: New tools to protect against new vulnerabilities

Three areas of financial regulation that relate to globalization and its effects on financial markets —anti-money laundering, climate-related financial disclosures, and the regulation of crypto currencies—have seen rapid regulatory development.

First, despite widespread efforts to address money laundering, the United Nations estimates that between US$800 billion to US$2 trillion dollars (2 percent to 5 percent of global GDP) is still laundered each year. The Financial Action Task Force (FATF), which the G7 set up in 1989, has emerged as the global focal point of anti-money laundering efforts. Significant new efforts to strengthen anti-money laundering provisions are currently being enacted. Notably, both the US and the EU updated and reformed their anti money laundering regulations consistent with FATF recommendations in 2020 and 2021, respectively.

Second, growing concern about climate change is prompting the adoption of new mandatory climate-related disclosure requirements, often modeled on the Task Force on Climate-Related Financial Disclosure’s (TCFD) recommendations. The EU has been a forerunner in the development of climate-related disclosure requirements. Recent EU regulations require businesses to report on both the risks to their operations from climate change and how their operations may affect the climate. To date, no federal climate-related disclosure requirements apply to public companies in the US. But in March 2022, the US Securities and Exchange Commission proposed new rules mandating climate-related disclosures for public companies, which have sparked considerable discussion.

Third, in the wake of exceptional cryptocurrency market volatility in 2022, the regulation of cryptocurrencies has become even more urgently debated. Governments are responding with new regulations that aim to ensure systemic stability and protect consumers. Some countries including China are imposing outright bans: The number of jurisdictions introducing such bans more than doubled to 51 in 2021 from 23 in 2019. Many states are subjecting cryptocurrency to traditional rules of financial regulation, an approach adopted increasingly by European countries and the US. A few countries including El Salvador have embraced cryptocurrency as an integral part of the country’s financial system, and some countries are issuing their own state-backed “central bank digital currency,” often in conjunction with some form of cryptocurrency regulation.

Clubs and fences in financial regulation: 5 out of 10

Legislative activity in all three areas has been rapid and widespread (2 points). In anti-money laundering and climate-related disclosures, powerful institutional forces are harmonizing governmental regulatory reform, and distinct clubs are already emerging (2 points). In terms of real-world impact, while anti-money laundering regulations have led to a significant reduction in global money laundering, the development of climate-related disclosure requirements and cryptocurrency regulations remains too recent for a full evaluation of their effects (1 point).


Implications of the clubs and fences world

If the trends identified in this report continue, both clubs and fences will become defining elements of the global economy. Regulatory clubs have significant potential to shape global economic interconnectedness. As governmental regulation increases globally, businesses are likely to seek to reduce the barriers to and costs associated with cross-border transactions. One way to do so would be to structure transactions and operations within a club of states that have similar regulatory regimes.

In contrast, business transactions that involve countries with distinct or incompatible regulations face growing costs, delays and even outright barriers. These regulatory divides, or fences, in the global economy limit interconnectedness by increasing the costs of or delaying cross-border business activity.

This report contains historical context for, evidence of and observations about how new regulations are changing global interconnectedness. Viewing global interactions through the model of clubs and fences offers implications for businesses and sovereigns, including: 

  • Navigating sovereign state interests and interventions will become more complex
  • Operating within clubs or crossing fences will bring both risks and rewards
  • Fences may be costly for governments, businesses and the global economy
  • The applicability of regulation will likely give rise to new battlegrounds
  • Businesses may have opportunities to help shape the emerging regulatory environment

Collectively, the trends toward clubs and fences in the global economy mark a profound change from the years when globalization was in full swing and deregulation, privatization and liberalization were the watchwords. The conceptual model of a world of clubs and fences provides a framework for corporations and governments to see, navigate and shape the world that is emerging.