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Economy

What happens when Asia's low labor cost model is disrupted?

Perhaps the chance to lead on climate change, trade and other issues

| Japan
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An attendee leaves the Congress Hall during the World Economic Forum in Davos, Switzerland on January 20.   © Reuters

At the recent World Economic Forum in Davos, Switzerland, there was an undeniable sense of unease despite the bright sunshine and ever-flowing champagne.

The 3,000 or so business and political elites gathered in the Alpine splendor had to not only face the fact that the international order is being rewritten under their noses, but also that some of their most cherished assumptions had helped bring about the upheavals in the first place.

At the core of these assumptions is their faith in globalization -- not only the free trade of goods, but also the free movement of people. In recent years, voters on both sides of the Atlantic have responded to this vision with a growing sense of insecurity and injustice.

Whether this aversion to globalization is "right" as a matter of policy is beside the point. It may indeed be true, for example, that many of the people who object loudest to globalization are also among those who benefit from inexpensive Asian imports of everything from trucks to T-shirts.

All the same, majorities of American and European voters are not seeing life get any better than it had been in their parents' days. The result was something that one Davos attendee referred to as "costly punishment" -- a retaliatory action that a critical mass of voters were willing to take against a seemingly out-of-touch establishment, even if it meant undercutting their own self-interests.

This discontentment may get even deeper in the years to come. That's because the world faces what many Davos participants called a "fourth industrial revolution," in which artificial intelligence and advanced forms of automation further destabilize societies and labor markets.

Like globalization itself, this revolution will distribute its blessings and harms unevenly -- and will deliver them with a swiftness that modern regulatory systems will be hard-pressed to keep up with.

This transformation will raise countless questions. While it seems wonderful that dangerous or menial work can be left to machines, what will this mean for the thousands of jobs that will be lost? Can people be "reskilled" fast enough to stay ahead of AI? Who will invest in life-long retraining? Are we ready to face numerous career changes throughout our lives, painstakingly reinventing ourselves with each one?

The questions will extend not only to policies within nations but also to relations between them.

The consequences for Asia could be profound.

For starters, many emerging Asian economies will be forced to rethink their sources of competitiveness. There are already signs that Europe and North America could increasingly "reshore" production from low-cost developing countries, many of which happen to be in Asia.

As Larry Fink, chairman and CEO of BlackRock, pointed out at Davos, all of this raises painful questions for Asia's biggest economy: How is China supposed to climb up the curve and achieve a level of prosperity comparable with developed nations, when the low-cost manufacturing model that fed its spectacular growth may no longer be viable?

But while the erosion of globalization and the rise of the fourth industrial revolution certainly raise questions for Asia, they also present opportunities.

At a Davos panel provocatively titled "Asia Takes the Lead," speakers extolled ASEAN -- which is celebrating its 50th anniversary -- as a successful alliance and a stellar example of what the countries of the Asia-Pacific region can achieve when they act in common cause.

While a U.S. turn toward protectionism would certainly hurt Asian exports, the region can take solace in the fact that its polities remain relatively unscathed by the populist rumblings that have shaken America and Europe. This could create opportunities for Asia to exercise a quiet leadership on a range of issues, from climate change to trade.

Indeed, the traditional Asian emphases on harmony, humility, and consensus-seeking could be especially useful and welcome in the increasingly acrimonious debate over globalization and the rise of ever more advanced technologies.

At Davos, Chinese President Xi Jinping emphasized his nation's commitment to free trade. While many saw this as an assertion of a new leadership role for Beijing, it is more likely that in a multipolar world China will simply be one power among several.

Even within its own continent, China will hardly be the only leader. Each Asian nation will have to define its own strategy for the new global era and fourth industrial revolution.

"The challenges we face and the choices we must make as an international community do not hinge exclusively on Washington's leadership," said then-Vice President Joe Biden in his Davos remarks. "Those choices must be made in every nation, and they will determine what kind of world we leave to our children."

As the stunning events of 2016 should make clear, now is the time for these considerations to begin in earnest.

Nobuko Kobayashi is a Partner with A.T. Kearney, a global management consulting firm, based in Tokyo. She specializes in the consumer sector with a special focus on multi-national corporations operating in Japan.

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