02. Juli 2021

Geo-Economics in 2030: How the EU Can Squeeze Out From Between the US and China

Chapter from Building European Resilience & Capacity to Act: Lessons for 2030

Geo-economics involves states using levers such as their control of natural resources and new technologies for narrow strategic advantage. It is something the European Union and United States have tamed in the past, wielding their market power to shape a global trading system in which even competitors share access to resources and innovations. But that system is being tested by US-China antagonism – at just the moment when technological and environmental changes unleash huge challenges. Therefore, this chapter presents three plausible scenarios for geo-economics in 2030 that each play out around two factors: the character of US-China interaction and access to resources and new technologies.

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DGAP Report 2021-13-EN Illustration Chapter 1

Content

# Status Quo Scenario: In a Highly Competitive, Highly Innovative Landscape, the EU Struggles to Survive
# Worst Case Scenario: To Access New Technologies, Europe is Drawn into a Chinese Sphere of Influence
# Best Case Scenario: A Cooperative World Order Based on Green Rules

Geo-economics involves states using levers such as their control of natural resources and new technologies for narrow strategic advantage. It is something the European Union and United States have tamed in the past, wielding their market power to shape a global trading system in which even competitors share access to resources and innovations. But that system is being tested by US-China antagonism – at just the moment when technological and environmental changes unleash huge challenges. Therefore, this chapter presents three plausible scenarios for geo-economics in 2030 that each play out around two factors: the character of US-China interaction and access to resources and new technologies. This reveals something unexpected. We show that, whether the pair cooperate or compete, the EU can still be frozen out of access to resource and tech. (Two obvious examples being a cooperative “G2 arrangement,” in which China and the United States sew up the global economy bilaterally, and a competitive G2 arrangement, in which the EU is stuck in between the US and China). Consequently, the EU has a vital interest in shaping a trading environment that – regardless of whether big states cooperate or compete – contains strong mechanisms for the diffusion of resources and innovation.

The first factor we explore is the style of US-Chinese interaction. In the status quo scenario, the United States and China compete aggressively. Each initially seeks to leverage the current trading system, but this robs the existing multilateral system of its raison d’être. The historical advantages of the United States are eroded while China’s wide-ranging “infrastructure diplomacy” leaves it well positioned to spread its rules in the emergent fields of information and communications technology (ICT) and renewable energy. The EU is split between the familiar norms of a weak ally and the new obligations of an emergent challenger. The worst-case scenario foresees a far more cooperative international environment – one based on China emerging as the sole global superpower, and the US pressed into cooperation. Fearful of disruption and overstretch, this China promotes a cautious and oppressive model of trade. The EU finds itself drawn into China’s regulatory ambit. In the best-case scenario, the United States and China cooperate but not in a collusive “G2” manner. Issue-specific policy alliances emerge, and intellectual and industrial leadership is distributed widely – including to EU members.

Our second factor is access to resources and innovative new technologies. Although global innovation is high in the status quo scenario, the EU is unable to participate in the new breakthroughs. Innovation is driven by competition between two antagonistic blocs – one led by the United States, the other by China – that leverage their control of trade routes and, thereby, access to resources. The EU is doomed to be an innovation-taker, obliged to ally with one or the other – and increasingly split between the two. In the worst case-scenario, global innovation is low despite a cooperative international landscape. The United States is recovering from a lengthy economic crisis and no longer innovating. China has free reign to impose cooperation agreements on third parties that contain obligations for Chinese access to their resources and their adoption of Chinese technologies. A fragmented EU duly signs up, limiting its own choices. The best-case scenario projects a high degree of global innovation that is evenly spread. A global web of multi-stakeholder networks, which include non-governmental actors such as research institutes and businesses, depoliticizes cooperation on big challenges like climate change and digital transformation and serves to diffuse breakthroughs worldwide.

What to Watch Out For – Takeaways for Policymaking Today

Should the EU remain on its current geo-economic trajectory, the status quo scenario for 2030 looks gloomy. This scenario projects a weak EU that is busy navigating between a highly competitive United States and China in the key fields of ICT and green adaptation. While EU member states do initially enjoy the freedom to pick and choose between the two when it comes to cooperation, each choice has sizeable consequences for the medium term. Stuck in reactive mode, the EU misses the chance to put forward a European model that differs from that of the United States or China – a collaborative regulatory environment prone to innovation in ICT and green industries. By 2030, the EU lacks its own home-grown transformative technologies in fields including energy storage, hydrogen technologies, quantum computing, and artificial intelligence (AI) and loses its leadership, even in established industries like the automotive sector. With the EU caught in a vicious cycle of low innovation and high dependency, internal polarization deepens. Its damaging dependence on China and the United States leaves the EU a weak geo-economic power that is not ready to compete and unable to cooperate as an equal partner.

The EU will be in greater trouble when trying to weather the worst-case scenario. It foresees a near-unipolar Chinese-led order into which the United States is being gradually co-opted. By itself, the EU is unable to exert geo-economic influence; yet to link itself to its US ally and decouple itself from Chinese trade in both ICT and energy technologies would only be to back the losing horse. Inevitably, more and more EU countries follow the United States and make their peace with a Chinese-led order that promises a kind of stability and solidarity. They lock themselves into Chinese data-cloud solutions and other highly intrusive infrastructure. A global Pax Sinica emerges to offer a cooperative global order, but only once China has thoroughly transformed the EU’s entire culture and politics. This dire long-term eventuality once again underlines the need for the EU to build a European model for ICT and green industries. It also puts into perspective the initial retaliation that moves toward such a model could incur – an uptick in the incidence of hybrid threats, cyberattacks, and the theft of intellectual property, as well as an occasionally violent scrabble for resources in the EU’s neighborhood.

If the EU is to work toward the best-case scenario, it must consider the importance of effective multilateral organizations and global governance platforms as well as the costs of their absence. But – and slightly contradicting this – the prerequisite for this scenario is the EU building an independent capacity to act. Such a capacity necessitates the EU’s ability to counter geo-economic warfare and overcome its structural dependencies on third countries for new critical resources. Greater European cohesion and autonomy are not ends in themselves but should help the EU to continue driving multilateral organizations like the World Trade Organization (WTO) to be more inclusive and better at producing tangible outcomes. In this scenario, the EU substantially invests in public-private partnerships to boost digitization and green innovation. Old fault lines – for instance, between the United States and China, democracies and authoritarian powers – are softened by successful issue-specific cooperation on green innovation. India reaches out to the EU, seeing it as a sympathetic partner when it comes to ensuring access to resources and diffusing innovation.

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DGAP Report 2021-13-EN_Timeline_2_GEO-ECONOMICS SCENARIOS

 

Status Quo Scenario: In a Highly Competitive, Highly Innovative Landscape, the EU Struggles to Survive

US-Chinese competition sharpens in a scenario characterized by geo-economic power games over rare earths and critical natural resources. Traditional multilateral institutions like the WTO fall short in dispute settlement and standard-setting, becoming a mere playground for great power competition. The EU fails to hedge against the loss of US influence within the WTO through new diplomatic démarches to Asian democracies and autocracies. China, on the other hand, consolidates its strengths in all world regions, including Europe. Because European business is kept busy navigating between US and Chinese sanctions regimes, even European legacy industries like the automotive sector start to misfire.

Multilateral Bodies Are Squashed as the US and China Wrestle

The WTO is mired in disputes with “emerging economies” like China and their claims for greater representation. In 2023, it looks set to get ahead of the problem by securing a mandate to negotiate rules for e-commerce and green technology, focusing on emergent fields in which some measure of equal representation can be ensured from the outset. But China refuses to apply free trade principles to new fields while its old grievances remain. And the United States, falling irrevocably out of love with the WTO, starts acting unilaterally. Washington uses secondary sanctions to crush trade with countries it perceives as too friendly to China and its energy needs – notably, Iran and Russia. China follows suit and uses sanctions to isolate a group of key US allies that has opened full diplomatic relations with Taipei, the semiconductor king. Amid these competing sanctions regimes, any remaining credibility that the WTO had as a forum for dispute resolution and standard-setting evaporates. Smaller countries are the first to feel the effects. Disempowered by the absence of effective collective action structures, they are left to fend for themselves between China and the United States.

As WTO standards break down and the United States and China compete, relative advantage is decided by each superpower’s ability to secure critical supplies. The United States cashes in on certain historical advantages – for example, its position as guarantor of the open global economy, in particular through its rules for cross-border trade and finance and the global internet. But China gradually gains advantages via the infrastructure strategy epitomized by its Belt and Road Initiative (BRI). Moreover, the transactional Chinese diplomacy on display during the COVID-19 crisis has become routine in the 2020s, a decade of pandemics and natural catastrophes. When a bird flu epidemic emerges from the Amazon, Beijing provides local governments with aid in return for valuable primary supplies of lithium, cobalt, and graphite – resources that are required to build batteries and electrodes and, thus, vital to green innovation. China cements this with investments in green infrastructure, helping Latin American governments adapt to the demands of a 2021 Conference of the Parties (COP) summit dominated by the United States and European Union. The US regresses from status quo power to spoiler when it tries to stir up local resistance in Central America to China’s extractivism.

Innovation is Dynamic – but Decoupled Between China and the US and Between Green Technologies and ICT

Overall, there is a high degree of global innovation despite the breakdown of the WTO – or perhaps because of it. Innovation is driven by the emergence of two trading blocs that compete for gains and thrive in emergent sectors and the unregulated global environment. Both the United States and China cite raison d’état for taking innovation risks that are sometimes unethical and for developing technologies that are specific to their individual cultures. Their competition leads to the compartmentalization of research and investment, in turn preventing the diffusion of new good practices and shared regulatory standards. ICT innovation and green adaptation become the two fields of prestige and power – ICT because the United States is able to harvest vast amounts of data from its legacy internet platforms; climate adaptation not least because China uses its access to Latin American resources to launch a new “green e-mobility” initiative. While the United States funnels dwindling subsidies to ICT firms and cuts back on funding for green innovation, China invests heavily in the development of low-cost electrocars and batteries.

With a global economy increasingly driven by Chinese-style green innovation and energy efficiency, the United States ends any commitment to an open global economy. A new, protectionist administration erects trade barriers in an attempt to safeguard its legacy ICT companies from Chinese competition and directs its efforts toward supporting its domestic oil producers. It is this protectionism that provides the motivation for the United States to instrumentalize sanctions and secondary sanctions: Since assuming power in 2025, this administration has been seeking to isolate rival oil producers in Russia and Iran, as well as erstwhile allies in the Middle East. Collaterally, the US sanctions also serve to put pressure on its own allies to cease business dealings with China’s satellite states and China itself. The United States also boycotts Chinese green technology in a further move to revitalize domestic fossil energy generation. The impact of this protectionist impulse is global and results in a failure to share innovative responses to problems that require global collective action such as climate change. China achieves breakthroughs in energy transition, but they come too late given that climate change is already highly advanced.

Europe is Stuck Between a Rock and a Hard Place

The European Commission – encouraged by France, Germany, and the Nordic and Baltic countries – tries to keep up with the competing superpowers. It introduces policies to reshore production even from its own neighborhood and creates European champions in both ICT and green innovation. But as the United States uses the worldwide web to harvest data for its domestic tech sector and China sews up global supplies of green resources, the EU finds itself cut off from the resources it needs for domestic production. The EU is increasingly dependent on both actors – the US for ICT innovation, China for green adaptation – and desperately tries to rebuild its international supply and production chains. But, with each attempt, its corporate sector is struck by Chinese and US sanctions. To its own frustration, the EU can clearly envisage the new, uniquely European instruments required to create a distinctive model of collaborative innovation but can no longer achieve sufficient unity to adopt them. Staring defeat in the face, Brussels tries to align the EU with US regulatory standards, seeing the wisdom of hooking into its ICT models, but poorer southern and southeastern member states are attracted by Chinese-led innovations that drive down energy costs. As its southern and eastern neighbors become locked into Chinese infrastructure systems and technologies, so too does the EU.

The EU is still capable of competing with the United States and China thanks to a few incumbent advantages. The field of e-mobility is fertile ground for technological breakthroughs, and the EU has a huge legacy advantage thanks to its automotive sector. But this advantage, too, is gradually eroded by its inability to access resources as well as diverging risk cultures in its member states, and lengthy, state-heavy coordination processes. The German automotive sector thus fails to move from engineering and precision technology to user interface and systems-driven tech. By contrast, China, just three years after launching its “green e-mobility” initiative, sees its efforts pay off with a breakthrough in battery technology in cooperation with a Brazilian firm. While China’s innovation in energy storage crowns its global leadership role in green adaptation, Europeans cannot even reproduce technologies that build on Chinese breakthroughs. That is because, although Beijing makes a great show of opening up the patents, it simultaneously restricts the EU’s access to resources vital for their production. The EU fails to carry over its legacy advantage into a new phase of industrialization, having cut itself off from human and natural resources even in its own neighborhood.

Stocktaking: Lessons Learned from 2030

Facing fierce competition for supplies of primary goods and resources, the EU proved itself a weak contender. Although the European continent is poor in key natural resources, Brussels nevertheless tried to gain autonomy and competitive advantage by reshoring production. By contrast, China, despite being relatively resource rich, invested in partnerships and forged strong interdependence. These activities reached into Europe’s neighborhood, and Beijing capitalized on the fact that the EU had regarded its surroundings as more of a threat and less of an opportunity for too long. Decreasing intra-EU cohesion and capacity to act were the logical results – and these meant it failed to divert from this trajectory. The EU should really have used the inward orientation of the United States and the weakened structure of multilateral institutions like the WTO to break from past path dependencies and locked-in relationships and alliances. This would have given the EU a chance to build new coalitions and partnerships and ramp up cooperation on obvious thematic challenges like ICT innovation and green transition.

In short, the EU had an opportunity to make the best of an unfortunate situation, moving out of its comfort zone of muddling through and piggybacking on the United States. It might have built up a larger circle of like-minded countries with access to critical resources and human capital, including Australia, Canada, and Japan, not to mention the countries of its southern and eastern neighborhoods and traditional European partners across Latin America and Africa. If EU member states had invested in an open and collaborative model of production and diversified their international relationships, they could have built on the EU’s existing reputation as the normative leader in the ethical application of new technologies and fighting climate change and created entrepreneurial international institutions. By diversifying its relationships, Europe could have rendered itself less vulnerable to US-Chinese confrontation, in turn reducing its need to act as a collective when it came in contact with other powers’ technologies, innovations, and standards.

Worst Case Scenario: To Access New Technologies, Europe is Drawn into a Chinese Sphere of Influence

China is permitted to evolve into an unrivaled global superpower, combining supremacy in the field of ICT and control over resources critical for the green economy. A United States that never properly recovered from COVID-19 retreats from multilateral governance and reaches an accommodation with Beijing, driving one EU member state after another into China’s arms. Global governance structures like the WTO simply cease to matter, except as fora for China to radiate influence. Under heavy financial pressure, member states propose severe cuts to EU funding; as a result, disintegrative tendencies grow. Europe opts for a closer alliance with China, robbing the EU of any remaining credibility as a liberal regulatory power.

Regional and Global Institutions Are Subject to Chinese “Venue Shopping”

The United States never recovered economically from its “long Covid” and is struggling to uphold American representation in the WTO, Bretton Woods organizations, and beyond. An opportunistic Beijing has been out “venue shopping” – not only in the usual sense of looking around for the best institutional venues to achieve its policies but also actively buying allegiance. As the WTO loses the active backing of the United States, it becomes dependent on Chinese budgetary support to maintain its secretariat. A similar dynamic also comes to define regional organizations like the Economic Community of West African States (ECOWAS) or the Intergovernmental Authority on Development (IGAD) in the Horn of Africa whose policy output is soon strongly intertwined with BRI structures and standards. The US-led G7, by contrast, simply melts away when China unleashes sanctions on Australia and New Zealand. The G7 grouping, formerly labeled the “Economic NATO,” never had a secretariat, legal personality, or even official membership – and it shows. Over the heads of its allies, the United States now finds itself reaching a cooperative accommodation with China. China asserts its supremacy over global investment, trade, and economic rule-setting without a struggle.

Innovation Remains Low and Compartmentalized Despite a Cooperative US-China Regime

The replacement of the WTO system by a G2 arrangement puts a dampener on global efforts to share resources and innovation. The United States lost its appetite and capacity to innovate long ago. In the early 2020s, US internet platforms cracked down on the alt-right. These political radicals simply resorted to low-end closed subscription platforms to organize a backlash. When they rampaged through the Googleplex in Silicon Valley, seeking out “Asian programmers,” they dented the attractiveness of the United States as a destination for highly skilled tech workers. Shanghai has become the world’s alternative tech Mecca. Its major selling points are a top-notch infrastructure, ample supplies of state capital, and the lack of ethical constraints on innovation. But Shanghai encourages innovation only enough to cement China’s global hegemony and never so much that it might disrupt stability. China generously rolls out 6G infrastructure to Russia, Central Asia, and the Caucasus, complemented by “cooperation” agreements cementing a totalitarian “Industrial Internet of Everything.” This is “tech trap diplomacy” – China giving technologies away at cost price but then straight-jacketing recipients into new systems. At the end of the decade, almost despite itself, China achieves a breakthrough in quantum computing and, typically, sees this as a way to control the pace of global change.

A Fractious Europe Finds Unity with China

US society is polarized, the G7 states have scattered, and the EU is divided. In this context, Western states find the stability and certainty provided by China attractive. Some EU member states – including the New Hanseatic League consisting of the Netherlands, the Baltic and Nordic states, and Ireland – remain hawkish toward China, but they alienate their closest partners by advocating an 80-percent reduction of funding for EU Common Agricultural and Cohesion policies. Societies in poorer, geographically peripheral EU states begin looking eastward for access to resources and cheap tech and take up the offer of Chinese friendship. One after another, Hungary, Italy, Malta, Bulgaria, Romania, Croatia, and Greece opt into the BRI digital network and China’s “integrated Balkan innovation hub.” By 2027, Greece is openly saying that it is impossible to maintain close ties to both China and the EU given their regulatory differences. It debates GREXIT. These moves are greeted with horror by hawkish states like Czechia and Poland, but, having lost faith in an EU model of cooperation, they push for a return toward national priorities. In 2028, a slim majority of member states proposes to find a way to harmonize the EU single market and the Eurasian Economic Union, now under unofficial Chinese leadership.

Stocktaking: Lessons Learned from 2030

In this scenario, the EU hastened its own marginalization through both its hesitancy and dependency on China for stability, solidarity, and cohesion. Scared by the perspective of being shut out from global ICT infrastructures and not achieving sufficient breakthroughs of its own in green innovation, the EU quickly gave up on its own ambitions in innovative research and development and began to disintegrate before being reassembled and stabilized along Chinese lines. More and more EU member states preferred the outlook of China-led global stability at the expense of liberal values and standards. The decision by a group of wealthy, hawkish, liberal member states to punish their poorer counterparts for adopting Chinese technologies by withdrawing funding from intra-European cohesion policies backfired badly. In a Chinese-led world, the EU remained a relevant actor but only by adopting Chinese standards wholesale.

Countering the Chinese tech trap required the EU to take decisions of strategic importance more quickly and in a less risk-averse fashion. Only then could the EU have built on its traditional industrial strengths and achieved breakthroughs in areas like biotech, green energy, or health tech innovation. European success stories would, in turn, have made it easier to attract capable human capital to the EU, with migration establishing itself as an opportunity not a threat. Moreover, European countries needed to invest greater resources and diplomatic efforts into effective international organizations and resilient, diversified partnerships with like-minded countries. Beyond the United States, such efforts ought to have included not only Europe’s neighborhood but also countries like India, Japan, Canada, or those in Latin America – just as in the previous scenario. To achieve all this – from the capacity for nimble decision-making to the openness to a full range of outside players – it needed to invest in EU Cohesion and Structural Funds.

Best Case Scenario: A Cooperative World Order Based on Green Rules

The use of coercive geo-economic levers is minimized by the spread of issue-specific cooperation platforms. Incentives for international cooperation are carefully ramped up by stakeholder coalitions. Topics insulated from great power competition – such as the resilience of global value chains for climate adaption – build interest-led cooperation between the United States and China. Businesses and researchers play a crucial role in facilitating the diffusion of ICT and green technologies. This positive experience spills over to other areas of trade. In the aftermath of the COVID-19 pandemic, the EU heavily invests in strengthening European resilience and intra-European cohesion, allowing it to build domestic – and then global – coalitions.

Enhanced Multilateral Responses Encourage Innovation – with India at the Center

Amid a slow global recovery from COVID-19, resource-rich countries across Africa and Latin America had been banking on a new commodities “supercycle” fueled by a resurgent China and India. Instead, India suffers a series of severe climate-induced droughts and food shortages whose effects ripple out globally, resulting in shortages of critical products. Indian small businesses now frame climate change as the “biggest non-tariff barrier” hampering prosperity. In the shell of the old Indian Congress Party, a new inter-caste green alliance emerges and puts pressure on the government. Its big idea: using crowd intelligence for climate adaptation – green tech married with open ICT platforms. New Delhi bends to the pressure and, when it hosts the 2023 G20 summit, it pushes for a Global Green Fund (GGF) to encourage green innovation and ICT roll-out. This support for cross-border public-private partnerships is an implicit acknowledgment that the G20’s intergovernmental methods have failed to resolve the big global issues. India has long blocked WTO reform, but its usual sticking points have dissolved. It can hardly maintain protections on its agricultural sector when its food stockpiling policy failed so badly in the drought; and it can hardly maintain protections on its ICT sector if it wants a new approach to climate adaptation.

Positive Spill-Over Effects from Green Tech Cooperation Toward Other Areas

Traditional conflict lines in the WTO soften and long-overdue reform agendas become feasible. In 2023, the WTO points to the need to deal with new fields such as e-commerce and green tech but acknowledges that the usual intergovernmental negotiations will not suffice. Its secretariat designs a rolling multi-stakeholder approach that goes beyond its usual annual Public Forum and generates new practices and standards over time. A new global alliance for research and innovation emerges, which grows in members – soon also including Chinese companies afraid of missing out on cooperation opportunities. It helps, of course, that Chinese President Xi Jinping has to step down in 2025 citing health reasons. His exit may be more than coincidental, however, since the Chinese Communist Party felt him to be out of step with the new global mood of cooperation. The new Chinese leadership begins to look upon multilateral frameworks as something more than just a means to project its domestic order. In 2026, the New Delhi round of WTO negotiations on sustainability and digital rules starts. In it, China is finally willing to move forward in reforming the system of industrial subsidies. Four years later, negotiations on resource access and innovation are concluded.

The EU Establishes a More Open Form of Geo-Economics

In the aftermath of the COVID-19 pandemic, the EU heavily invests in strengthening societal resilience and cohesion. This helps it use economic recovery schemes more effectively to speed up the roll-out of its digitization and interconnectivity strategies, as well to create incentives for skilled European workers to return to the EU from the United States and Asia. Tech and green innovation hubs flourish in Central Europe; starting from a low base, they boost local support for the EU. As Central European countries join the euro, they kickstart a debate about how to raise the currency’s international status, thereby increasing the EU’s heft as a trading power and extending it to financial markets. The reform process starts in 2025 when the EU holds a convention for a new treaty. This convention is followed by a genuinely inclusive consultation process, making not only a proper banking union possible but also the introduction of qualified majority voting on sanctions on states that weaponized the global economy. In 2028, the new treaty enters into force. The year 2030 sees the Tesla Gigafactory outside Warsaw achieve a breakthrough in energy storage technology – the result of US-Polish-Indian collaboration.

Stocktaking: Lessons Learned from 2030

This scenario sees the EU in a strong position, faced with a favorable international environment catering to its strengths. Credible and dynamic multilateral and international cooperation with strong networks of non-governmental actors allowed European countries to adopt intellectual leadership in advancing the digital and green transition. Due to the fact that innovation came from transnational consortiums, including non-state actors from the business and research sectors, smaller European countries like the Nordic and Baltic countries were able to take leadership roles in the green transition and tech innovation despite their limited power capabilities as state actors. The EU also highly benefited from innovation and integration beyond Europe due to open data flows, best practice sharing, and overall high rates of innovation diffusion.

However, even in this positive scenario, climate change-related risks remained high despite successful collective action. Countries like the United States, China, or India were especially at risk of being hard hit and potentially bringing back protectionist approaches. This optimistic scenario shows how crucial domestic factors were to creating positive spill-over logics in international cooperation and how easily they could be reversed, making the international system highly volatile. It is notable how many of the best-case scenarios in this booklet begin with a crisis or severe disruption, and how much of the EU’s ability to withstand these crises and adapt in a positive way comes down to its investments in intra-European relations, infrastructure, and societal cohesion. Putting in place this kind of bottom-up capacity to act is apparently important even in fields like climate change – fields where disruptions are easily foreseeable and usually prepared for by top-down restructuring processes.