Geostrategic Analysis: December 2023 edition

What happened

In the aftermath of the Hamas attack in Israel on 7 October, the most significant local conflict in decades has begun and it is unclear how long it will continue.

While violent incidents have also occurred in Iraq, Lebanon, Syria and Yemen, the conflict has not significantly escalated throughout the region.

Global and regional powers have engaged in diplomatic efforts to contain the conflict, including through intensive bilateral engagement and at multilateral summits held in Egypt and Saudi Arabia.

A temporary ceasefire took effect on 24 November, during which both parties released hostages and prisoners, and international aid was delivered to Gaza.

What’s next

In the near term, the violence is likely to continue and could elevate tensions among various communities throughout the region.

Regionally, the conflict will test the durability of recent Abraham Accords normalization agreements between several Arab states and Israel, as well as stress other relationships such as between Turkey and Israel. It may also continue to delay or even derail US-backed negotiations on formalizing relations between Israel and Saudi Arabia.

Regional conflagration would become more likely if Iran or its proxies increase engagement on Israel’s borders or further target US assets, or if Israel dramatically intensifies its military campaign.

Globally, other countries or non-state actors may seek to launch campaigns to redraw boundaries, while the US, Russia and others are focusing their attention elsewhere. The continued dispersion of geopolitical power may limit the policy options and diplomatic influence of global powers such as the US, EU and China if and when other regional conflicts emerge.

What happened

China convened its third Belt and Road Initiative (BRI) forum in October, marking the tenth anniversary of its global infrastructure initiative, with a reported near 200 agreements in 140 countries and an estimated total investment value of approximately $1 trillion.¹

BRI funding has declined in recent years and Western governments continue to raise concerns about its governance, lending practices, and sustainability credentials.² But China reaffirmed at the forum its commitment to support development in the Global South through investing in infrastructure networks.

What’s next

The BRI’s future strategy is expected to focus on smaller-scale projects in areas such as green energy and digital transformation that will provide new service opportunities for Chinese firms and secure critical resources such as green minerals from Latin America, while supporting Beijing’s efforts to influence global geopolitical and economic security.³

Western governments are also recommitting to infrastructure investment as a foreign policy strategy, including the EU’s Global Gateway initiative,⁴ the G7 Partnership for Global Infrastructure, and the new India-Middle East-Europe Economic Corridor.⁵

Business impact

Seizing new opportunities for green and digital infrastructure investment will require government and public sector organizations to revisit their infrastructure strategies and determine where their objectives align with different international funding programs.

Investors will need to balance opportunities for financial returns with heightened political, economic and potential reputational risks. Infrastructure investors and construction firms should assess their sustainability and ESG capabilities in order to respond to multiple stakeholders and meet increasing reporting requirements.

EU-US cooperation even as trade talks stall

In October, EU and US leaders met in Washington DC, to advance transatlantic trade talks but did not deliver any significant outcomes.⁶ A decision to permanently abolish US tariffs on European metals (including steel) was postponed. Agreement still needs to be reached on the potential exemption of US steel exports from the EU’s Carbon Border Adjustment Mechanism (CBAM) and an EU anti-dumping investigation into Chinese steelmakers. The EU and US did, however, make progress on a critical minerals agreement.

The proposed critical minerals agreement would enable European companies to access the tax credits and subsidies for electric vehicles (EVs) in the US Inflation Reduction Act. Once an agreement on metals is reached – potentially by year end – transatlantic trade will benefit from lifting US tariffs on metals and EU-US cooperation on carbon levies. In contrast, Chinese steelmakers may face 10% to 25% tariffs to access the EU market. Companies should ensure their supply chain strategy incorporates policies that preference trade with governments’ allies and partners.

Biden-Xi summit positive for diplomacy, more neutral for business

China’s President Xi Jinping met with US President Joe Biden on the sidelines of the Asia Pacific Economic Cooperation (APEC) summit in the US in mid-November. Tangible outcomes that had been widely expected were announced, including the resumption of military-to-military communications, cooperation to combat illicit drug manufacturing and trafficking and establishing government-to-government talks on artificial intelligence (AI). The two leaders also reportedly discussed geopolitical conflicts, US export controls and the situation in Taiwan – without resolving any of the underlying disagreements, as evidenced by the official readouts from China⁷ and the US⁸ highlighting different aspects of these conversations.

The “candid and constructive” meeting between Presidents Xi and Biden followed months of high-level official bilateral engagement, and both sides committed to continue such dialogues. This diplomacy helps to establish a floor for US-China relations, reducing geopolitical uncertainty for businesses. The resumption of military-to-military communications will also reduce the risk to companies’ supply chains and logistics in the South China Sea. But companies should not expect policy changes regarding export controls, investment restrictions, market access or intellectual property rights.

EU-China summit likely to reinforce economic de-risking, climate change cooperation.

On December 7-8, EU leaders will meet Chinese President Xi Jinping and Prime Minister Li Qiang in Beijing to call for increased cooperation on tackling climate change and complying with Russia sanctions.⁹ The EU will likely also raise a lack of access to the Chinese market for several European industries, such as renewables and telecom equipment. Chinese leadership may try to dissuade the EU from placing more restrictions on critical inputs to China’s technology industry and will warn of potential disruptions to global supply chains due to the EU’s carbon border tariffs and EV subsidy investigations.

With this summit occurring during the COP28 summit, the EU and China may highlight opportunities to cooperate on biodiversity regulation, zero-emissions targets for the construction sector and carbon pricing initiatives. While European EV producers may temporarily benefit from potential tariffs on Chinese competitors as a result of the subsidy investigation, Beijing could in response limit exports of more critical raw materials, disrupting battery supply chains in Europe. Chinese technology companies could face supply chain and investment challenges due to expansion of EU economic security policies to more sectors such as AI, quantum, biotechnologies and semiconductors.

The indicator

EY research based on a survey of 520 chief sustainability officers (or equivalent sustainability leaders) of large public and private organizations worldwide indicates government actions accelerate companies’ sustainability agendas more than they inhibit them. Most notably, 52% of organizations view the availability of government subsidies and incentives as an accelerator to their sustainability programs. About one-third of organizations also see government regulations and geopolitics as accelerators of private sector sustainability efforts.

Business impact

The ongoing 2023 United Nations Climate Change Conference (COP28) summit will include the conclusion of the first Global Stocktake, an assessment of the world’s progress toward achieving its climate goals. This assessment could motivate governments to take more climate actions in the years ahead. While some climate regulations may lead to higher short-term costs for companies, they could also help to reduce reputational risks and are likely to present more sustainable growth opportunities for the long run.