How companies can navigate the transformative age in geopolitics

Geopolitics is changing the world that businesses have grown and operated in for 70 years.

Since the end of World War II, businesses have been operating on the hypothesis that the integration of global markets would promote political cooperation and the harmonization of the rules of the game around the world. But we are now living through a paradigm shift, a transformative age in geopolitics that is impacting the outlook for the global economy and global businesses. For the time being, the global economy remains strong not because of positive geopolitical developments – but despite negative ones. That resilience will be tested as the global economy enters a new cycle and geopolitical tensions continue to increase.
 

Three geopolitical undercurrents

Managing geopolitical risk begins with understanding the source of geopolitical disruption – the three key geopolitical undercurrents that drive and generate the breaking news we see every day. These undercurrents affect established norms of doing business and global governance, causing uncertainty in the business environment and adding complexity for long-term planning.

• Global re-balancing
  The US position of global dominance is beginning to erode, in part due to globalization’s successes (growth in emerging economies) and its failures (growing inequality and political discontent in developed markets).
  As a result, we may be moving to a multipolar world, a world in which geopolitical rivals set the rules of the game in their respective “spheres of influence.” This process, from global political integration to fragmentation and geopolitical competition, will result in profoundly higher levels of complexity for businesses that span the globe.
• Challenged democracy
  As part of this re-balancing, Western democratic models are being challenged. Western democracies that championed global economic integration in the late 20th century believed that a prospering world would trend toward democratic transformation and overall stability. What we see today is that alternative political systems have proved resilient and are often seen by their proponents as more stable, less fractious, and able to appropriately and judiciously deal with global challenges.
• Fourth Industrial Revolution
  Global leadership has always been anchored in technological superiority. The future will be no different. The Fourth Industrial Revolution (4IR), combining big data, analytics and technology, promises not only to disrupt industry structures, wealth distribution and labor markets, it will also reshuffle the geopolitical order.

Key geopolitical issues

We identify three primary geopolitical issues affecting businesses around the world.

1. US-China tensions

Having initially focused on reducing the trade deficit, the Trump administration has raised a broader array of China-related issues: 

• Concerns over challenges to US firms doing business in China, such as restrictions on foreign direct investment (FDI)
  
• Requirements such as mandatory joint venturing and technology transfer
• Regulations seen as challenging competitiveness
• Intellectual property protection
• US national security, including cyber threats and China’s stronger presence in Asia

2. Europe: how stable is the Union?

The nationalist challenge to EU cohesion has driven the negotiations over the UK’s withdrawal from the EU, the ascendance of the Five Star Movement and the Northern League coalition government in Italy, and the standoff between the EU and Poland over the supremacy of EU law. Meanwhile, Angela Merkel, who has mediated critical European crises over the past 10 years, stepped down as the leader of her party and announced she will end her political career in 2021. French President Emmanuel Macron, who positioned himself as a pro-European integrationist, is facing stiff resistance against his ambitious domestic reform agenda.

While Europe faces profound internal challenges, external ones loom large. Immigration and refugee flows have been managed in an ad hoc manner at best, and Russia’s military and cyber threats have grown.

Meanwhile, European leaders have been flummoxed by the US. President Trump has repeatedly questioned the need for NATO; the US has imposed tariffs on European steel and aluminum imports and threatened tariffs on automotive imports; and it has expressed support for Brexit, suggesting the UK would be “better off” without the EU, prompting European leaders to question US commitment to shared transatlantic objectives.

3. Global trade: evolution, not revolution

Despite the significant attention global trade received during the past two years, evolution, not revolution, has been the overriding paradigm in global trade relations. In fact, the G20 summit in late 2018 closed on a pro-trade and pro-investment note.

The US administration has been at the center of events in the trade arena near and far. In one of his first official acts, President Trump withdrew the US from the long-anticipated Trans-Pacific Partnership (TPP). The remaining 11 members moved on without the US, setting up a transformational Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), covering 480 million people and a combined 13.3% of global GDP.

The Trump administration also set in motion a protracted renegotiation of the 24-year-old North American Free Trade Agreement (NAFTA) and took up other agreements and trade actions.

Concurrent with its actions to renegotiate various trade agreements, the administration exercised existing, but little-used, provisions of trade law statutes allowing the President to impose tariffs on national security grounds or for unfair and competitive practices. This resulted in multiple and unpredictable tariffs on imported steel, aluminum and myriad other goods from China, which triggered multiple retaliations of punitive duties on US-origin goods exported to various countries.

Looking ahead

Political leaders and businesses must remain vigilant to the shifting global trade landscape and relations. Strategic decisions must be made in the light of new and reframed trade relationship negotiations, the growing relevance of emerging markets to nations and industries, and increased complexity and scrutiny of trade and capital investment on national security grounds.

Despite continued uncertainty and disruption, developing a geostrategy--the integration of political risk assessment into risk management, strategy and operations--organizations have an opportunity to both mitigate risk and create value.

For more, we invite you to read our full report What we're watching: Geostrategic outlook (pdf).