As countries employ economic diplomacy to react to current geopolitical tensions, they employ tariffs, economic sanctions and other trade barriers that disrupt global supply chains, an environment that can fuel rivalry.
The recent passing of a law that gives the US government the authority to ban the TikTok app in the US because of national security concerns related to its Chinese owner, ByteDance, is just one example of the possible effects of geopolitical rivalry on the operations of multinational corporations.
Geopolitics influence the external environment of businesses and can create both opportunities and threats.
In 2018, American companies such as Apple and Nike had already paid a similar price during an earlier episode of the US-China trade war. Their Chinese sales declined following a consumer boycott responding to the US imposing tariffs on Chinese steel and aluminum. Just last week, US President Joe Biden levied new tariffs on Chinese imports, especially on electric vehicle batteries.
In another region, after the start of the Russia-Ukraine conflict, EU regulators imposed wide-ranging sanctions on Russia. This forced, though not obliged, numerous European companies to divest, especially if they were involved in the sanctioned industries. French, Austrian and Italian banks were particularly exposed and were mostly caught off-guard and unprepared to find Russian buyers. To extricate themselves from the country, they either had to sell to their Russian subsidiaries at a fraction of the value of their assets, write them off completely from their balance sheets or freeze their investments while waiting for the conflict to end.
In 2024, nearly half of the people in the world have the opportunity to vote in at least 64 countries, so geopolitics quickly takes centre stage in business risk management. Domestic political events affect companies as soon as they lead to heightened populism. Numerous examples from Latin America and South-East Asia indicate that right-wing populism particularly capitalises on the anti-globalisation sentiment, and thus traditionally goes hand in hand with protectionism and harsher immigration policies. This negatively affects both foreign trade and labour market conditions, making it tougher for businesses to operate efficiently and successfully.
Importantly, it is not just the big multinationals that suffer. In the current context of economic fragmentation due to the US-China antagonism, and of heightened insecurity related to the Russia-Ukraine conflict and the war in Gaza, trade and investment flows are often delayed and diverted. Thus, geopolitics also affects smaller domestic companies depending on imports for their production processes, or on exports for their sales.
Companies that are evolving in today’s volatile, uncertain, complex and ambiguous (VUCA) environment need specific skills to survive and thrive. One of the most important of these is acquiring knowledge, insight and understanding of the current geopolitical landscape. Such understanding is crucial to give businesses the agility required to minimise their risk exposure and to ensure their resilience.
It allows for scenario planning that lets companies anticipate and adapt to the inevitable changes. In a recent study by Ernst and Young, nearly 90 per cent of executives said that they find scenario analysis a highly useful tool for political risk management, adding that identifying early warning indicators and collecting accurate data is crucial to obtaining the necessary foresight from such scenario analysis. This leads to the development of contingency plans, including emergency response plans, alternative financing sources or data safeguarding protocols, as required.
As well as developing a portfolio of such strategic actions, businesses should develop a portfolio of strategic connections to operate in VUCA settings.
French bank Societe Generale had one of the largest Russian exposures of about €18.6 billion, but it was swiftly able to sell its Rosbank subsidiary to the same Kremlin-related billionaire from whom it had purchased it some 14 years ago, albeit incurring a €3.3 billion loss in the process. The deal was concluded shortly before Moscow adopted a law requiring presidential approval for all business entity sales initiated by foreign owners from “unfriendly” countries, which has effectively prevented the divesture of many other European banks.
Such shifts, while creating risks, also provide opportunities. Companies that have the skills to understand geopolitical trends can identify new markets and can re-position themselves quickly to benefit from the early bird advantages.
As trade is being reconfigured, industrialised economies accommodate more concentrated trade with reduced geopolitical distance, while developing economies strive to diversify their trade relationships to reduce dependency on just a few partners.
In a recent study, McKinsey Global Institute estimated that China, Germany, the UK, and the US are reducing the geopolitical distance of their trade by 4-10 per cent, while India, Brazil and the South-East Asian nations are trading across longer distances and a broader geopolitical spectrum.
Diversifying supply chains, striving to ensure intellectual property protection, choosing localisation strategies carefully and investing in cybersecurity are also elements of the risk management programmes that companies need to put in place to navigate the new geoeconomic paradigm.
Companies that do not have the in-house expertise outsource geopolitical analysis to think tanks and consulting giants for hefty fees. Others, such as Japanese giants Mitsubishi and Hitachi, have hired former diplomats and international relations experts to build up their geopolitical risk muscles and understand the potential fall-out from events such as the US-China tensions around Taiwan and its semi-conductor chips, a potential second presidential term for Donald Trump, or Japan’s own strained relations with China and Russia.
Two industries that have a headstart in building their own expertise are the oil and gas industry, which has historically operated in risky geopolitical environments, and more recently the tech industry, particularly in the US, with Microsoft going as far as having a UN affairs office in New York.
The trend is also being picked up in the finance world, with recent examples ranging from Lazard investment bank hiring former UK national security adviser Stephen Lovegrove as senior adviser, to Goldman Sachs employing former head of MI6 Alex Younger.
Now, with the emergence of artificial intelligence, its dynamic innovation and lack of meaningful regulation, geopolitical competition will be even stronger in the not-so-distant future. The global marketplace is morphing from the era of globalisation towards multi-polarity and regionalism, and this evolution of the dynamics of international economic development requires geopolitical considerations to be fully embedded in business models and strategies.
