Geopolitical rivalries are costly for global businesses. Here’s why – and what's at stake

International trade is under extraordinary pressure, experts warn, as crises ranging from continued supply chain disruptions to heightened geopolitical rivalries compound stains on the global economy. Moreover, the merits of free trade are increasingly being questioned in economies around the world.

“We've had a sequence of shocks which have hit the world economy,” Simon Evenett, the founder of the St. Gallen Endowment for Prosperity Through Trade, a Switzerland-based trade policy think tank, said in an interview with the World Economic Forum. The benefits of globalization, Evenett added, are “potentially at risk if geopolitical rivalry gets too far out of control.”

Evenett, who is also a member of the World Economic Forum’s Trade and Investment Council, is a contributor to a new white paper, The Costs of Geopolitical Rivalry for Business: Ten Lessons for Better Policy Design, which provides analysis on how corporations and policymakers can best prepare for and respond to the various geopolitical pressures fragmenting the global economy. The paper is based on interviews with over a dozen senior executives from international businesses representing a range of manufacturing and service sectors.

“The case for free trade is under unprecedented pressure,” the paper states, adding that geopolitical rivalries have “come back with a vengeance during the past 15 years.”

The white paper found that companies are taking steps to mitigate geopolitical risks. This includes reconfiguring cross-border supply chains, reassessing corporate exposure to geopolitical hotspots and developing new revenue streams, among other actions. The private sector, however, has disparate understandings of the issues facing the global economy, the paper found.

Moreover, the white paper provides policy recommendations for governments formulating industrial policies as well as steps businesses can take to improve their decision-making processes around handling geopolitical pressures.

In the following interview, Evenett further explores the impact that geopolitical tensions are having on the private sector and the resurgence of industrial policies around the world.

“One of the things we did in the paper was to identify 12 different ways in which firms take advantage of globalization. That could be seeking out new revenue streams abroad, lowering your costs, reconfiguring how you organize yourself internally, and how a firm finances and acquires resources. All of those things can be jeopardized in different ways by geopolitics.

“You could be shut out of foreign markets because of a trade war; you could find the costs of the energy that you were buying from Russia suddenly surges; if you're a German company, you could find that you're unable to hire Chinese scientific talent as much as you used to be able to; and you might find that you can't finance your company as well as in the past because you can't tap into foreign capital markets — all of this is potentially at risk if geopolitical rivalry gets too far out of control.”

“The response across different industries is very varied. So much depends on how fast a company tapped into overseas markets to start with.

“We're certainly seeing some companies moving production out of China, often going maybe to Vietnam and Mexico. This is often linked to companies which are trying to supply the North American market. We're also seeing other companies rethinking their innovation strategies, perhaps localizing innovation for certain markets and/or moving some sensitive innovation projects outside of geopolitical hotspots.

“We're also seeing some firms trying to essentially liquidate and withdraw from certain key geopolitical hotspots. The responses were quite diverse, but this reflects the fact that the commercial footprints of so many companies differ so much across sectors.”

“We are seeing a big evolution in how companies are assessing risks. Many companies are on a journey in this respect and becoming more sophisticated about how they do this. Perhaps at the less sophisticated end, you have companies which view geopolitics as a compliance risk, mainly to deal with sanctions.

“But I think that more and more companies realize that they need to figure out how they're going to enter markets. Or rather, which markets to plan for and how they're going to enter as well as whether they're going to deploy lots of capital there or maybe enter via franchising or some licensing model where they put less of their own capital at risk. We're seeing quite sophisticated responses developing as companies figure out how to cope with this ever changing world.”

“The first thing is that geopolitics has many dimensions, so boards of companies need to start taking a broader canvas of this. This is not just a US-China contest; there are different facets here. So boards have to educate themselves on the different types of geopolitical risks. Then they have to figure out how to assess those geopolitical risks, which parts of their operations and strategy are going to be compromised and how to turn this around.

“There could well be opportunities as well, so companies need to figure out what their risk appetite is. Some of the companies we spoke to had looked at their operations in places like China and said that there is no way they could replicate them as efficiently elsewhere. So that's a judgment that requires taking a position on risk appetite. I think these are the areas and ways in which corporate political risk moves from being a compliance issue—a nuisance issue—to being central to strategy making of companies.”

“One thing I learned from these interviews was the can-do attitude of many companies who operate internationally. They realize they might have had a setback in China or Russia, but they're not giving up on globalization. They've got revenue targets which they've promised and committed to their shareholders, so they're looking for new markets. And this actually opens the possibility of customers in emerging markets who might not have been served in the past.

“So I see globalization essentially being reoriented. I don't see retrenchment. I see can-do businesses trying to find ways to make globalization work better — and better for them, not retreat from it. I think the sources of optimism really come from this kind of attitude.

“Another area of optimism is that you still see a lot of scientific collaboration, whether it's in the digital space or even in the biotech and medical space. That should be grounds for positivity.”

“When governments develop their interventions in industrial policy, they should have in mind what objectives they're trying to accomplish. And translate much of these objectives into quantifiable metrics so we know what success is.

“Secondly, governments should try and inject as much competition in their industrial policies as possible. So instead of just giving it a grant to a company — say, $5 billion to produce some part of a semiconductor plant — why not have a competition between firms to see which one could put forward the best plan to do that? Now, of course, that depends on the number of firms in a particular sector. But injecting as much competition here is likely to elicit better private sector offers to governments.

“Lastly, we have to be very transparent about how the money is allocated. And then afterwards we have to learn how effective these different forms of industrial policy are, because some are going to be much more effective than others. And governments, after all, are accountable to their people for how they spend money. And if they can show that they are learning to improve industrial policy over time, populations might be more sympathetic putting up these large amounts of cash. And if not, then I expect we'll have a backlash against industrial policy in the near future.”