Four principles for managing commercial relations with difficult neighbours

Modern day international relations are different from Kant's words. Globalization has diminished the role of geography, but both commerce and conflicts still take place – mostly among neighbours.

According to the Global Peace Index (GPI) 2023, the level of global peacefulness has deteriorated since 2008. The main driver of deterioration in recent years has been external conflicts. Russia’s invasion of Ukraine – and its far-reaching consequences – played a major role, but conflict intensity has been increasing globally even before this act.

While the 2023 GPI identified the Middle East and North Africa (MENA) as the region with the second largest improvement in peacefulness, it has also seen significant escalation of conflicts. Tensions are high in other regions too and a build-up of military capacity by governments is continuing. According to GPI, the global economic impact of violence has been estimated at $17.5 trillion in 2022. This is equivalent to 12.9% of global GDP – or $2,200 per person.

The question is therefore how commercial relations can be managed in a world with rising regional conflicts? Especially, as a geostrategic rivalry between the world’s largest economies and military powers simmers and more countries pursue value-based, non-trade objectives in their foreign economic policies.

Managing commercial relations with difficult neighbours requires a delicate balance of diplomacy, pragmatism, and strategic foresight. The principled approach should be a guide – a North Star – for political leaders to navigate these tough waters.

Here are four principles that could guide such a principled approach:

1) Diversification of markets: Also known as “de-risking”, it encourages businesses to diversify both their export markets and sourcing countries to reduce dependence on neighbours with whom they may encounter strained relations. This requires governments to step up and assist industries to develop risk mitigation strategies. This includes diversifying supply chains, securing alternative transport routes, and investing in political risk insurance. These can minimize the impact of political instability on commercial activities.

For example, before 2006, Georgia was highly dependent on the neighbouring Russian market. Russia used this dependency as leverage to influence the internal politics of Georgia and imposed an embargo on major Georgian export products like wine and mineral water.

This had a tangible short-term negative impact on the Georgian economy but pushed the Georgian government to extend support to businesses to develop globally competitive products targeting new markets. The result was that, from 2005 to 2023, the share of the Russian market in Georgian exports dropped by almost 40%. Today, Georgia is a country which has one of the largest networks of Free Trade Agreements and is a candidate country for EU membership.

2) Engagement through renewed economic cooperation: Diversification does not mean full cancellation of commercial ties with troublesome neighbours. In fact, quite the opposite. It involves finding ways to foster mutually beneficial economic cooperation initiatives and creating interdependencies that incentivize both parties to maintain peaceful relations. It moves away from full reliance on each other, which helps efforts aimed at building trust and reducing tensions.

Australia claims that it wants "A stable, productive and mature" relationship with China, whereby “dialogue enables us to manage our differences," according to Penny Wong, Australia’s Foreign Minister. She recently made these remarks following what was termed a "frank" discussion in Canberra on trade, regional security, and human rights with her Chinese counterpart.

Martin et al. analysed the relationship between military conflict and trade both theoretically and empirically. They highlight the opposite effects of bilateral and multilateral trade on the probability of war. They conclude that bilateral trade increases the opportunity cost of bilateral war, thereby deterring the chance for such a war. Multilateral trade openness, meanwhile, reduces this opportunity cost with any given country. This weakens the incentive to make concessions during negotiations to deescalate tensions. It, therefore, increases the probability of war between countries.

3) Transparency by engaging civil society: Civil society advocates for transparency in government policies and decision-making processes. Transparent governance practices help build trust among stakeholders and reduce suspicions that political considerations are unduly influencing commercial relations. Civil society can play a crucial role in monitoring the implementation of international agreements and sanctions regimes, thereby ensuring that governments adhere to their international commitments, respect human rights, and protect vulnerable populations. Governments must provide sufficient space for civil society, by embedding standard protections in their constitutions (such as freedom of expression and freedom of association). They must empower domestic courts to be willing and able to uphold these protections.

4) Compliance with international norms: Although not always easy, governments need to establish clear legal frameworks and procedures that delineate between political disputes and economic interactions. One way to do this is to uphold international norms and obligations such as for human rights, non-proliferation, and counterterrorism. This will build trust and ensure credibility in the international community. It furthermore involves implementing sanctions in a predictable, targeted, and selective manner, focusing on specific individuals, entities, or sectors implicated in political disputes. Likewise, ensuring humanitarian exemptions in sanctions regimes will ensure that essential goods and services (food, medicine, and humanitarian aid) can flow to affected populations without hindrance.

Managing commercial relations with difficult neighbours requires a nuanced and principled approach that balances economic interests with geopolitical realities. As the global landscape evolves, the principles outlined above offer a roadmap to navigate complex interactions.

Diversification and Engagement as core directions, and Transparency and Compliance as navigators safeguard economic interests and contributes to global peace and stability.