Intensifying geopolitical rivalry and tensions such as the Russian invasion of Ukraine are now firmly on the radar in C suites and on corporate boards.
Unlike the Cold War, the starting point for the current bout of geopolitical rivalry was a dense set of cross-border commercial ties between protagonists. Companies with international operations have invested trillions of dollars of capital in foreign markets and spend multiples of that sourcing from foreign suppliers.
Trimming commercial ties between nations without either disrupting corporate operations, impairing financial performance and or, in some cases, stranding assets is unlikely. Identifying the least disruptive state means to advance carefully selected, legitimate geopolitical ends should be the goal.
In the third quarter of 2023, executives from 13 international businesses headquartered in China, Europe, the Middle East, and North America were interviewed to understand how their companies reacted to rising geopolitical tensions.
How to manage commercial relations amid geopolitical tensions
These interviews provided the groundwork for six lessons that governments should take on board when managing commercial relations as geopolitical rivalry intensifies. These are:
1. Clear, consistent messaging on geopolitical ends and means is vital
The first lesson relates to the signals government send to the private sector. Given the multi- faceted nature of geopolitics and its potential conflation with profound global shocks – such as the COVID-19 pandemic – unsurprisingly, when business people hear the term geopolitics, they interpret it in different ways.
A failure to understand precisely what is meant by phrases such as ‘de-risking’ may lead businesses to postpone making the very changes that governments seek to promote. Officials should spell out as clearly as is practical the links between intended geopolitical goals, actions taken and their rationale.
2. The calculus concerning punitive measures is different in a multipolar world
The effectiveness of punitive geopolitically motivated state measures needs review. In a world with multiple poles of economic activity, tools such as trade sanctions are typically less effective than in the past. The documented surge in exports from some Western nations to Russia’s neighbours witnessed since the February 2022 invasion of Ukraine attests to this.
Moreover, pressures to exit geopolitical rivals are more likely to be resisted by companies with long payback periods and where home markets have matured, offering limited growth prospects.
A senior executive from a leading chemicals manufacturer told us that they could not conceive of a future where their company abandoned the Chinese market. Also, that so few Western companies exited the Russian market in 2022 and 2023 should give pause to those officials browbeating companies to leave the much larger Chinese market.
The calculus employed when deciding sanctions needs to be revisited. More weight should be given to the potential fallout from countersanctions by targeted governments and to the options available to sanctioned firms. Tit-for-tat sanctions add to risk premia and frequently boomerang on those involved.
A multi-polar world affords sanctioned firms the opportunity to bounce back by developing revenue streams in underserved markets and by sourcing needed components and technologies from new locales.
3. As states ratch up sanctions, the resulting regime must remain coherent
Greater attention ought to be given to coherence of sanction regimes as they unfold over time. The more objectives a sanctions regime has, the higher the likelihood that a sequence of sanctions packages contains measures that cut against each other.
For example, a presumably unintended consequence of European bans on professional services firms contracting with Western subsidiaries operating in Russia is that the exit of the latter is delayed further and becomes more costly.
Sometimes objectives clash too: pressure on Western firms to leave Russia cuts against the goal of depriving the Kremlin of revenues to maintain its military operations in Ukraine. This is because subsidiaries from sanctioning Western nations must pay sizeable “voluntary contributions” to the Russian government to expedite their departure from the Russian market. Sanctions regimes ought to be reviewed periodically to ensure that they are coherent and remain effective.
4. Offset harm done to competitiveness by punitive measures
Several interviewees called for officials to develop a better understanding of the burdens imposed on international business by punitive geopolitical measures. Those burdens include additional operational costs, greater investment outlays, impaired cash flow, unnecessary delays and heightened uncertainty. Uncertainty, an enemy of corporate investment, is particularly pernicious and tends to be higher when policy changes abruptly.
Another important point relates to those state measures that discourage firms from availing themselves of certain foreign locations, data, talent, and technologies. Encouraging firms to repatriate commercial activity is likely to encounter greater opposition the more glaring are the deficiencies in the home business environment. Therefore, steps to encourage reshoring should be paired with improvements in the supply side conditions of national economies.
5. Develop responsible business conduct guidelines for trapped multinationals
Existing Organisation for Economic Co-operation and Development (OECD) and United Nations (UN) guidelines on responsible business conduct (RBC) ought to be repurposed.
To the extent that current guidelines relate to conflict zones, they do not contemplate conflicts instigated by geopolitical foes. This exposes firms in such foes to accusations of “trading with the enemy”, even if the relevant investments were made in less fractious times.
Worse, that geopolitical foes can introduce countermeasures that reduce the profitability and likelihood of disposing corporate assets creates the potential for genuinely trapped subsidiaries of multinationals.
Sensible norms for RBC need to be articulated for trapped subsidiaries. These norms should be formulated in a multi-stakeholder dialogue to which business executives with operational experience operating in geopolitical hotspots should be invited to contribute.
6. Engagement with the private sector is the best way to avoid frustration
A recurring theme from the interviews was that, if governments are serious about reshaping the commercial footprint of companies, then officials must develop a deeper understanding of the strategies firms devised to tap the benefits of globalization previously and the hurdles faced by international business caused by state moves.
Business and governments operating in parallel universes is a recipe for mounting frustration on both sides. Limiting downside risks to competitiveness during an era of geopolitical rivalry requires intensified official engagement with international business.
This Article was first published on World Economic Forum and is republished under the Creative Commons Licence
Authored by
Simon Evenett Founder, St. Gallen Endowment for Prosperity through Trade
