Political risks are on the rise, and the US-led liberal international order of the past is under threat. It promised globalization as a path to peace, prosperity, and stability, only for forces such as nationalism, geopolitical competition, and technological advancements to reshape the world. While each existed in some form in the 20th century, their modern equivalents are converging and causing political disruption at a time when countries have become more economically integrated.
These global uncertainties are keeping executives up at night. One study found almost 39% of investors saw geopolitical instability as the greatest risk to foreign direct investment projects in Europe. Another showed 62% of US executives believed a trade war could cause a recession. Here is a closer look at what’s happening and how companies can respond.
Global dynamics have changed
As globalization accelerated in the 1990s and 2000s, it kept its promise by lifting many into the middle class in emerging economies, particularly in Asia. But in advanced economies, job losses, income inequality, policy failures, technological disruptions, and overall dissatisfaction with the status quo bred social discontent, deepened political and societal divisions, and bolstered the rise of populism.
On a national level, automation threatens jobs and has the potential to exacerbate wealth inequality. On a societal level, social media can amplify public fury and effectively mobilize campaigns against businesses. Geopolitically, countries are jostling for who will take the lead in developing critical technologies and forming global tech standards.
These trends have aided international political fragmentation, such as Brexit and the Trump administration’s withdrawal from the Trans-Pacific Partnership (TPP) and the Paris climate agreement. These actions threaten the rules-based multilateral order of international cooperation of the past, while trade wars call into question the effectiveness of institutions such as the World Trade Organization (WTO) that served to harmonize the rules of trade. A fracturing political consensus is contributing to a rebalancing global power from the 20th century’s US-dominated international arrangement to a multipolar system, where different powers exert their influence, and doing business under Western rules and institutions can no longer be assumed.
Yet economic integration continues despite these increasing political divides—and in increasingly modern, technological ways. Economies are more entwined than ever as supply chains and workforces span multiple countries, capital flows across borders, and global trade goes digital. This combination of political disruption and evolving economic integration increases political risks by adding complexity and reducing stability for long-term planning.
Unpacking the US-China rivalry
Geopolitical rivalry between US and China is a clear example of this dynamic. The world’s two largest economies are deeply interdependent: US firms have historically benefited from low-cost labor and integrated China into their global supply chains, while consumers enjoy inexpensive goods; China has gained from export-led growth and foreign technological expertise. But despite economic interdependence, political relations have been deteriorating.
A US-China trade dispute is still ongoing, with no clear path toward a resolution or timeline for the completion of negotiations. Tensions have already taken a toll on businesses operating in both countries, hurting competitiveness and prompting some foreign companies to restructure their supply chains out of China. A recent Bain & Company survey found 60% of US executives with operations in China planned to review their supply chains over the next year.
How companies can cope
A recent study by EY concludes this new climate of political risk is both fragmented and heightened. It also suggests that organizations may need to rethink their mitigation strategies and the best course of action may not be obvious. For example, minimizing risk to sales might mean changing sourcing strategy rather than strictly looking at pricing. Executives in this strategic role should coordinate strategies for public stakeholders such as governments and communities, and have a say in how different business functions operate.
Companies can address political risks at three levels:
- At the transnational or geopolitical level, businesses are largely limited to monitoring global trends that may pose risk to their operations and relocating as needed. This may even involve adjusting supply chains.
- At the national level, companies should consider carefully examining the organization of their operations and manage relations with host country governments. For example, in countries with weak institutions, making lower-level commitments like joint ventures may be safer than acquiring companies. Likewise, using domestic suppliers, hiring locally, or making greenfield investments that create jobs can help align with the interests of governments.
- At the societal level, a wider set of stakeholders—such as communities, civil society organizations, and unions—should be taken into account. Companies can step up corporate social responsibility practices and improve transparency to monitoring supply chains for stronger due diligence.
These are uncertain times, to be sure. But armed with insight and understanding, companies can better navigate this brave new risk-filled world.