Businesses Will Find It Hard to Ignore Geopolitics

We’re at a critical juncture, decision-makers need to be ready for what comes next

Many of today's business decision-makers grew up, went to college, and climbed the corporate ladder in the post-Cold War era. that relatively peaceful era we seemed to have just lived through, beginning in the early 1990s and lasting until relatively recently. It’s the only world that is known to many through lived experience. While there were still security concerns and violent conflicts, a key feature from the start of this era was the absence of the great power politics of the Cold War, less concern about geopolitics, less concern about the impact of geography on international politics, and more of a focus on globalisation and economic growth.

With the fall of the Berlin Wall and the collapse of Soviet Communism, this post-Cold War world initially seemed a lot like what the political scientist Francis Fukuyama had controversially termed “the end of history”, where liberal democracy, as a system of government, had proven superior to all other systems and had come to represent the pinnacle of human political evolution, “the final form of human government”.

In the early 1990s, we had moved from a militarised bipolar world defined by two competing nuclear-armed superpowers, the United States and the Soviet Union, to a unipolar world with America as the world's sole remaining superpower.  A world of two different economic blocs dissolved into one. The American way had become the only way. With the absence of a direct enemy, geopolitics took a back seat; there was a peace dividend to be enjoyed, and less need to spend so much tax revenue on defence by the U.S. and its allies.

That meant that from the Clinton years forward, it was the economy, stupid. President Clinton balanced the US budget and economic ideas that had accelerated during the Reagan Revolution of the 1980s, with their focus on small government, deregulation, tax cuts, and free-market capitalism, also known as neoliberalism, became the prominent economic philosophy.

Businesses could focus more on their core activities and operate with less government intervention or distraction from geopolitical issues. Lower taxes supported investment in innovation. The liberalisation of international trade supercharged economic globalisation. This and the information revolution supported the building of complex global supply chains. Manufacturing could be reallocated worldwide wherever labour costs were cheaper. Less expensive manufacturing costs meant prices at the store became relatively cheaper than they would have been otherwise. Lower prices supported historically low interest rates. A favourable corporate and personal investment environment made it easier during this period for businesses to expand and plan for the future, and for many of their employees to invest for retirement. An age of abundance could finally blossom, but not without intermittent financial bubbles and crises.

Throughout the post-Cold War era, these economic ideas were exported internationally, particularly to the debt-burdened developing world,  through what became known as the Washington Consensus, within institutions such as the IMF and the World Bank.

The geopolitical environment today, however, is more complex. If the 1990s seemed a lot like the end of history, where business decision-makers and policymakers could focus primarily on the economy, then the present day looks a lot like the resumption of history. The American way is no longer the only way.

Geopolitics is back, and while America still has a lot of influence, we now confront a multipolar world with multiple great powers with different political systems, regulations, and priorities. We live in a world where rivalries, partnerships, and strategic maneuvering shape global affairs. It was American global leadership and the rules-based international order it had constructed, with its focus on free trade and stable institutions, that had fostered a relatively stable and predictable environment for international trade. This has helped Western businesses to flourish internationally. Not all great powers today want the existing order to continue. Chief among the challengers are Russia and China.

The peace dividend of the post-Cold War era has been cut short in Europe with an irredentist Russia intent on conquering its European neighbour, Ukraine. It's an open question about how this war will ultimately end and who in Eastern Europe might be next. Meanwhile, a rising communist China, which grew its enormous economy in the same period with the help of American and European politics, capital, and customers, now poses a real challenge to the American way, where its size by economic and military metrics and its different values and ideology challenges American power and global status. An important theory in International relations, the Thucydides trap, suggests that where a rising power threatens to displace an established leading power, it can potentially lead to conflict. Complicating matters today is how entangled the economies of China and the US have become in recent decades.

The Washington Consensus has also been contested and even resented by some in the developing world who felt that its one-size-fits-all approach had focused too much on short-term gains, neglected social issues, and was imposed by and benefited the global north at their expense. Such an experience has provided an opening to alternative emerging forums such as the China-centric BRICS grouping, a potential challenger to the US-led rules-based order.  

Meanwhile, on the home front, the policies that supercharged economic globalization over the last decades have also led to a domestic backlash against it in the U.S. and many other Western countries as issues such as deindustrialization, the outsourcing of jobs, rising inequality, environmental concerns, and a significant increase in migration have contributed to a rise in populism, nationalism, unpredictable political leaders, and polarised politics.

What could come next?

These developments have brought us to a critical juncture, a fork in the road, where political leaders are now reevaluating the world order and the economic operating system used to run it. Businesses may find it harder to ignore the impact of geopolitical developments on their business activities in the coming years. They need to be aware of the different geopolitical scenarios that could unfold and become more agile in their operations and strategy.

The necessity of the geopolitical and national priorities of governments to maintain international influence, competitiveness, national security, and national cohesion has seen a waning of strict neoliberal core principles. There is now a turn towards big government to deal with political problems, many of which are of international origin. This is the case in several countries on both sides of the Atlantic, at the EU level in Europe, and to a degree in the developing world. We see this, for example, with the intervention of government in the economy, with the return of industrial policy, and the prioritisation of national security over unfettered free trade. In such an environment, fiscal policy, in addition to monetary policy, is becoming an important driver of economic outcomes. Depending on the policies and market dynamics, this approach could ultimately prove to have long-term benefits. It may also make for good politics with strong electoral support. However, it could also prove to be inflationary. Such a scenario, in addition to the trend of fragmentation in world trade, will make business costs more expensive.

It is no longer just a question of comparative advantage. Outsourcing to the most cost-effective location has now evolved into onshoring or friend-shoring if the most cost-effective location is deemed a security risk. Today, defence is considered more important than opulence. It is increasingly the case that politics is driving economics, where economic power is used to achieve geopolitical goals, including in areas such as trade, investment, finance, and technology.  This has real implications for business decision-makers. Multinational businesses that normally prefer to remain apolitical may be pressed by governments to become their agents in regulatory and gatekeeping activities. Businesses of all sizes may face restrictions on the technology they use, export, or import, e.g., telecommunication equipment from China.

When there is strategic rivalry between great powers but a hot war ultimately proves too dangerous or catastrophic, particularly between nuclear-armed states such as the US, China, and Russia, a cold war between rival states is a possibility, such as between the Soviet Union and the U.S. in the bipolar period between the Second World War and the early 1990s. What happens in such a scenario is that instead of a global conflict, there are flashpoints, proxy wars, misinformation, and propaganda campaigns to win the hearts and minds of the international community. Strategic military and economic maneuvering is pursued to achieve relative gains. Regional conflicts get entangled with larger plays for world domination.

In such a volatile environment, businesses should expect further trade tensions, the possibility of sanctions, political instability in key markets, cyber threats, competition over resources, a focus on national security interests, and the environmental consequences of less cooperation over climate change. This makes it more difficult for unprepared businesses to achieve desired levels of efficiency and profitability, as such a volatile, and perhaps inflationary, environment affects planning visibility and production costs.

The war in Ukraine is a flashpoint and has changed the dynamics of energy markets, and the evolution of the EU economy from a focus on peace through trade towards one of peace through strength. The EU has introduced its defence-industrial strategy to build up capacity. There are new opportunities for businesses operating in this space. The EU is also beefing up its regulations on outside misinformation and interference in its internal elections with new responsibilities for online businesses, particularly big tech.

Another potential flashpoint is the island of Taiwan, an American-supported democratic island that China claims as its own. Taiwan produces a critical world share of the semiconductors needed to manufacture many essential Western goods, from automobiles to airplanes and personal computers. Semiconductors are also a critical component for the Artificial Intelligence revolution. A blockade of the island or an invasion by China would cause massive disruption to global supply chains.

Business decision-makers should watch out for what diplomatic efforts are being made to de-escalate tensions. Xi’s visit to California last year was helpful. As I have argued before, cold wars are not inevitable. Human agency matters, and skilled and proactive diplomacy can help mitigate the risks. The sweet spot, I think, is for great powers such as the US and China to strategically compete without becoming vulnerable to each other. In other words, to learn to live with one another.

From a Western perspective, whoever is elected to the White House in November can prove significant in whether the situation in Taiwan or the ongoing conflict in Ukraine escalates or de-escalates. Elections in Europe this summer will also form part of the wider equation. We already know who will run China for the foreseeable future.