The 10 political risks companies should prepare for in 2021

All eyes are on the US this week as Joe Biden is inaugurated president. This attention is due in no small part to the historically elevated security risks surround the event. But even without this risk of political violence, Biden’s inauguration would still command attention because it will usher in a period of US policy realignment with significant business implications. But the US is not the only political risk story in the world – far from it. While executives prepare for policy changes in the US, they also need to manage a variety of other political risks throughout 2021.

In our 2021 Geostrategic Outlook, my colleagues and I identified the top 10 global political risks based on an assessment of their probability of occurring and the degree to which they would impact companies across sectors and markets. It should come as no surprise that the top political risk we’re watching in the year ahead is COVID-19, which affects all of the other risks on our list and generates high levels of uncertainty about the policy environment that companies will face. It has therefore never been more important for companies to dynamically monitor political risks for potential opportunities and challenges in the year ahead.

1.      Geopolitics of COVID-19

The geopolitics of COVID-19 will shape the global operating environment for companies in 2021. The country that wins the vaccine race is likely to get a boost in geopolitical standing and reputation. Countries are likely to continue imposing temporary export restrictions for critical medical supplies and pharmaceuticals as long as the pandemic persists. Such restrictions could create or exacerbate geopolitical tensions between some countries. Cross-border movement of people will also remain restricted in 2021. COVID-19 will continue to have domestic political implications as well. Public trust in governments and vaccines will affect the effectiveness of deployment and inoculation. And with greater government intervention in economies, political debates in many markets will shift from whether to how the state should intervene.

2.      Disentangling US-China interdependence

China and the US will continue to try to disentangle their strategic interdependence in 2021, with the Biden Administration likely to perpetuate many of the policies pursued under Trump. Competition is likely in four main areas. The first is the continuation of an acrimonious trade relationship, as at least some bilateral tariffs will remain in effect. The second main area of competition will be technology, with a focus on 5G, semiconductors and AI. Closely related to this is industrial policy, through which both countries will try to disentangle bilateral economic ties, particularly in strategic sectors. Finally, there will be friction in areas of Chinese sovereignty, including its maritime territorial boundaries and its stance on noninterference in what Beijing considers to be domestic affairs.

3.      Toward European strategic autonomy

In a world of rising geopolitical tensions between global powers, the EU is seeking to define its place and role. Throughout 2021, the EU will sharpen its policy tools and regulation to rebuild a post-COVID-19 Europe that is open, strategic and autonomous. This will include a review of its trade and investment policies, as well as a new industrial strategy with a focus on green and digital capabilities. Importantly, this will involve the EU continuing to shape global norms and standards, especially in the fields of digital regulation and environmental policy. The EU will also review its competition framework, making changes to regulations to create a level playing field for its industry. And it will seek to secure the supply of critical raw materials to increase autonomy in the production of key digital technologies.

4.      Neo-statism on the rise

In 2021, the world will enter a new era of neo-statism as COVID-19 continues to heat up the debate on self-reliance. This is causing many countries to launch efforts to reshore manufacturing or diversify supply chains. Governments will not only deploy policy tools to support domestic production — they will also do more to ensure that domestic companies control this production. COVID-19 will drive the adoption of broader and higher numbers of investment screening mechanisms across the world. Increasing geopolitical competition, especially in 21st century digital technologies, is also driving a shift toward more state interventionism in many countries, including in the three largest geopolitical powers: China, the US and the EU.

5.      Reinvigorated climate policy agendas

Reinvigorated climate policy agendas will shape the global business environment in 2021 and beyond. In the EU, an aggressive “Green Deal” codifying carbon neutrality by 2050 has been launched and 30% of the €750 billion COVID-19 rescue package is pledged to climate-friendly projects. China’s recent carbon-neutrality pledge may raise the bar for other emerging markets, most notably India, that are expected to be hard hit by climate change but where the discussion on achieving carbon neutrality is still nascent. And the Biden Administration will use executive orders and regulatory changes to tighten environmental rules. Stakes are high for the UN climate change conference COP26, scheduled for November 2021, since negotiators at COP25 failed to agree on rules for carbon markets and financial mechanisms to protect poorer countries from climate change.

6.      Geopolitics of technology and data

The geopolitics of technology and data will continue to play out in 2021. Industrial policies will be a key tool that governments use to compete in digital technologies. The increasing divergence of technology standards across markets is another aspect of this risk. Many countries are likely to forge a middle path between the US and China, while the EU may project its own standards via the so-called Brussels effect. More countries will implement data privacy and localization regulations, often modeled on the EU’s General Data Protection Regulation (GDPR). Digital taxation will likely be a geopolitical flashpoint, as many governments will seek additional revenue in 2021 to help finance COVID-19 recovery efforts. Another head wind for major technology companies will be antitrust enforcement.

7.      US policy realignment

The incoming Biden Administration will usher in a US policy realignment in 2021. One area of significant attention will be industrial policy, continuing the current policy trend to incentivize the reshoring of supply chains for strategic products, including pharmaceuticals and medical equipment. Environmental regulations are likely to be another area of significant change in 2021. The Administration will also seek to include some aspects of Biden’s campaign proposal of US$2 trillion investment in renewable energy infrastructure in COVID-19 economic stimulus efforts. Other areas of policy volatility are likely to be immigration, antitrust and trade. Finally, in terms of foreign policy, the US will re-engage in multilateralism. The US will rejoin the Paris Agreement and may join the WHO-backed COVID-19 Vaccines Global Access Facility (COVAX) initiative as well.

8.      Tipping point for emerging market debt

Emerging and frontier markets currently have about $11 trillion in external debt. The sustainability of emerging market debt will likely hit a tipping point in 2021. Across the large emerging markets, the funding vulnerabilities are expected to be highest in Brazil, India, Mexico and South Africa. The pandemic complicates the outlook for emerging market debt resolution. This is particularly true as political willingness to service debts could become a risk factor for restructuring or default the longer the COVID-19 crisis drags on. Geopolitical considerations will also influence multilateral and bilateral debt restructuring to a greater degree than in the past. China is the largest creditor to many emerging and frontier markets, so its willingness to restructure the debts of cash-strapped countries will be crucial.

9.      Geopolitical dynamics in the Indo-Pacific

The Indo-Pacific is becoming the main arena of global competition in the 21st century. Geopolitics within the Indo-Pacific will likely be even more volatile in 2021 as the major and middle powers become more assertive. The emerging Quadrilateral Security Dialogue (Quad) among Australia, India, Japan and the US is one example of the middle powers’ actions to influence regional geopolitics. Australia, India and Japan also recently announced the Supply Chain Resilience Initiative (SCRI). The Association of Southeast Asian Nations (ASEAN) members will focus on deepening regional economic integration, primarily through RCEP. The ongoing strategic competition between China and the US will be a complicating factor, though. European countries or the EU more broadly may become more active players in the region as well.

10.  Another wave of social unrest

The conditions are set for another wave of social unrest in 2021. Five primary issues are likely to motivate protestors in 2021. As governments impose new restrictions on commerce and socializing to contain localized COVID-19 hot spots that flare up, it is likely that small-scale protests will continue to pop up as well. Another driver of social tensions continues to be inequality, including the lack of opportunity and social mobility. Social justice will also persist as a mobilizing force for protests in the US and elsewhere. Youth climate activism will likely gain new life in 2021 in an effort to influence governments to design green COVID-19 recovery plans. And governance issues such as electoral transparency, widespread corruption and civil rights abuses will continue to animate protestors.

The views expressed here are mine alone and do not necessarily represent those of EY. This analysis was a joint effort with Jon Shames, Mary Karol Cline, and others from the EY Geostrategic Business Group.