Geopolitics Trumps Economics

For much of the past thirty years, the global business environment has been driven by economics. As nations stumbled over themselves to enter a global economy that offered enormous markets, economists and business consultants preached the logic of gains from trade, the concept of competitive advantage, and the promise that a world with less barriers was one in which a rising economic tide would lift all national boats. Businesses faced a tailwind of less protectionism and friction in conducting global commerce. For better or worse, that world no longer exists.

The global business environment today is increasingly driven by geopolitics and the great power war being waged between China and the United States . Leaders in virtually every industry need to acknowledge this reality and adapt to the shifting environment. Countries need to recognize that the global economy is splitting into two ecosystems — one led by the United States and its Western allies and the other led by China, Russia, Iran and North Korea — and they’ll be forced to pick sides. (And if they don’t, there could a further fracturing of the global economy into regional blocs and “spheres of influence” that will create an extremely disjointed business environment for multinational companies.) The days of relying on US military protection while profiting from trade with China are numbered. This doesn’t mean that countries like India won’t try to play both sides. After all, they’ve been historically aligned with Russia but competitive with China…which makes for an awkward relationship triangle as China and Russia get closer.

Unfortunately, all of these dynamics will lead to less (if any) cooperation on addressing some of the planet’s greatest challenges as multilateral institutions prove increasingly useless . Thinking about the world as having one economy is rapidly emerging as an antiquated concept. Despite this increasing fragmentation, disruptions can rapidly spread from one area of the world to another.

Just think about the Israel-Hamas conflict and how it has generated a social fissure in the United States, disrupting not only America’s leading education institutions but also Israeli companies operating in the United States . Or how the Russia-Ukraine war continues to increase supply uncertainty in agriculture and fertilizer markets . Or how might escalating tensions between Venezuela and Guyana impact oil markets and inflation pressure in energy-intensive industries ?

One of the most obvious implications of this accelerating global fragmentation is that geopolitics is trumping economics as a driver of the business environment. Economics has handed the baton of business risk to geopolitics. The clearest manifestation of this dynamic is in the geography of supply chains and manufacturing. Offshoring (based on economics) is being replaced with friendshoring (based on geopolitics) or onshoring (based on domestic politics). One of the main beneficiaries of this trend is Mexico, a country that has seen inbound foreign direct investment and exports to the United States surge. In fact, the Port of Laredo was the number one point of entry for American bound goods last year .

Consider also how geopolitics is impacting shipping and the movement of goodsacross the world. As Iran-backed Houthi rebels continue to attack ships in the Red Sea, shipping patterns are shifting rapidly. In the first two months of 2024, for instance, Suez Canal trade dropped by more than 50%. Let’s not forget that approximately 15% of global trade has historically transited through the Suez Canal as it’s a primary sea lane for Europe-bound Asian exports. When combined with decreased capacity at the Panama Canal , it’s not surprising that shipping rates have surged. What might the impact be on global inflation, and how might inflation change the voting behavior of citizens as they head to polls this year ?

Geopolitics is also starting to impact the safety of personnel at US companies operating in countries such as China. In May 2023, the Chinese government raided the Beijing offices of Mintz, an American due diligence firm, and held five local employees . Boston-based Bain & Company noted that it too had been the target of the Chinese government and that employees in the firm’s Shanghai office were under investigation . And last September, Michael Chan, a Managing Director at US risk consultancy Kroll, informed his employer that he was blocked from leaving the Chinese mainland . And that’s just in China. How many senior American business leaders are willing to take an assignment in Moscow?

Navigating Geopolitical Uncertainty

Geopolitical uncertainty is an increasingly important factor in today’s business environment. Management teams and corporate boards need to consciously think about global affairs and how they might create risks or generate opportunities.

This means spending more time on scenario planning and identifying risks that will inevitably surface from geopolitical disruptions. For instance, how might a Chinese military takeover of Taiwan impact the semiconductor industry and send ripples towards other industries? Will a semiconductor chip shortage create bottlenecks in a supplier’s supplier’s supplier? Or how might countries dependent upon wheat imports from Ukraine be at risk of social unrest as food riots spread? What will political shifts in these countries mean for foreign businesses with local operations? But let’s not forget that uncertainty and risk create lots of opportunities. Might American farmers find opportunity in exporting to Eastern Europe? Or could US semiconductor companies spot growth opportunities in Australia?

Today’s world is increasingly interconnected and demands that business leaders think about risk in an integrated manner. This means connecting the dots across politics, technology, demographics, economics, and increasingly geopolitics.

VIKRAM MANSHARAMANI is an entrepreneur, consultant, scholar, neighbor, husband, father, volunteer, and professional generalist who thinks in multiple-dimensions and looks beyond the short-term. Self-taught to think around corners and connect original dots, he spends his time speaking with global leaders in business, government, academia, and journalism. LinkedIn has twice listed him as its #1 Top Voice in Money & Finance, and Worth profiled him as one of the 100 Most Powerful People in Global Finance. Vikram earned a PhD From MIT, has taught at Yale and Harvard, and is the author of three books, The Making of a Generalist: An Independent Thinker Finds Unconventional Success in an Uncertain World , Think for Yourself: Restoring Common Sense in an Age of Experts and Artificial Intelligence and Boombustology: Spotting Financial Bubbles Before They Burst . Vikram lives in Lincoln, New Hampshire with his wife and two children, where they can usually be found hiking or skiing.