T47: Geoeconomic Reflections

In the age of volatility strategic hedging will give your company a competitive edge

As former US President Trump is set to be re-elected (T47), what could be the consequences? Here are three very preliminary thoughts from a geoeconomic perspective (and yes, more than 280 characters and not always polished wording ….):

Shades of authoritarianism

The democracies vs authoritarian dichotomy has always been problematic as a concept and as a narrative. A better way may be to reconsider systemic competition as a contest along a spectrum of different shades of authoritarianism - likely with significant consequences.

“Democratic authoritarian systems” (yes, difficult wording) could be less stable than “one-party authoritarian systems” due to domestic liberal resistance against authoritarian preferences. If so, one of the questions to watch closely is the nexus between stability and growth: Will one-party authoritarian regimes become the new loci of “stability” in a more volatile world? If so, how would this affect global resource allocation with regard to investments, for example?

Another aspect of authoritarianism is the role and the size of the state. “Big state authoritarianism” is likely to increase the public sector’s economic footprint – very likely to the detriment of the private sector. This could cripple innovation and lower economic growth. And this, in turn, could imply stability at the cost of low or zero growth. But (and I am NOT advocating this option) how about “small state authoritarianism,” i.e. an authoritarian government that cuts back regulatory prescriptions, trims spending, and lowers taxes? Would such a domestic political system enhance growth? And would liberal democracies still want to "friendshore"?

Three levels of disciplining others

Disciplining, whether by the hegemon or a group of like-minded nations, is likely to be strengthened in the light of authoritarianism (but democratic states do discipline as well). Three levels are worth considering:

(a) Carrots and sticks to shape access to markets and shape strategic flows (e.g., commodities, data, capital and more)

(b) Carrots and sticks to shape behavior once a company has gained access to foreign (and domestic) market, and

c) Extraterritorial disciplining or “regulatory imperialism”

Almost every nation wants to play at level (a). The effectiveness of disciplining at level (b) very much depends on a nation’s ability to attract other nations for trade and companies to set up subsidiaries and invest - thus you need to be careful with level (a) disciplining (just saying for a friend...). Level (c) disciplining is in fact the “big game” that is being shaped, for example, by market size and attractiveness, prestige (you need to be in country xyz to be considered a relevant actor) and by the global importance of a national currency (and thus also the national digital financial system, aka who routes your payment transfer?).

Across all three levels the US remains the key actor, in particular as past policies like IRA have primarily addressed level (a) to create a lock-in for level (b). The US’s emphasis on level (c), for example vis-à-vis the EU and China, needs to be seen in this light as well. If you can press your allies to lower their footprint in a specific foreign market you effectively render this market’s regulatory power at levels (a) and (b) less effective – and by doing so you also potentially cripple its ability for level (c) disciplining (less trade, reduced money transfer, fewer options to “shape” money flows, less influence - very simplified)

Impact not input

In sum, various shades of authoritarianism and multiple levels of disciplining suggest that volatility will be the (new) norm. This is not only bad news as volatility creates upsides and downsides. The question is: Can companies handle volatility?

And here things are getting complicated because the most for reaching (in my view) implication is that to ensure economic growth the regulatory focus should change from input to impact driven regulation.

Currently, the focus is on input driven regulation. Regulation meticulously addresses where and how production can take place at all. While input driven regulation evokes the impression of “control,” this approach stifles flexibility: Governments want companies to diversify away from “countries of concern” but at the same time supply chain transparency and responsibility regulation drastically reduces the number (and scale) of new locations companies could tap in.?

If, however, volatility is growing, the focus should shift to impact – in the sense that governments should enable companies to be better prepared in handling the fallouts of political and market dynamics (and seizing opportunities that occur).

One instrument that should rank atop the agenda is strategic hedging not only as a broad (and often too abstract) concept but also as a specific financial instrument to deal, for example, with FX volatility or volatile commodity prices

Hedging, for example with the help of AI-empowered instruments, is certainly not a panacea. But it will help companies gain more “financial fire power” (aka liquidity) to weather storms. This may not be enough. But this instrument could give companies more leeway in navigating the shades of authoritarianism that come with different levels of disciplining.

Governments that want companies to take sides will need to think about compensation – for markets lost and revenue forgone. And compensation in most cases equals subsidies; and subsidies require government income (taxes) to be financed. Governments, however, that give companies an edge by considering strategic hedging a major competitive differentiator might be able to advance their own leeway while at the same time giving companies more “breathing space.”

Sometimes, “small” changes could make a “big” difference – hopefully. And what are your thoughts?