The world stands at a crossroads: as global shocks unfold, we’re entering a “low-growth, low-investment and low-cooperation era”.
That’s according to a report from the World Economic Forum (WEF), which warns that factors such as worsening climate change, resource scarcity and the rising risk of conflict, combined with a gradual weakening of global multilateral institutions and increasing geopolitical fragmentation, are resulting in the marked ineffectiveness of international cooperation mechanisms.
It’s something that can be seen everywhere from Ukraine and Taiwan to the Middle East, where tensions have risen, disruptive conflicts have bubbled up, and prices have surged. The likes of the UN, Nato, the World Trade Organization and the G7 have done little to help.
The WEF’s dismal forecast of more of the same has major implications for global businesses too. The breakdown of top-level cooperation threatens to put businesses’ supply chains, communications lines, finances and people management in the firing line.
But how have we got here? And what can businesses do to mitigate against the slow collapse of international cooperation?
What effect will protectionism have on global businesses?
“Up to now, globalisation – or rather, international economic policies – have exacerbated the inequalities that have been undermining democracies in the West,” says John Breen, lead consultant at global risk analysis firm Sibylline. It’s one narrative explaining what’s behind much of the unravelling of international cooperation.
After all, greater economic integration over the past 30 years has not changed the internal political dynamics or military ambitions of economic superpowers such as China and Russia. It has, then, been all too easy for these regimes to point the finger, casting Western-led globalisation as an attempt to reinforce the status quo. And mirroring the sabre-rattling overseas, the US has also shifted towards a more protectionist economic policy to shore itself up against the likes of China.
Overall, the consequences of this escalation – and the adoption of policies which diverge from the principles of deregulation and trade liberalisation – are potentially broad-ranging, affecting businesses’ investments, supply chains, goods prices and cross-border operations.
For instance, billions of dollars were lost amid Russia’s invasion of Ukraine and many Western businesses’ subsequent exit from Russia. Fuel giant BP let go of close to a 20% stake in Russian oil firm Rosneft, at a cost of more than $20bn (£15.6bn). Italian bank Unicredit lost more than $8bn, and Exxon Mobil took a $3bn hit. Clothing chain H&M suffered a 68% loss in earnings and German DIY chain OBI had to sell its Russian stores to a local businessman.
How the death of cooperation hurts business
In addition to this mounting risk of costly disruption, Liza Robbins, chief executive of Kreston Global, an international advisory and accountancy network, points to the increasing compliance burden and conflicting country-by-country regulations which make it hard to secure the consistent, productive flow of resources that international businesses rely on.
Businesses’ digital set-ups are a particular source of problems. “We frequently encounter issues when trying to align digital operations because of regional technical infrastructure capabilities,” says Robbins. A complete move to the cloud, for example, is not always feasible in countries which experience routine power outages.
Data privacy and data protection discrepancies between countries also restrict the free flow of information, particularly within the accounting sector, Robbins explains. In some cases, that could raise the risk of fraud and money laundering.
And it’s not just on the information side of the equation that the breakdown of international relationships is having an effect. “Post-Brexit, UK firms have had reduced access to skilled talent through migration, a common issue across countries in a skills-short market,” says Robbins. As barriers to talent migration increase, there is an inherent risk that workforces will become increasingly nationalised or monocultural, making it harder to achieve global collaboration between and within businesses in the long term, she warns.
Why supply chains are on the front line of global tensions
The various challenges of a low-cooperation world may already be having a chilling effect on business growth. A survey of 600 international business leaders by Kreston Global has found that 56% have chosen not to expand their business abroad. Just under a third of those (32%) said that their decision was down to international supply chain issues.
The recent experience in the semiconductor sector is a cautionary tale here. Tensions between China, Taiwan and the US have piled on the pressure in the global semiconductor market, resulting in huge shortages. The US ban on exports of semiconductors and semiconductor manufacturing equipment to China has contributed significantly to this, as most foundries depend on American technology for production, explains Rashi Singh, assistant vice-president for procurement and supply chains at analytics specialist The Smart Cube.
“With chips being the building blocks for so much modern equipment and future-defining technologies – such as AI, robotics, biotech and 5G – it has become imperative for Western countries to invest in the development of a local supply chain for semiconductors chips while these geopolitical issues continue,” he says. Of course, that won’t be a quick fix, and nor will it come cheap.
What can business leaders do to guard against rising tensions?
Beyond semiconductors, any effort to diversify supply chains will likely be a key mitigation strategy for global businesses. But the cost issue will undoubtedly remain.
“It’s really expensive to move these supply chains,” says Breen. “And they’re incredibly vulnerable to shocks because there are so many different inputs going into products these days.”
He also underlines the importance of adding geopolitical expertise at the board level to help with crisis preparedness – a skill which is increasingly sought by firms’ legal counsel.
But as John Caplan, CEO of the online payment platform Payoneer, puts it, there’s only so much preparedness can do. True resilience is forged in the fires of a crisis. “When, for whatever geopolitical reason, an international corridor is shut down, folks have to be resilient,” he says. “What we’ve seen in our Ukrainian businesses is that 30% or more are looking to accelerate the growth of their business.”
Business leaders, then, may simply have to adapt to the low-cooperation era as each successive international crisis arises, operating as and where they can and pivoting to new opportunities when existing avenues close to them. That, surely, will be the true measure of their resilience.