Managing business in times of rising geopolitical risks
- Asia Pacific
- Political and Country Risk
- Organisational Resilience
- Investment Support
Managing business in times of rising geopolitical risks
As China marks its 20th year of World Trade Organization (WTO) membership, Beijing is rightly celebrating the immense economic transformations that have taken place over the past two decades. The operating environment for European businesses during that time has significantly improved, with more predictable, transparent regulations, increasingly professional enforcement, and more effective legal processes.
But the United States’ (US’) and European Union’s (EU’s) criticism of Chinese trade and economic policies at China’s WTO hearings in October also demonstrated how the three parties diverge in perceptions of China’s current economic and trade policies, and the political tensions that result. The geopolitical environment is becoming more complex, and businesses need to recalibrate their business strategy accordingly if they want to succeed globally.
New geopolitical fault lines
For many companies, sharpened US-China tensions have significantly raised awareness of geopolitical business risks. Similar to their US and Chinese counterparts, EU firms that do business in both markets have had to respond to tariffs, sanctions, export controls and less formal trade restrictions.
Geopolitical competition will increase—not just between China and the US, but also with the EU—and will force European companies to consider political risks across new business areas. With EU leaders regularly referring to China as a “systemic rival”, companies should expect an expansion of regulatory measures that raise political risks for their business. These will range from further trade defence measures, supply chain rules and restrictions on Chinese investment, to expanded cooperation with the US on technology trade restrictions on China under the Trade and Technology Council.
This trend can already be seen in technology and data-intensive industries, which are becoming more politicised. As data and technology become essential resources for economic and political competitiveness, both are becoming subject to more government scrutiny, more restrictions and reviews, and greater politicisation. Digitalisation—including automation, Internet of Things (IoT) and developing data-driven revenue models—means more businesses will face the same political risks regarding data and technology, especially in supply chain management and cross-border data transfers.
Not business as usual
Geopolitical tensions are becoming a larger source of disruptions. Areas in which businesses will most need to focus on include:
- Rising compliance burdens and ambiguity: These include the challenge of complying with US, EU or China tariffs, export or import controls and other sanctions, as well as new supply chain regulations, data localisation rules or changing market access requirements. In extreme cases, these can put businesses between a rock and a hard place, with mutually exclusive legal obligations – the Law on Countering Foreign Sanctions passed in China in June can penalise companies for complying with foreign sanctions against Chinese entities.
Although the law has not yet been applied to any foreign firms in China, it highlights the challenges that legal ambiguities will place on businesses seeking to remain compliant in the changing regulatory landscape. In this context, it is essential that businesses understand the drivers and enforcement trends of regulations.
- Costs and business continuity: Increases in operating costs resulting from tariffs and supply chain disruptions due to COVID-19 and geopolitical factors have been widely reported. Amid geopolitical tensions, businesses face uncertain export and import conditions, which has been most visible in China-Australia trade over the past year.
From recent concerns over shortages in Chinese magnesium exports to the EU, to greater scrutiny of the national security implications of sourcing technology, businesses will face greater political and operational pressure to build resilience into their supply chains. Balancing cost, efficiency, availability and geopolitical risks will require more of senior leadership teams’ time during business planning.
- Competitiveness: Geopolitical pressures and perceived supply chain risks have bolstered efforts in China, the EU, the US and elsewhere to localise or onshore products and technologies viewed as strategic or essential to national security. Businesses will need to understand their level of exposure to ‘buy local’ trends and adapt their supply chains, as well as cost and brand management, to succeed across different markets.
Businesses will also need to more closely manage their brand and reputation to remain competitive. They must be better prepared for crises at a time when companies are more likely to face zero-sum decisions when responding to politically sensitive issues in China or in their home markets.
Redefine your strategy
Recent years have seen accelerating geopolitical changes impact the operating environment for European companies. Rising geopolitical competition and the politicisation of technology will further increase the related risks facing businesses.
Trying to address these challenges with a triage approach is insufficient. To succeed in these times, businesses need to adapt their strategies and take new geopolitical fault lines into account.
The good news is that businesses can find new opportunities driven by geopolitical changes if they recognise the changing landscape and what it means for their existing business. Elements they should consider include:
- Developing scenarios: What are the most likely or alternative scenarios? What do these mean for your business sector and jurisdictions? Will your current business strategy be effective when you look at how these scenarios play out over the next two, five or ten years?
- Risk and opportunity mapping: What are the major risks facing your business during the scenario period? What are the major opportunities? Are you thinking about the scenario impacts broadly enough to incorporate not just suppliers and customers, but also your personnel management, brand or technology strategies?
- Strategic adjustments: Based on this analysis, where should you consider making strategic adjustments? Which areas would benefit from new investments to shore up your resilience to disruptions? Which business areas would be less viable under more adverse scenarios? Which new opportunities should you prepare for now?
- Triggers: Not all adjustments should be activated immediately but will be contingent on specific developments. Use triggers or signposts to activate specific changes to avoid having to make unnecessary ones amid uncertain conditions. Identify the regulatory, industry or cost tipping points that optimise your strategy adjustments.
This article was originally published in Eurobiz, Journal of the European Union Chamber of Commerce in China, Issue 65 November/December 2021.