Amid one of the most conflict-ridden years since the turn of the century, geopolitical risk has generated new structural realities in the global economy.

Businesses are now contending with economic weapons including sanctions, protectionism and the spiralling US-China tech war – as well as direct supply chain disruption in areas such as the Red Sea.  

Ahead of GlobalData’s Understanding Geopolitics and its Role in Shaping the New Economic Order webinar on Thursday (21 March), Christopher Granville, managing director for Global Political Research at TS Lombard, and Michael Orme, thematic analyst at GlobalData, answered questions on the systemic risk posed by geopolitics.

Geopolitics has always had a significant impact on business. Is this even more pressing now – and why?

CG: The main difference between geopolitical impacts on business past and present is that for most of history these impacts were episodic, whereas, in today’s world, in which geopolitical tensions hinge on the US-China rivalry, the impacts are systemic.

Episodically, Great Power competition has always involved potential and actual armed conflicts. The competition resulted in trade barriers, and – more seriously – periodic wars that caused damage/destruction/plunder of physical plant and the displacement/destruction of labour. But wars came and went (“episodic”).

In the Age of European Imperialism, geopolitics also had a positive impact (though less positive for the colonised peoples) in the sense that new colonies, as they were established from time to time by European powers and later the US, opened up captive markets for businesses operating out of the colonising companies.

Systemically, the difference now is not so much that the world is locked into a long-term competition between the superpowers, US and China, which both participants clearly regard as a ‘zero-sum’ contest (i.e. win-win attitudes that were apparent in the period of US-Chinese engagement around the turn of the millennium have now largely disappeared). If that were all there is to it, there would be nothing new: for a half-century after the end of WWII, the world lived through a similar ‘systemic’ confrontation – between the US and the USSR.

The major difference is that whereas the US and USSR led two self-contained economic blocks with minimal trade and investment links straddling the divide, the US and China have entered into a zero-sum struggle for global mastery just at the point where they had spent the preceding three decades building up deep mutual economic ties, consisting not only of trade and investment but also complex supply chains. The inexorable disentanglement of all these various ties will leave few sectors and companies unaffected in some way.

The ’systemic’ impacts do not even end there. In contrast to the ‘gunboat diplomacy’ imperial powers in the nineteenth century, today’s coercive method is the economic weapon, also known as ‘sanctions’. Companies in all tradable sectors must monitor and adapt to (sometimes on pain of criminal liability) a relentless avalanche of sanctions measures, mainly emanating from the US (and its allies), in response to which China (and other US targets like Russia) then retaliate, often ‘asymmetrically’. The radical cut-off of trade, investment and financial flows between the West and Russia after the outbreak of the Ukraine war in 2022 not only generated substantial losses for thousands of firms but serves as a warning of a geoeconomic shock of an altogether greater order of magnitude if China were to make a military move against Taiwan.

The impacts on business are not only ‘systemic’ but also acute. The reason for this is that the US-China struggle is still at an early stage when neither side shows the slightest inclination to compromise over anything (the same goes for the confrontations with Russia, Iran and North Korea). This recalls the international situation during the first few decades of the Cold War which led, in the end, to a more stable equilibrium between the superpowers based on mutually respected spheres of core interest (with armed clashes kept on the margins in the form of proxy wars in former European colonies from south-east Asia to Africa and the Middle East). But that relative (if still precarious) equilibrium was only attained after the world had brushed with nuclear annihilation in the Cuban Missile Crisis of 1962. If that experience is anything to go by, present geopolitical tensions – and their economic and business impacts – may have to escalate a good deal further from their already rather high levels before some degree of stability and predictability is restored.

What are the guiding principles of ‘democratic peace theory’? Does it leave businesses located in non-democratic states more susceptible to the impact of geopolitics?

CG: ‘Democratic peace theory’ posits that democratic countries do not go to war with each other (because their government are answerable to their voters, who by and large, do not want to have to fight in wars). Like all theories, this is arguable and counter-examples might be cited: but the theory on the whole reflects practical experience and seems valid in a common-sense way. Applying this theory to business risks, the conclusion might appear to be that companies should mitigate geopolitical risk by concentrating their operations in democratic countries (‘friend-shoring’, ‘re-shoring’).

A more sceptical view, however, would be that friend-shoring really just means friends of the US – and in this circle of friendly countries that, to varying degrees, are geopolitically aligned with the US, not all are democratic. The key criterion for mitigation of geopolitically-related business risks would therefore be not ‘democracy’ but being in the US tent.

Conversely, countries that are outside the US alliance system and which, for one reason or the other, have strategic importance will be in a state of geopolitical tension with the US even if they are quite democratic (Iran for example, a prime US adversary, is more democratic – or, at least, less undemocratic – than Saudi Arabia, a firm US ally).

Some of the best opportunities in the present geopolitical environment may be found in countries that chart a middle non-aligned course between the US- and China-oriented camps. India is now the single most important country charting such a course through the geopolitical middle – being both a member of the BRICS grouping and a participant in ‘The Quad’, a military coordination association with the US designed to strategically contain China.

Against the ‘democratic peace theory’ stands the ‘realist’ approach to international relations which posits that powers that are not grouped together in hierarchical alliance systems (e.g. the US as top dog in its alliance system, with all its allies subordinate to it) will always be in a state of mutual suspicion regardless of their domestic political systems. On this view, China would still be regarded as an adversary by the US even if it became more democratic. This realist view was powerfully expressed by the US political scientist Kenneth Waltz in these terms:

“If each state, being stable, strove only for security, and had no designs on its neighbours, all states would nevertheless remain insecure; for the means of security for one state are, in their very existence, the means by which other states are threatened.”

In other words, from the point of view of business, there is nowhere to hide from political risk.  

Which regions are facing the most pressure with commodity nationalism at the moment? Do you envision greater protectionism over the critical minerals of Latin America, for example, amid rampant Chinese and US interest?

MO: The commodity issue is mostly to do with stranded assets due to the chronic lack of mining investment since 2008 with the global re-arming, reshoring and energy conversion. It is likely, for example, that there will be a major crunch in copper needed in everything with most of the easy-to-get quality ores already mined.

This also applies to all the other critical minerals and metals at crunch point. In the case of lithium, it’ll happen when the price stabilises after its jagged price collapse due to overspeculation and as and when smartphone and EV sales perk up.

Mass demand for lithium will not get underway across the world until national supercharger infrastructures are built and prices fall appreciably. Meanwhile, Chile and Bolivia are nationalising their lithium industries with the latter wanting out on ESG grounds anyway. And what about Argentina under new President Javier Milei, previously giving itself over China?

Of course, a big geopolitical factor is that over 90% of all ores have to be smelted and refined in China currently to become useable.

Which nations are putting most energy and money into rare earth mining capacity?

MO: On rare earths (REEs), Australia, the US and Myanmar lag China which produces 60% and processes over 80% of the world’s reserves. Only a few years ago, China controlled 90% and 90% in both cases. China needs to get what leverage it can as RoW gets onto cutting dependence on China by initiating mining and refining REE projects – REES are everywhere. Japan is leading an initiative in the G7 to mine and refine REEs in Africa and LATAM.

On EVs – the market is vastly overcapitalised and supplied following deliberate policy in China aiming to do with EVs what they did to steel and solar cells; swamp the global market. Chinese products are affordable and high quality – so what will the US and Europe do about it? Would they impose tariffs and non-tariff discrimination even on non-Chinese vehicles that carry Chinese components, such as batteries? They won’t be able to afford to, since their own auto companies lag the Chinese in the round.