Impact of geopolitical tumult on businesses to continue in 2023, say risk experts

Risk experts predict businesses could face another year of tumult as the U.S. and international powers jockey for position in a new era of geopolitical shifts.

The previous year brought Europe’s largest armed conflict since World War II and broad complications to business in Russia, as well as public displays of tension between the U.S. and China, two countries that nonetheless remain deeply intertwined economically. Businesses that have grown used to free, global trade have faced mounting complications, such as proliferating sanctions and export controls.

Governments are increasingly using "financial levers" to advance national security goals, said Lindsay Newman, head of geopolitical thought leadership for S&P Global Market Intelligence. That development has clear implications for businesses.

"Where geopolitics would have been reserved for dinner-party conversation or a cocktail-party conversation, clients are coming to us and saying, ‘We need a geopolitical risk management function,’" Dr. Newman said. "The post-Cold War era is clearly over, and there are major powers out there looking to shape the future."

BLOCKADE OF TAIWAN BY CHINA COULD COST WORLD ECONOMY OVER $2 TRILLION, REPORT FINDS

"We see more volatility ahead rather than less," she said.

Risk professionals have grown more wary. Geoeconomic confrontation ranks among the top three perceived risks over the next two years, according to a survey of more than 1,200 risk experts, policy makers and industry leaders released Wednesday by the World Economic Forum, Marsh & McLennan Cos. and Zurich Insurance Group Ltd. The only near-term risks perceived as greater were the cost-of-living crisis, and natural disasters and extreme weather.

Another survey, this time of more than 1,300 executives by consulting firm Protiviti Inc., also showed a dramatic jump in the last year in risk experts’ concerns about geopolitical shifts, global trade and a potential reshaping of globalization. The geopolitical risks weren’t necessarily top of mind for respondents to that survey—talent challenges, economic conditions and labor costs were the top three concerns—but they showed some of the largest jumps compared with what respondents said the previous year.

Brendan Hanifin, a partner with the law firm Ropes & Gray LLP, said the measures the U.S. has imposed in response to Russia’s 2022 invasion of Ukraine approach a "comprehensive embargo by another name." 

McDonald’s Corp.’s exit from Russia after more than three decades—with its trademark arches in some instances carted away by crane—exemplified some of the difficulty facing the globalization project. More than 1,000 companies, from consumer brands to law firms, left the country or curtailed their business operations after last year’s invasion, according to data from Yale School of Management.

Ticker	Security	Last	Change	Change %
MCD	MCDONALD'S CORP.	265.40	-0.75	-0.28%

By June, businesses had racked up more than $59 billion in losses from their Russia operations. U.S., U.K. and other sanctions have frozen tens of billions of dollars in assets. 

Meanwhile, China and the U.S. have butted heads, in some instances conspicuously. China, for example, has repeatedly rejected U.S. claims that its treatment of the Uyghur minority group in Xinjiang amounts to a "genocide." China launched a major military exercise in August in response to a visit to Taiwan by then-Speaker Nancy Pelosi.

Amid the tensions, U.S. rules have proliferated making it more difficult to do business with China. U.S. restrictions have targeted the development of China’s semiconductor industry while subsidizing domestic chip production. The Uyghur Forced Labor Prevention Act, which came into force in June, blocks most imports to the U.S. from the country’s Xinjiang region, a major source of cotton and solar panel components, among other goods.  

Companies increasingly pose questions about how to manage the complicated U.S. relationship with China, Mr. Hanifin said.

Covid-19 and the attendant disruptions to supply chains already had alerted many companies to the risk of overrelying on China. But even as pandemic-related disruptions recede, legal and compliance uncertainties and risks have prompted some companies to review how they source from the country, said Stephenie Gosnell Handler, a partner at the law firm Gibson Dunn & Crutcher LLP. 

Businesses don’t necessarily need to rethink the use of Chinese suppliers, she said, but they should be reviewing whether they face compliance risks because of new regulations targeting China and possibly plan for broader geopolitical impact in the future.

JPMORGAN CEO JAMIE DIMON ON CHINA: ‘WE SHOULDN’T BE AFRAID’

Some China watchers fear that another major "export" from the U.S. to China—U.S. investment dollars—could be hindered if the government takes up proposals to review outbound investments for national security concerns. Currently, the U.S. reviews certain inbound investments by foreigners for red flags, but members of Congress from both parties have begun to agitate for a regime that would apply similar scrutiny to U.S. investments abroad.

The body that could potentially conduct those reviews, the Committee on Foreign Investment in the U.S., has added personnel and signaled a toughening approach. The Biden administration also recently instructed Cfius to heighten scrutiny of deals that may give China or other adversaries access to critical technologies or endanger supply chains.

Commerce Secretary Gina Raimondo said in November that the U.S. isn’t seeking to decouple from China. Though some companies are shifting operations out of China, to places such as Vietnam and India, U.S. businesses are still heavily enmeshed in the country, said Sridhar Tayur, a supply-chain management expert who teaches at Carnegie Mellon University’s business school.  

Prof. Tayur said in addition to finished goods, many raw materials and components ultimately trace back to China, and any effort by businesses to shift supply chains out of the country would take years.

CLICK HERE TO GET THE FOX BUSINESS APP

S&P’s Dr. Newman predicted that, notwithstanding current tensions, international cooperation in the long term could prevail as countries try to deal with collective challenges such as climate change and transition away from fossil fuels.

"There’s not going to be a situation where countries can take their ball and go home and not solve those problems together," she said. "These challenges are shared and will require shared solutions."