Long the beneficiaries of a stable geopolitical environment and liberalizing trade flows, multinationals now face a more uncertain, challenging world. National security and differences in values are back on the political agenda with a vengeance. Governments increasingly address commercial questions through the lens of national security and values, not just of economics. Across borders, there is more volatility, antagonism and uncertainty. Fault-lines are opening up in the global economy.

Day-to-day, companies now face the risk of sudden export or import bans on key suppliers and customers — sometimes for clear reasons, sometimes not. They may find acquisition or investor opportunities blocked or subject to lengthy reviews. They may need to decide how to comply with contradictory laws, originating from US and China with extraterritorial reach. And they may need to justify to stakeholders in one country why they continue to operate in another. How then can multinationals, with business models built on operating across borders, navigate these new global fault lines?

The forces underlying the new geopolitics

Two major underlying factors are at work.

First, national differences are coming to the fore, as economic power shifts to higher-growth economies in Asia, in particular China and rivalry takes the place of engagement and cooperation.

China, now the world’s second-largest economy, is choosing a more assertive role, more explicitly pursuing its own interests as it sees fit. As China integrated into the world economy, some western leaders simply assumed a convergence towards western models of market economics and governance. In 2000, President Bill Clinton described China’s WTO accession as “agreeing to import one of democracy’s most cherished values: economic freedom” and said that “the genie of freedom will not go back into the bottle”.^[1]https://macropolo.org/analysis/china-us-engagement-policy/ In 1999, then-presidential candidate George W Bush stated: “Economic freedom creates the habits of liberty, and habits of liberty create the expectations of democracy… Trade freely with China and time is on our side.”^[2]The Death of Engagement, Orville Schell: https://docs.house.gov/meetings/IG/IG00/20200701/110846/HHRG-116-IG00-Wstate-SchellO-20200701.pdf

Instead, under President Xi, the Chinese Communist Party has returned to prominence across all aspects of life: “Party, government, military, civilian, and academic, east, west, south, north and center, the Party leads everything.”^[3]https://www.reuters.com/article/us-china-congress-maoists-idUSKBN1CX005 The emphasis is on the ‘Great Rejuvenation of the Chinese Nation’ and on national security against internal and external threats. This ‘big security’ is defined expansively across eleven categories: political, territorial, military, economic, cultural, social, ecological, science and technology, information, nuclear, and natural resources.^[4]https://www.chinausfocus.com/peace-security/framing-chinas-national-security

On the international stage, Robert Zoellick, then-US Deputy Secretary of State, urged China in 2005 to become a ‘responsible stakeholder’ in the global system. But this did not consider how China might wish to reshape such a system. In fact, rather than accepting or rejecting the western-developed multilateral system, China seeks to contribute, adapt and supplement it based on its own position.

In parallel, under President Trump, the US has judged its interests best-served by less multilateral engagement in general and a more confrontational approach with China. The US sees China’s growing technology and military capabilities as a competitive challenge and a source of at least some of America’s own economic problems: One analysis estimated the US employment impact of the low-cost manufacturing ‘China Shock’ at 2.4 million jobs.^[5]https://www.nber.org/papers/w21906 The US government has also criticized China for its ‘economic aggression’ and ‘state-sponsored intellectual property theft’.^[6]https://www.whitehouse.gov/wp-content/uploads/2018/06/FINAL-China-Technology-Report-6.18.18-PDF.pdf The US-China relationship is now framed primarily as a ‘strategic competition’.^[7]https://www.whitehouse.gov/wp-content/uploads/2020/05/U.S.-Strategic-Approach-to-The-Peoples-Republic-of-China-Report-5.20.20.pdf The open question is how wide-ranging, intense, and dangerous this competition will be. Is it a New Cold War?

Political concerns about globalization go wider than the US and China. Governments now see the risks more than the rewards of interdependence. Whereas before, voters saw the benefits of lower-price manufactured imports and increased international travel, many now pay more attention to lost manufacturing jobs at home, fears of uncontrolled immigration and the risk of other countries withholding their vital supplies in times of need. Leaders from India to Europe to Brazil speak more vocally of national identity and values. Ideology is back in the discourse.

Second, the all-pervasive role of technology and data has changed the nature of security risk. Technology is increasingly ‘dual-use’, with both civilian and military applications, making it a challenge to split economic considerations from national security. It makes broad swathes of national infrastructure vulnerable to remote disruption through technology networks. The UK government identifies thirteen areas of Critical National Infrastructure requiring protection, including Energy, Finance, Transport and Water.

Technology also raises new ethical questions in areas such as AI and facial recognition. Countries are developing, deploying and regulating these in markedly different ways, especially in the area of surveillance. And, ultimately, economic prosperity underpins national security — which requires leadership in key technologies. China identified ten such industries for investment in its Made in China 2025 initiative.

Taken together, these two changes point to a world where countries each take a more integrated view of security, economics and values at national level, while diverging in important ways at the international level. ‘Strategic autonomy’ is favored over interdependence. These fundamentals will not change easily or quickly regardless of who leads a country. Where leaders do make a difference is in their choices about what to do and how to do it. Alongside this, the faltering multilateral system or ‘rules-based order’ makes tensions worse and uncertainty greater. Much needs updating — to reflect shifts in economic power and to establish ‘rules of the game’ in fast-changing areas such as technology and environment. This too calls for leaders to build the coalitions needed to do this. But whose rules? Whose order?

One World: How Many Systems?

Are we heading, as some propose, to ‘One World, Two Systems’? This ill-defined phrase harks back to a Cold War world split between NATO and the Soviet Bloc. China’s development of a distinct internet ecosystem behind the ‘Great Firewall’ is then called in evidence. Will the world divide again into ‘spheres of influence’, operating on different technology standards and trading rules?

Such a clean split is highly unlikely. Countries, like companies, want to avoid choosing sides, maintain options and pursue their own agenda. Even the Cold War saw the founding of the Non-Aligned Movement of nations.

Relationships between countries are complex and many-dimensioned, not binary. Recall that, prior to 3G, Korea, Japan, the US and Europe operated on incompatible mobile phone standards. Today the choice for 5G is between different suppliers on the same standard. Australia, Japan, Singapore, Vietnam and others have now signed two, partly-overlapping, free-trade agreements, the CPTPP^[8]The Comprehensive and Progressive Agreement for Trans-Pacific Partnership: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam and the RCEP.^[9]The Regional Comprehensive Economic Partnership: Australia, Brunei, Cambodia, China, Indonesia, Japan, Laos, Malaysia, Myanmar, New Zealand, the Philippines, Singapore, South Korea, Thailand, and … Continue reading One includes China and one does not — at least currently. The US is in neither.

A more likely future is a world will be made of up of multiple groupings, with overlapping members and different groups focused on different purposes, such as security, technology and trade and with different geographical reach. This is not a binary ‘decoupled world’, but rather a different world, adjusting to change as explored in the BCG paper “Is Decoupling Bad?”.^[10]https://bcghendersoninstitute.com/is-decoupling-bad-1fd836d3c913 In some areas — health pandemic monitoring may be one — the benefits of a single common approach will justify compromises between countries, whatever their differences. In others, a smaller group of countries will agree closer alignment. The European Union stands out here currently. New initiatives are still taking shape, such as the ‘Quad’^[11]Quad: Australia, India, Japan, US and ‘D-10’^[12]D-10: G-7 economies (Canada, France, Germany, Italy, Japan, the United Kingdom and the United States) plus Australia, India, South Korea, a would-be grouping of ten democracies that the UK has proposed.

Companies will need to keep navigating tensions, contradictions and opportunities in the relations between countries. The choices that national leaders make will matter as much as the underlying economic and technological forces.

Beyond the headlines: Understanding the political dynamics

It is not yet clear what will replace the stability and structure of the post-Cold War order. To see beyond the noise of day-to-day headlines, companies should consider three dimensions of international relations for insight into how the political dynamics and key bilateral relationships are developing:

1. Autonomy vs Interdependence: How do national government leaders see the balance of costs and benefits between ‘autonomy’ and ‘interdependence’ in their foreign policy? And in regard to which countries? US-China relations, of course, stand out. But so too India’s relations with China, the US and Japan. And the EU-US relationship, given an EU focus on ‘strategic autonomy’.
2. Antagonism vs Acceptance: Do national leaders share some form of mutual understanding about the interests of each country? Or is the situation inherently zero-sum with a reluctance or inability to reconcile contradictory positions? Examples include the US-China military power balance in Pacific and differing positions on human rights. But also, more directly for business, trade practices and technology competition.
3. Volatility vs Stability: How consistent is the focus and level of antagonism or acceptance between countries? Recently, there has been more volatility on both the US and Chinese sides, with emotional rhetoric often not followed by consistent policy actions. Stability reduces the risk of misunderstanding and helps long-term planning.

Geopolitical fault-lines open up where leaders push for significantly more autonomy from the other. They are deepest and most harmful where the antagonism and volatility is the greatest. They also tend to be self-reinforcing. Following the US bans on certain semiconductor exports to China, China is redoubling its efforts to build its own capabilities, vindicated in its assessment that dependence on the US was a risk.

Seasoned observers argue that strategic competition between the US and China is inevitable on multiple fronts. But leaders can act to agree rules and guide-rails for this competition. They can move, as former Australian Prime Minister Kevin Rudd articulates, from ‘unmanaged’ to ‘managed strategic competition’.^[13]https://kevinrudd.com/2020/07/09/the-us-china-relationship-needs-a-new-organising-principle/ They can also agree to cooperate on global issues such as environment and health and to update and adapt multilateral rules of engagement to today’s world. Fu Ying, a former Vice-Minister of Foreign Affairs of China, argues that the key issue is whether the US and China are ‘able to objectively judge each other’s strengths and purposes, and find a middle ground where their respective goals won’t be mutually exclusive’.^[14]https://www.chinausfocus.com/foreign-policy/after-the-pandemic-then-what This will make the difference between ‘zero-sum confrontation’ and ‘co-opetition’.

All this takes time, effort and focus but offers the prospect of reduced antagonism and increased stability. It may in time reduce the impetus for autonomy — but differing interests will remain and so will the fault-lines.

Which business sectors are most affected?

A nation-based, security-and-values perspective has understandably long dominated sectors such as defense and aerospace. It has played a role too in energy, resources and some defined areas of technology. But now dating apps, face masks and lobsters get attention too. Does geopolitics now affect every sector?

Data collection from a country’s citizens is increasingly viewed from a national security perspective. The US blocked the acquisition of Grindr, a gay dating app, by a Chinese company on grounds of preventing Chinese access to sensitive data. The Trump administration questioned whether Chinese fintech companies such as Alipay pose risks too. As every business becomes a ‘data business’, where do countries draw the line on security? And when is a security risk assessment really cover for protectionism or sheer anti-foreign bias?

The COVID-19 pandemic highlighted China’s dominant role in the global manufacturing of face masks. While Chinese production and exports grew rapidly to meet demand, countries see now a dependency risk and aim to build their own manufacturing capacity. In which sectors does it make sense to pay to build up self-sufficiency rather than buy from the lowest-price supply source? And who will pay?

One analysis identified 56% of EU exports to China as ‘completely benign’, free of any security implications and placed 83% of Chinese imports into the EU in the same category.^[15]Exploring a Green List for EU-China Economic Relations: https://rhg.com/research/green-list/ But when tensions rise and fault-lines between countries deepen everything becomes ‘fair game’. Anything can be deemed a risk.

Individual businesses can fall victim to broader tensions in bilateral relationships. In 2017, China banned packaged tour groups to Korea in response to the basing there of US THAAD missiles. One year later, the ban was lifted as relations thawed. As China’s relations with Australia hit a low, so China introduces new inspections of lobster imports to address potential health risks, that effectively block the imports. The UK’s new National Security and Investment Bill proposes mandatory review of acquisitions by foreign acquirers in sectors as broad as ‘transport’, ‘AI’, and ‘critical suppliers to government’. However tightly worded the legislation, what affects national security is ultimately open to political interpretation, based on the geopolitical environment.

Geopolitical risk for companies is now pervasive, beyond neatly-segregated industry categories. Technology and data are part of the reason, but risk can flare up suddenly when international relations become tense, whatever the business.

What should companies do?

In this changed and changing world, companies need to determine how geopolitics affects their own business. A world of greater autonomy and — likely — continued antagonism places a premium on companies being good ‘corporate citizens’ in each country. But, when fault-lines between countries deepen, it is the cross-border challenges that become greater, causing tensions internally and with stakeholders. HSBC received extensive parliamentary criticism in the UK for its public support of the Hong Kong National Security Law. Google’s US employees were reportedly disturbed by Google’s plan, ‘Isolated Region’, to provide ring-fenced cloud services in China’s controlled internet environment. In extreme cases of war, multinationals have had to split operations as Coca Cola did in Germany during World War Two.

Companies need to consider action in six areas:

1. Assess and monitor the risks on an ongoing basis: In each country where they operate, companies need to assess the security risks and questions of values potentially associated with their business. In some situations, assessing risk to individual employees is also important. The greater challenge comes for multinationals that straddle geopolitical fault-lines — or are at risk from sudden changes in where those fault-lines lie. They need first to assess which fault-lines are most relevant; how deep and fixed they are; where they cut across the business; and what new ones may emerge. The perspective to take is that of a skeptical outsider or a determined competitor, seeking to stretch these arguments for competitive advantage. Companies need to invest in enhanced monitoring of the geopolitical environment and identify where contingency planning makes sense in the face of uncertainty.
2. Be an even better corporate citizen in each country: Foreign multinationals have long committed to making a ‘second home’ in major markets such as China. Now is the time to double down on these efforts. Government relations and compliance functions may need upgrading. Look also to demonstrate how multinational operations bring local value to a country.
3. Consider where separation makes sense: By increasing operational separation between countries, organizational changes can help address external perceptions of risk and foreign control. Changes to governance and ownership structures, additional local stock market listings and internal reorganization may all have a role. The argument for localizing production and supply chains strengthens. Strong local talent, with the corporate credibility to decide locally, while remaining consistent with global principles, becomes more important. In the most extreme cases, spinning off a country operation completely may be the solution.
4. Determine whether growth opportunities have shifted: Growth across fault-lines has become tougher. Acquisition opportunities may dry up. Companies in a start-up phase or a weaker competitive position may find the best exit route.
5. Look for the opportunities from geopolitical risk: Change brings opportunity. Companies may benefit from shifting competitive dynamics as a company’s national identity becomes a factor in some purchasing decisions. Industrial policy for key technologies and domestic manufacturing is back on the agenda in the US and Europe — a response to China’s own policies. The Japanese government is offering subsidies to relocate manufacturing from China back to home and to other countries. Companies need to assess the durability of such policy changes and whether they change the calculus on where and how to invest. Competitively, dynamics can also shift.
6. Be a force for good in shaping the context: Companies have the opportunity to lead and help address geopolitical challenges through acts of corporate statesmanship. BCG defines corporate statesmanship as “the action of a company, and in particular of its CEO, to intervene in public affairs to foster collective action in support of the common good beyond the scope of his or her enlightened self-interest.”^[16]https://www.bcg.com/en-us/publications/2018/case-corporate-statesmanship For some, in sensitive commercial situations, keeping one’s head down may be the right solution. But multinationals have benefited greatly from a stable, multilateral rules-based order. Especially in the areas of trade and investment, they are well-placed to contribute to the evolution of this multilateral system, as it adapts to new challenges in environment and technology and the shifting role of countries within the world economy. They can connect and bring people together across borders, find commonalities in what appear to be differences of values, and propose practical solutions to address sometimes-misplaced fears of security risk such as in the area of data and technology transfer. This can both strengthen a company’s competitive edge and contribute to the common good.