A survey conducted by Ipsos, a French market research firm, in late 2021 found that 77% of respondents, or some 22,000 adults, from across 33 countries, believed that 2022 would be a better year than 2021. Looking back, such optimism appears misplaced. However, they are not alone – the International Monetary Fund has since lowered its 2022 global growth forecast three times by a total of 1.7 percentage points since the start of the year, citing economic headwinds caused by Russia’s invasion of Ukraine and the ongoing Covid pandemic.
The conflict in Ukraine, which began in February and is the biggest geopolitical crisis in Europe for decades, is happening at a period when the world is becoming increasingly fractured and polarized. This has caused economic relations to sour as well. Between 2009 to 2021, the world became less trade-friendly with import-restrictive measures increasing both in terms of value and percentage (Figure 1).
In the meantime, there has been a perceptible increase in trade and financial sanctions as a proxy (and less costly alternative) to waging a real war. According to The Economist, the number of individuals and entities on the U.S. sanctions list has surged more than tenfold to 10,000 since 2000. Following Russia’s invasion of Ukraine, major Russian banks have been excluded from SWIFT, an international payment system. At the same time, half of the Russian central bank’s currency reserves have been frozen. The U.S. is also banning all Russian oil and gas imports while the European Union is trying to wean itself off dependence on energy imports from Russia.
These are worrying developments with far-reaching implications for businesses, who will need to review their businesses and supply chains periodically to ensure they are not overly exposed to geopolitical risks or have all of their eggs in one basket. That will be easier said than done because if U.S.-China tensions go from bad to worse, companies with operations in both markets may be forced to pick sides.
Businesses will also have to contend with compliance issues. For instance, new rules and regulations could be imposed on the technology sector as governments attempt to shield crucial data and key technologies from falling into the hands of strategic competitors. In addition, rules to screen inward investment on claims of national security – which often involve long vetting periods – have become commonplace. This obviously makes cross-border investment less attractive in more sensitive industries.
Businesses, especially multinational corporations will have to spend additional time and money to comply with international sanctions. Recent developments stemming from events in Ukraine show that sanctions can be imposed quickly and without notice. This has injected further uncertainty into the operating environment, and leaving businesses with a minefield to cross to make an investment.
A divided world is also affecting the rules-based, multilateral trade system as we know it, which is further exacerbating the uncertainty and unpredictability. Against a highly-charged political backdrop, international organizations such as the World Trade Organization are becoming increasingly sidelined, weakening their ability to effectively resolve cross-jurisdictional disputes through the use of established mechanisms. As a result, disputes that may have previously been settled by existing international rules could escalate into tit-for-tat retaliation.
As governments become increasingly inward looking and protectionist, alliances are being redrawn based on shared ideology and reshaping the business landscape. Under such conditions, commercial decisions can no longer be made solely on such metrics as cost and market opportunities. For CEOs and their boards, this will necessarily mean a change in mindset and approach to doing business.
Wilson Chong, wilson@chamber.org.hk