Companies facing challenges of geopolitical tensions

What are the defining geopolitical trends of recent years?

Parag Khanna The most significant geopolitical trend of recent years is the emergence of a coalition of states across West and East that are seeking to coordinate their responses to China’s rise. One might say that China’s rise was the salient trend of the 2010s. The 2020s are therefore a period in which we are witnessing strategic realignments to counter China’s aggressive ambitions. On the one hand, these take the form of military alliances, such as the Quadrilateral Security Dialogue (QUAD) between the US, India, Japan, and Australia, and AUKUS, the security pact between Australia, the UK, and the US. On the other, there are also more commercial, technological, and infrastructural maneuvers such as the CHIPS Act (to shift semiconductor production away from greater China towards the US and allied states) and the Build Back Better World (B3W) initiative to compete with China’s Belt and Road (BRI) initiative by offering concessional rates for infrastructure finance across developing countries. What’s most notable is that none of these Western initiatives even existed five years ago. They are very much a reaction to China’s previous actions, and therefore remind us that geopolitics is complex and non-linear. It is not merely a matter of China’s unhindered ascent to geopolitical primacy. On the contrary, these most recent trends point to a world that will be more multipolar.

Russia’s invasion of Ukraine in February 2022 prompted a strong backlash from the West. The West is showing a united front in the face of the threat from Russia, and Russia is orienting itself towards the East. What are the geopolitical effects of the war in Ukraine?

Khanna The Russian invasion of Ukraine is certainly accelerating specific trends that were already underway. The first is Russia’s own demise as a power. Its significant military losses, economic contraction, diplomatic isolation, and the outflow of talent will only hasten what has been a multi-decade decline since the collapse of the Soviet Union. There is currently no indication that Russia will be able to engineer a turnaround as a society, economy, or polity. Russia’s tilt towards Asia is also accelerating. It was under Putin in the early 2010s that Russia began more serious engagement with Asia, including strengthening ties with its Cold War partner India, expanding its trade and investment with China, and improving ties with Japan. Many Western diplomats and analysts have been surprised that Asian powers did not by and large take the West’s side in condemning Russia’s invasion, but these countries have been primarily focused on maintaining access to flows of oil and gas that power their economies. True, the rising price of oil has weakened their fiscal position, but they are now also moving ahead with new oil and gas pipeline projects that will enable Russia to expand supplies to them. As Europe accelerates its efforts towards energy independence from Russia, Russia will become ever more deeply embedded in the Asian system. In fact, I often refer to Russia as “North Asia,” which is geographically correct – and always has been – but is jarring for the Western conception of Russia’s place in the world as a state that haltingly aspired to join the West. That is simply no longer the case. In that sense, Russia is following the path of Turkey, but in a far more extreme form, since Turkey remains a NATO member and is not pursuing autarky (whether involuntarily or by choice). But both Russia and Turkey are increasingly focused on Asian trade, investment, infrastructure, and security arrangements such as the Belt and Road initiative, the Asian Infrastructure Investment Bank, and the Shanghai Cooperation Organization.

«Western firms are already back in Saudi Arabia in a big way, and I can imagine tentative steps towards re-engaging with Russia after the war is over.»

Dr. Parag Khanna

In recent years, “America First” and “Made in China 2025” have emerged as initiatives aimed at protecting and strengthening domestic economies against foreign competition. Foreign companies are struggling with regulations that distort competition. What role do economic measures play in connection with geopolitics?

Khanna Economic measures, investment restrictions, resource nationalism, and other measures are now worldwide phenomena. What used to be friendly competition among export credit agencies amidst widening and deepening interdependence has become a far more geopolitically driven process of beggar-thy-neighbor protectionism, coupled with strong subsidies to near-shore industries. I fully expect this to continue in the years ahead, but I also see it as a process of optimization that can potentially be win-win. First of all, it could reduce domestic socioeconomic tensions if it creates jobs and increases investments in the productivity and skills of each country’s own population base. This might be somewhat inflationary, but it can also rebuild the industrial base and promote national self-sufficiency and solidarity. Second, it could be better for the environment. If we can have more regional energy markets driven by gas and renewables rather than shipping oil globally, that would be good for the planet. The same applies to agricultural supply chains, which account for 15% of global emissions. So somewhat more autarky is actually desirable if done right. If this process results in the stabilization of growth across the major economic zones – North America, Europe, Asia – then firms will certainly wish to remain global because they need to pursue global markets and profits. I believe multinationals will take on a more regional structure as they seek to comply with local regulations and appear more “local” to better compete with incumbents. So we might see fewer traditional multinational companies and more joint ventures and partnerships.

Another important “transmission channel” through which companies are affected by geopolitical developments are economic sanctions. How do you assess the current situation in this respect, and where will the journey take us?

Khanna First and foremost, the sudden imposition of sanctions is always a possibility, and thus the present situation is a clear reminder that corporate management should never assume a frictionless global operating environment. This is a mistake that executives made in the 1990s until the 9/11 terrorist attacks, and they again became complacent in the run-up to the Russian invasion of Ukraine and China’s hardening of its technological regulations. Second, sanctions tend to be counterproductive, in that they harm the citizens more than regimes, and also harm our own businesses, which suddenly face write-downs in key markets and prolonged uncertainty in their supply chains and operations. Third, it is almost impossible to completely isolate countries today. In a world of multipolar multi-alignment, there is little binding coherence to sanctions. Russia is turning to China and India, for example, as has Iran. Lastly, sanctions regimes tend to fray rather quickly. The Chinese market is too attractive for Western firms to stay away from, Western firms are already back in Saudi Arabia in a big way, and I can imagine tentative steps towards re-engaging with Russia after the war is over. It always seems inconceivable in moments of tension, yet supply and demand tend to dictate the long-term outcome more than political convictions.

How do you assess the position of small countries, and especially Switzerland, in an environment marked by geopolitical tensions?

Khanna I have long been an advocate of small states as role models for governance, particularly Switzerland and Singapore (both of which are highlighted in my book “Technocracy in America”). Both are open economies, innovative, attractive to talent, and globally opportunistic in their commercial ties. All states should behave in this fashion. Of course, small states are “price takers,” in that they cannot shape the global landscape of conflict and regulation. But the steadiness of their performance despite this volatility influences how larger states think and behave, as they can learn from smaller states about such matters as efficiency in public spending and stimulating innovation. Switzerland has a long history of neutrality and always keeping the door open to dialogue with hostile states such as Russia or Iran. This is an essential function that others do not fulfill, and yet it is a fundamental foundation of diplomacy. I have great respect for the role Switzer-land continues to play in reminding us of the central importance of diplomatic dialogue – especially in times of great uncertainty.