Business & Geopolitics: The Growing Relevance of Geopolitics for European Business

Written by | Monday, July 9th, 2018
@Eubulletin

Today’s international business environment is less predictable, more volatile, and involves more politics than in previous decades. The declining economic weight of the United States and growing doubts about its leadership role in global governance have important implications for European companies. There is a growing likelihood of high-profile incidents in which large enterprises suffer major financial and reputational damage from geopolitical risks – whether through sanctions, state sponsored cyber attacks or geopolitical shocks. But while managers increasingly regard geopolitics as relevant to their activities, for many companies this insight has not yet resulted in changes to their behavior.

 

A fundamental geopolitical trend is the erosion of the US-led liberal international order. Founded during the Second World War by the United States and the United Kingdom, the liberal international order became the overall global order after the end of the Cold War. It is based on principles such as state sovereignty, abstinence of violent border alterations, no use of military violence unless mandated by the United Nations Security Council, an open global economy, free access to the global commons, and the promotion of human rights and democracy. A major cause of the liberal international order’s diminishing performance is the declining role of the United States as its main sponsor.

 

In the years after 2001, the United States was becoming less enthusiastic about issues such as multilateral governance, the role of the Security Council and human rights. The presidency of Donald Trump questions not only multilateral governance, but also the value of an open global economy. But since 2017, a new global order is emerging: a ‘multi-order’, which is a highly diverse system in which international cooperation takes place depending on which policy domain is at stake. The themes discussed include climate change, trade, counter-terrorism, cyber security and crisis management. Actors may cooperate in one domain while opposing each other in a different field. The emerging global order is no longer centered on a core group of western actors, but instead everyone involved.

 

The United States – joined by its main partners the European Union and Japan – has long provided leadership in global governance. It took the initiative to establish core institutions such as the United Nations Security Council, the World Bank, the International Monetary Fund and the World Trade Organization. However, today things are not as they used to be. While the United States remains a very influential actor, its leadership role in global affairs is declining. This leads to uncertainty in parts of the world where the US has long guarded the regional balance of power. Particularly in the Middle East, Europe and East Asia, the United States’ traditional allies are increasingly doubting US security commitments, especially in the long run. They and other states within each region are therefore recalculating and recalibrating their foreign policies, which is, in turn, changing the regional security orders.

 

Economic globalization was previously driven to a large degree by two global powers: first, Britain; and, subsequently, the United States, where each played a key role, but often as a distinct actor. Today’s American corporations and private financial institutions act primarily on behalf of their shareholders, not of the US government. The rapidly advancing role of Chinese companies and banks in the world economy is different in the sense that they operate within policy frameworks that have been defined by their government. Chinese corporations and financial institutions are either directly or indirectly under the influence of the Chinese state. At the same time, China is aiming to advance from a ‘factory economy’ to a ‘headquarter economy’. The expanding organizational power of China in global economic relations is without precedent and is likely to trigger other states to adopt a more interventionist attitude in their external economic relations as well.

 

This geopolitical development brings both opportunities and risks for the companies. A failure to act on new opportunities can lead to a strategic disadvantage in relation to competitors who do engage with these opportunities. The closely related phenomena of boycotts, sanctions and embargoes are not new. For instance, US economic sanctions against countries such as Iran and Cuba have long limited the ability of European companies to engage in activities related to such countries. But, there is an even larger risk relating to China. Unlike in the case of Iran and Cuba, major European companies can hardly avoid doing business with China. The current American strategy of prohibiting access by Chinese firms to advanced technology in the United States is likely to expand and force relevant European companies to choose between doing business with the US or with China, but decision in either direction could cause severe damage to these firms.

 

Geopolitics and cyberspace are likely to become ever more interconnected, especially as technology transfers are becoming politically more sensitive. States can develop sophisticated cyber weapons that have a very large potential impact. For instance, Stuxnet, a computer malware program that infected many computers globally, is thought to have been developed by the United States and Israel to sabotage Iran’s capability to develop nuclear weapons. Any business is vulnerable to cyber attacks, but the possible damage from a state sponsored attack can have a devastating effect on a company. Last but not least are geopolitical shocks. Unexpected, yet major political events, cause sudden changes in the international business environment. These are very hard to predict and once such shocks occur, companies are forced to adapt, but it is difficult for them to prepare in advance given the limited predictability and huge potential impact.

 

‘The Growing Relevance of Geopolitics for European Business’ – Policy Brief by Frans-Paul van der Putten – Clingendael / The Netherlands Institute of International Relations.

(The Policy Brief can be downloaded here)

 

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