As the COVID pandemic swept the world in 2020 and changed the way we travel and do business, other disruptions happened too: large wildfires driven by climate change, and a volatile domestic political scene pressured corporate policies over diversity and other social issues — and that’s just what happened in the United States.
The long simmering trade and political tensions between the United States and China; Brexit; chronic instability in the Middle East; even looming bankruptcy of Chinese real estate Evergrande with its $300 billion in off-balance sheet debt — the list of geopolitical risks is endless.
Globalization means that the decisions made by business leaders and policy makers in one country can hugely affect financial markets in another country; everything is connected. This is especially true for large countries such as the United States and China, which are home to a majority of the world’s largest companies.
If global business affairs seem far removed from your own boardroom, you may want to spend time researching how your business is connected to the rest of the world, and just how economic uncertainty in, say, Brazil might affect your bottom line.
Whether your business is a Fortune 500 company or a flexible upstart, it pays dividends to keep one eye on geopolitics and gain a better understanding of how events far away can hit your company today.
Seven Top Geopolitical Risk Factors
Geopolitical risks are beyond our control: wildfire smoke might shut down the airport or a political uprising will suddenly blossom into a full blown revolution. These things happen, and can feel overwhelming.
The one thing a company can do is be better prepared. Yes, risk assessment can be difficult during these volatile times, but the good news is that you don’t have to be an expert on global risk management and political risk identification to limit your level of risk exposure.
Domestic Political Events in Other Countries
Latin America is primed to be a source of unrest because of upcoming elections in Argentina, Mexico, Chile, Brazil and other countries. Combined with the COVID crisis there, that can create a volatile climate that may hurt local financial markets and cross border trading.
Volatility in oil prices is another sore point. The Middle East is facing many challenges, including falling prices on oil and other petroleum products in 2020 thanks to the pandemic driving down consumption. (The price is back up in 2021.) This leaves oil producing nations such as Iraq facing some potential huge financial problems.
Cyberattacks and Lack of Cybercrime Enforcement
An attack on multinational IAAS (Internet as a service or cloud computing companies) may implicate clients on many continents. A hack in India may slow all your receivables in Chicago by days or weeks, presenting a high level of economic risk.
Cybersecurity is also hampered by a lack of international rules, regulations and agreements, making it easy for hackers to exploit the volatility of the cybersecurity world.
Tradewars and Political Events That Change Tariffs and Import/Export Rules
When Britain left the European Union, cross-border trade, customs and tariffs were thrown into a whirlwind that remains unsorted.
Tensions between the United States and China continue to grow and create a high level of enterprise risk and political instability. Human rights issues continue to surface in China, which is showing few signs of political change. Trade sanctions by the United States may have short-term effects, but do little to stabilize the business environment.
This has the potential to become a huge geopolitical risk factor, not just because the oceans are rising and extreme weather is becoming more common, but also because younger generations especially refuse to support industries and products that have the potential to accelerate climate change.
There is also a slow shift in ownership of resources (such as rainforest patches in Brazil) that may have a huge potential effect on exports to the western world.
How Can Global Companies Best Respond to Geopolitical Risks?
It’s a good idea to break geopolitical risk management into several parts before you make investment decisions or attempt mitigation of the outfall from a geopolitical event that impacts your business. McKinsey & Company outlines a great approach:
If a geopolitical event has already impacted your business, start by determining:
- How did we get here?
- Where are we now and what do we know?
- Where are we headed?
- And what can we do about it?
Then break the company response into three different kind of actions:
Short-term. Invest in strategy and different materials so you can complete your business goals and meet deliverables and cut your financial loss.
Mid-term. Should any business operations be changed? Any cybersecurity issues that can be strengthened? Look for case studies from other businesses and study their methodology.
Long-term. Compile key takeaways from your research and involve all stakeholders in future decision-making processes, to be as certain as possible that any long-term changes are solid and well-researched.
Let this research guide your future geopolitical risk analysis and establish solid long-term planning systems that take geopolitical events into consideration.
Carefully consider your corporate narrative. Assure that you make ethical business decisions. For example, perhaps now is a good time to stop using parts manufactured in a country with many human rights issues.
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