Businesses will continue to feel the effects of geopolitical unrest in 2023

According to risk analysts, businesses could be in for another turbulent year as the United States and other world powers compete for dominance in a ne age of geopolitical upheaval.

The preceding year saw the greatest armed conflict in Europe since World War II, significant corporate challenges in Russia, and public demonstrations of friction between the United States and China, two nations that continue to have a close economic relationship. 

Businesses that have become accustomed to unrestricted international trade now confront growing challenges like export limits and a proliferation of penalties.

According to the head of geopolitical Lindsay Newman’s thought leadership at S&P Global Market Intelligence, governments are increasingly leveraging “financial levers” to achieve their objectives in terms of national security. The effects of that development on enterprises are obvious.

Whereas formerly geopolitics would have only been discussed at dinner or cocktail parties, clients are now approaching us and requesting a geopolitical threat management function, according to Dr. Newman. “The era of the post-Cold War is over, and there are major capabilities out there looking to shape the future.”

“We anticipate greater volatility rather than less,” she said.

Risk professionals have evolved more wary. According to a study of more than 1,200 risk experts, policymakers, and business executives conducted by the World Economic Forum, Marsh & McLennan Cos., and Zurich Insurance Group Ltd. and released on Wednesday, geoeconomic altercation ranks among the top three perceived threats over the next two years. 

The cost of living crisis, natural disasters, and extreme weather were the only near-term threats perceived as being greater.

Another poll conducted by conferring firm Protiviti Inc. of more than 1,300 executives revealed a sharp increase in the previous year in risk specialists’ worries about geopolitical developments, international commerce, and a potential restructuring of globalization. 

The geopolitical threats weren’t particularly top of sense for respondents to that survey—talent issues, economic conditions, and labor prices were the top three concerns—but they exhibited some of the highest rises compared with what respondents stated the previous year.

Brendan Hanifin, a lawyer with the law firm Ropes & Gray LLP, said the measures the U.S. has implemented in reaction to Russia’s 2022 invasion of Ukraine approach a “comprehensive sanction by another name.” 

One example of the challenges facing the globalization initiative is McDonald‘s Corp.’s departure from Russia after more than three decades, with its signature arches often being carried away by cranes. More than 1,000 organizations, from consumer trademarks to law firms, departed the country or restricted their commercial operations during last year’s invasion, according to statistics from Yale School of Management 

By June, companies’ losses from their activities in Russia totaled more than $59 billion. Assets worth tons of billions of dollars have been frozen as a result of US, UK, and foreign sanctions.

Meanwhile, tensions between China and the United States have flared up occasionally noticeably. For instance, China has consistently denied American assertions that its remedy of the Uyghur minority community in Xinjiang constitutes “genocide.” 

In response to Nancy Pelosi, the speaker at the time, visiting Taiwan, China started a significant military drill in August. 

U.S. regulations have multiplied in response to the tensions, making doing business with China more challenging. The growth of China’s semiconductor industry has been the subject of US restrictions, which also support domestic chip manufacture. 

The majority of imports from China’s Xinjiang province, a significant supplier of cotton and other products like solar panel parts, are prohibited from entering the United States under the Uyghur Forced Labour Prevention Act, which went into effect in June. 

According to Mr. Hanifin, businesses are asking more and more concerns about how to handle the difficult US-China relationship.

Many businesses were already aware of the dangers of overdependence on China thanks to Covid-19 and the supply chain disruptions it caused. According to Stephenie Gosnell Handler, a lawyer at the law firm Gibson Dunn & Crutcher LLP, even when pandemic-related disruptions subside, legal and regulatory concerns and dangers have pushed some businesses to rethink how they source from the nation. 

She argued that while companies don’t necessarily need to reevaluate their usage of Chinese suppliers, they should consider whether they suffer compliance concerns as a result of new laws aimed at China and perhaps make plans for broader geopolitical effects in the future.

Some observers of China worry that if the government adopts recommendations to examine overseas investments for nationwide security issues, another significant “export” of American capital to China could be hampered. Currently, the U.S. looks for red flags in select foreign inbound investments, but members of Congress from both parties have started to push for a system that would scrutinize U.S. investments overseas with the same rigor.

In the U.S.,  The Committee on Foreign Investment, the organization that might undertake those reviews, has increased staff and indicated a tougher stance. Additionally, the Biden administration recently gave Cfius orders to increase the examination of any agreements that could allow China or other rivals access to vital technologies or jeopardize supply lines.

In November, Gina Raimondo, the secretary of commerce, stated that the United States is not looking to break ties with China. Despite some corporations moving their operations out of China to nations like Vietnam and India, Sridhar Tayur, a supply-chain management specialist and professor at Carnegie Mellon University’s business school, stated that American companies are still deeply ingrained in the country.  

According to Prof. Tayur, many raw materials and components, along with finished items, ultimately come from China, and any attempt by corporations to move their supply chains outside of the nation would take years.

Dr. Newman of S&P projected that despite current conflicts, international cooperation may ultimately succeed if nations work to address common problems like climate change and the transition away from fossil fuels.

There won’t be a circumstance in which nations can take their ball and go home without resolving those issues together, she said. These problems require joint answers because they are common.

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