Entrepreneurship and geopolitical change

“It was the best of times, it was the worst of times.” The opening line of Charles Dickens’ 1859 novel, A Tale of Two Cities, can usefully be borrowed to describe the global business environment today. On the one hand, geopolitical tensions between world powers and within regions have brought to an end the era of benign globalisation: trade barriers are rising, and global supply chains have become longer and less secure.

On the other hand, the new period of ‘friend-shoring’, ‘de-risking’ and ‘self-reliance’ is throwing up fresh opportunities: trade is becoming more concentrated within regions and the re-location of production is stimulating business activity in home and ‘near-shore’ markets. In the years to come, entrepreneurs will do more business in their own regions, rather than between regions, or with countries that share similar values to their own.

We are living through a change of era. Globalisation began to slow in 2008, hit by the fallout from the financial crisis, before the slowdown became more severe over the last five years as geopolitical tensions grew. These increased tensions have gone hand in hand with a rise in impediments to the free flow of goods and capital: around 3,000 trade restricting measures were imposed in 2022 – nearly 3 times the number imposed in 2019¹.

The shift in global trading patterns is entwined with today’s changing geopolitical landscape – the latest of three post-World War Two periods of international and trade relations. In the first phase, the world quickly settled into the Cold War, which was fairly predictable. Even if there was an ideological divide between East and West, with some non-aligned states in between, there was a minimum amount of dialogue and trust between powers. Financial markets knew that any international crisis would be de-escalated to keep the ‘war’ cold rather than turning hot, the price of which would have been mutually assured destruction. During the Cuban Missile Crisis of October 1962, the S&P500² dropped about 7 percent (in USD), which was mostly recovered by the time Khrushchev blinked.

Measures distorting trade and investment

In the second phase, the Cold War was followed by a period from 1990 to around 2008 during which the US was the sole guarantor of world peace and international free trade. A sense that Western liberal values had triumphed led to hopes that there would be no more major wars, as empirical evidence shows liberal democracies do not fight each other. As if to strengthen this theory, China joined the World Trade Organization in 2001 – a move the US hoped would see Beijing move towards a liberal, democratic model.

But, in the final phase, things started to unravel from 2008. China and Russia wanted to reassert their own greatness and in the global south a demand grew to replace the old world order, which was perceived as Western. Today, the result is fragmentation – both when it comes to politics and free trade. The West will continue to trade with China but does not want to depend on a country it is ideologically opposed to for key products and components or technology. At a corporate level, this means the China Plus One strategy has become the minimum rule of safety when it comes to supply chains.

Annual growth rate of bank loans to thenon-financial private sector in the euro area

This new normal shapes the framework within which entrepreneurs can work. It may not mean diminishing investment. But it does mean a greater concentration of trade within regions. China has lost ground as a source of US imports and as a destination for US investment³. Global value chains have lengthened, which is especially significant for supplier-customer linkages from China to the United States⁴. However, there is some evidence that a group of ‘connector’ countries – such as Mexico and Vietnam – are positioned to benefit from the US ‘de-risking’ its trade with China. These countries have gained the most in US import shares and gained more in China’s export shares. They are also receiving more Chinese foreign direct investment.

For the foreseeable future, the world will likely remain in this new framework. The outcome of this year’s US presidential election will make little odds, given the structural differences between the major world powers. There is no going back to the era of benign globalisation – not for another generation, at least.