Eurasia Group’s Ian Bremmer analyzes current geopolitical trends and what they mean for companies and boards.
In my last update for this quarterly, I laid out the structural factors underpinning the “geopolitical recession” the world now finds itself in. In short, absent clear global leadership, world leaders will struggle mightily to address growing global problems, both individually and collectively. For business leaders, that will require more investment in scenario planning and stress testing. It also means drawing up contingency plans to shorten supply chains, cutting long-term fixed costs, and limiting business exposure to political relationships that have considerable potential to go south.
In the last three months, we have begun to see world leaders increasingly adapt to this new geopolitical reality. The G7 in Biarritz over the summer was the least headlinemaking G7 to take place in the Trump era. Having learned their lessons over the first almost-three years of the Trump presidency, most G7 leaders (with the mild exception of Germany’s Angela Merkel) went out of their way not to antagonize the American president on matters they deemed nonessential, and it largely worked.
But this policy of nonconfrontation by Western leaders extends far beyond Trump. In Hong Kong, most are playing mum as Beijing continues to wait out the protests that are roiling the semiautonomous territory. While Beijing believes (correctly, in my view) it can weather the political storm—especially as the protests have begun to show signs of waning—consumer-oriented businesses based there are taking a beating, and the lack of outcry from Western governments isn’t helping. Similarly, the lack of decisive Western involvement in a brewing trade war between South Korea and Japan has allowed relations between two of the largest economies in the world to deteriorate markedly, with potential to grow even worse. In this new normal of geopolitics, nonconfrontation on the international stage is often the easiest course of action for world leaders to take.
Two related developments spell bigger problems for global governance down the line. The first is the number of world leaders coming to power among the world’s largest economies who are sympathetic to nationalist/transactional worldviews. Among G7 leaders, the U.K.’s Boris Johnson, Italy’s Giuseppe Conte, and Japan’s Shinzo Abe are aligned closer with Trump than with the leaders of “traditional” Western powers like Germany and France. Zoom out further to the G20, and nearly half of world leaders can be described as sympathetic to a “my nation first” approach to global politics. For the last 70-plus years, the global economic environment has been driven more by markets than by politics; that’s far less true going forward. In this increasingly politicized economic environment, trade alliances become both harder to establish and to maintain. Ratification of the United States–Mexico–Canada Agreement remains stalled, China’s Regional Comprehensive Economic Partnership outreach to India remains stuck, and even the EU-Mercosur tie-up was under threat of being scuttled by French President Emmanuel Macron after Brazilian President Jair Bolsonaro refused to seriously deal with Amazon forest fires. The economic benefits of free trade are increasingly struggling against domestic political concerns.
The second development is that the global economy has already begun slowing down, even prompting talk of a recession hitting the U.S. For the optimists, the hope is that a softening global economy will make economic nationalists more sensitive to the blowback that protectionist trade policies often bring. That’s possible—President Trump has already punted on tariff increases on Chinese goods for fear that the brunt will be felt by U.S. consumers. But while the prospects of economic headwinds ahead may provide some short-term respite, the longer the global economic malaise holds, the stronger the urge to hunker down will get for world leaders already inclined to nationalist trade practices. And should the economic downturn tip into crisis, it’s difficult to see the current crop of world leaders coming together to address the threat as effectively as their predecessors did back in 2009/2010.
The severity of the global economic downturn in the weeks and months ahead will depend a great deal on the ongoing trade war between the U.S. and China, the single most impactful economic relationship in the world today. The U.S. president’s pursuit of a signature “win” ahead of 2020 elections means he is genuinely amenable to striking deals—even with Beijing—but members of his administration have taken a more hawkish approach to China. While Trump’s overriding desire to be a dealmaker doesn’t close the door completely on a breakthrough with China, Chinese leaders are increasingly downbeat about a deal being reached with the U.S. ahead of the 2020 election. Over the next few months, watch for signals on whether Trump thinks his electoral chances are boosted by doing a deal with China (and avoiding a hit to the American economy) or by taking an increasingly hardline with Beijing.
There are plenty of other geopolitical stories to watch that have the potential to move markets this autumn. Chief among them is Brexit. While the last three years have generated plenty of headlines but little actual substance, matters are finally coming to a head; all sides are sufficiently fatigued by the proceedings and look to be moving towards the endgame. A soft-landing Brexit agreement would buoy international markets; so too the passage of long-awaited pension reform in Brazil (a surprise win for Mauricio Macri in Argentina would also be a boost … but that’s not going to happen). Pay attention to increased tensions in the Middle East, particularly following the drone strikes on Saudi oil production facilities and the commensurate risk premium that has been tacked on to oil prices. The growing prospects of Germany’s coalition collapsing is another story to watch for downward pressure on markets. In other words—plenty of drama these next few months, for both politics and for markets.
The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG LLP.