March 23, 2023 0 comment

Understanding Geopolitics: The Intersection of Power and Geography

There are major risks that the world is currently facing, which are affecting its stability, security, and economy. These risks can be broadly categorized into geopolitical risks, environmental risks, and technological risks. Geopolitical risks arise from conflicts, tensions, and competition between nations. Environmental risks arise from climate change, natural disasters, and pandemics. Technological risks arise from the rapid advancement of technology and its potential to disrupt economies and societies. The world is currently experiencing several major trade conflicts due to geopolitical tensions and disagreements over trade policies, tariffs, and regulations. These conflicts have significant implications for the global economy, with businesses and consumers feeling their effects. This blog focuses specifically on the major geopolitical risks and their impact on the world economy.

Existing Geopolitical Risks

US-China Rivalry

The rivalry between the US and China is one of the most significant geopolitical risks facing the world today. The two nations are competing for economic, military, and technological dominance, and tensions have been escalating in recent years. The US has been pursuing a policy of containment against China, while China has been expanding its influence through its Belt and Road Initiative and other initiatives. The rivalry between the two nations has the potential to disrupt global trade, investment, and technology flows. The two nations are competing for dominance in economic, military, and technological spheres, which has led to escalating tensions between the two countries. In 2018, the US imposed tariffs on $50 billion worth of Chinese goods, and China responded by imposing tariffs on $60 billion worth of US goods. The trade war between the US and China has disrupted global trade and investment flows. The IMF has estimated that the trade war has reduced global GDP. The trade war has also had a significant impact on the Chinese economy, which is heavily dependent on exports. The Chinese economy growth has slowed down. The US has been pursuing a policy of containing China’s military expansion in the Asia-Pacific region, which has led to an arms race between the two nations. China has been rapidly modernizing its military, and it has developed advanced weapons systems, including the DF-26 anti-ship missile, which can target US aircraft carriers. The US has responded by increasing its military presence in the Asia-Pacific region. The US has also been strengthening its alliances with countries in the region, including Japan and South Korea. The two nations are also competing for dominance in emerging technologies, such as 5G, artificial intelligence, and quantum computing. The US has accused China of stealing intellectual property and engaging in cyber espionage to gain an advantage in these technologies. China responded by launching its Made in China 2025 initiative, which aims to make China a global leader in advanced technologies. The ongoing tensions between the two nations are likely to continue to impact global trade and investment flows, and businesses will need to continue to adapt to these changes to remain competitive. Some companies getting affected include:

Apple relies heavily on China for manufacturing its products and has a significant presence in the Chinese market. The tensions between the two nations could impact Apple’s operations and sales in China.
Boeing has significant business interests in China and relies on Chinese orders for a significant portion of its aircraft sales. The escalating tensions between the US and China could impact Boeing’s business in China and potentially lead to a loss of orders.
Huawei is one of China’s leading technology companies and has been a target of US sanctions due to allegations of intellectual property theft and national security concerns. The sanctions have impacted Huawei’s ability to do business with US companies and could impact its global market share in the future.
Alibaba is one of the largest e-commerce companies in the world and has significant business interests in the US and China. The ongoing trade tensions between the two nations could impact Alibaba’s operations in both countries.
General Motors has a significant presence in China and relies on the Chinese market for a sizeable portion of its sales. The ongoing trade tensions could impact General Motors’ operations and sales in China.
Intel is a leading semiconductor manufacturer and has significant business interests in both the US and China. The ongoing technological rivalry between the two nations could impact Intel’s ability to do business in China and potentially lead to a loss of market share.
Tesla has been expanding its operations in China, which is one of its largest markets outside the US. However, the ongoing trade tensions between the two nations could impact Tesla’s operations in China. To counter this, Tesla has announced plans to build a factory in Shanghai, which would allow the company to avoid tariffs on its vehicles imported into China.
Walmart is one of the largest retailers in the world and has significant operations in both the US and China. The ongoing trade tensions between the two nations could impact Walmart’s operations in China. To counter this, Walmart has been investing in its supply chain and building more warehouses in China to improve its efficiency and reduce its reliance on imports.
Qualcomm is a leading semiconductor manufacturer and has significant business interests in both the US and China. The ongoing technological rivalry between the two nations could impact Qualcomm’s ability to do business in China. To counter this, Qualcomm has been investing in research and development in China and partnering with Chinese companies to develop new technologies.
Ford has significant operations in China and relies on the Chinese market for a significant portion of its sales. The ongoing trade tensions between the US and China could impact Ford’s operations in China. To counter this, Ford has been investing in electric vehicles and building a new factory in China to manufacture them.
Nike is one of the largest sportswear companies in the world and has significant operations in both the US and China. The ongoing trade tensions between the two nations could impact Nike’s operations in China. To counter this, Nike has been diversifying its supply chain and sourcing more products from other countries, such as Vietnam and Indonesia.

Thus, the rivalry between the US and China has significant risks and implications for the world. The trade war between the two nations has disrupted global trade and investment flows, which could have long-term consequences for the global economy. The military arms race between the US and China could lead to a dangerous escalation of tensions in the Asia-Pacific region. The technological rivalry between the US and China is also significant. The two nations are competing for dominance in emerging technologies, which could have significant implications for the global balance of power. The US has accused China of engaging in unfair trade practices and violating intellectual property rights, which could lead to a breakdown in cooperation between the two nations.

Middle East Instability

The Middle East is another major geopolitical fault line, with ongoing conflicts in Syria, Yemen, and Libya, and tensions between Iran and Saudi Arabia. The instability in the region had a significant impact on many companies, including those in the oil and gas, airlines and transportation, defence contractors, technology, and financial services industries. Though extremely difficult to quantify, some may have benefited also, here’s a brief overview of how some of the companies have been impacted:

Koch Industries has a significant stake in the refining and chemical sectors, which could be affected by geopolitical tensions in the Middle East. However, the company’s operations are diversified across many regions, which may mitigate the impact.
ConocoPhillips has significant operations in the Middle East, particularly in Qatar, which could be impacted by conflicts in the region.
Hess Corporation has operations in the Kurdistan region of Iraq, which could be impacted by the ongoing conflicts in Iraq and Syria.
Marathon Oil has operations in the Kurdistan region of Iraq, which could be impacted by the ongoing conflicts in Iraq and Syria.
Occidental Petroleum has operations, particularly in Oman and the United Arab Emirates, which could be impacted by the conflicts in the region.
Emirates Group is based in Dubai and could be impacted by any conflicts in the region that disrupt air travel or the global economy.
Qatar Airways is based in Doha and could be impacted by any conflicts in the region.
Etihad Airways is based in Abu Dhabi and could be impacted by conflicts that disrupt air travel.
Turkish Airlines is based in Istanbul and could be impacted by any conflicts in the region that disrupt air travel.
Air Arabia is based in Sharjah and could be impacted by any conflicts in the region that disrupt air travel.
Blackwater Worldwide (now known as Academi) provided security services in Iraq and Afghanistan and could be impacted by changes in the political or security situation in those countries.
DynCorp International provided security services in Iraq and Afghanistan and could be impacted by changes in the political or security situation in those countries.
Triple Canopy provided security services in Iraq and Afghanistan and could be impacted by any changes in the political or security situation in those countries.
Aegis Défense Services provided security services in Iraq and Afghanistan and could be impacted by any changes in the political or security situation in those countries.
Olive Group provided security services in Iraq and Afghanistan and could be impacted by any changes in the political or security situation in those countries.
Apple Inc., Microsoft Corporation, Intel Corporation, Dell Technologies, and Hewlett-Packard Enterprise have a significant global presence, and its operations in the Middle East are relatively small.

Russia-West Tensions

The tensions between Russia and the West have indeed created significant challenges for private companies that operate in these regions. Some of the private companies that have been impacted by the tension include:

The energy sector has been one of the most impacted by the tension between Russia and the West. The dispute has resulted in economic sanctions against Russia, which have limited its ability to export oil and gas. These sanctions have affected companies such as ExxonMobil, Royal Dutch Shell, and BP, which have significant investments in Russia’s energy sector.
The tension also had an impact on financial institutions. For example, in 2014, the European Union imposed sanctions on Russia’s banking sector, which restricted access to capital markets for Russian banks. This has made it difficult for international banks that have dealings with Russian banks to conduct business in the country.
In 2014, Russia introduced new regulations that required foreign automakers to produce a certain percentage of their vehicles in the country. This regulation has affected companies such as Ford, General Motors, and Toyota, which have had to make significant investments in Russian production facilities.
In 2015, Russia introduced a law that required companies to store data from Russian users on servers located in Russia. This has affected companies such as Google and Facebook, which have had to comply with the regulation or face fines.

Thus, the tension between Russia and the West has created significant challenges for private companies that operate in these regions. It is difficult to name specific companies that may be benefiting from the tensions between Russia and the West. However, it is possible that companies that operate in regions that are not impacted by the tension may face less competition from companies that are affected. For example, companies that operate in regions outside of Russia and the Western countries may benefit from the reduced competition in the markets that have been impacted by the tension. In addition, legal and consulting firms that provide services to affected companies may see increased demand for their services as these companies navigate the challenges posed by the tension. These firms may provide services such as advising companies on compliance with sanctions, helping them navigate regulatory changes, or providing guidance on risk management in the affected regions. It is important to note, however, that any benefits that may arise from the situation are likely to be outweighed by the negative impacts and uncertainties caused by the tension between Russia and the West.

Investment Flows

Geopolitical risks can also lead to a reduction in investment flows, with investors becoming more cautious in uncertain times. This can lead to a reduction in capital flows, which can have a negative impact on the economies of developing nations. The United States-China trade war is an ongoing economic conflict between the United States and China that began in 2018. The conflict was initiated by the Trump administration, which imposed tariffs on a range of Chinese goods, citing unfair trade practices such as intellectual property theft, forced technology transfer, and subsidies to domestic companies. The tariffs were aimed at reducing the US trade deficit with China and protecting American jobs and industries. In response to the US tariffs, China retaliated with its own tariffs on US goods, targeting key US export industries such as agriculture and manufacturing. The conflict has escalated over time, with both sides imposing higher tariffs on an increasing number of goods. The impact of the trade war has been significant, not just for the US and China, but for the global economy. The tariffs have disrupted supply chains, increased production costs, and lowered demand for goods and services. The trade war has also led to increased uncertainty and volatility in financial markets, affecting businesses and investors around the world. Many nations have felt the effects of the trade war, either directly or indirectly. Countries that rely heavily on exports to the US and China have been particularly affected, as the tariffs have reduced demand for their products and disrupted their supply chains. The trade war has also had political implications, as countries have been forced to choose sides and navigate a complex and rapidly changing global economic landscape. The companies that have been affected by this trade war have been discussed above. How geopolitical changes have impacted the investment flow is discussed in undermentioned paras.

Brexit

Brexit, the United Kingdom’s withdrawal from the European Union, created significant trade conflicts between the two entities. The UK’s exit from the EU led to a range of issues, including trade barriers, customs checks, and regulatory divergence. Here are some of the ways Brexit affected investment:

Brexit created a lot of uncertainty, particularly in the financial markets.
The UK’s exit from the EU created trade barriers between the two entities. This made it more difficult and expensive for businesses to trade between the UK and the EU, which could deter investment.
As the UK and the EU develop their own regulatory frameworks, there is a risk that they will diverge from each other. This could create additional costs and barriers for businesses that operate in both the UK and the EU, which could discourage investment.
Since the Brexit referendum in 2016, the value of the pound has fluctuated significantly. This can create uncertainty for investors, particularly those investing in UK assets.
Despite the challenges, Brexit has also created opportunities for investment. The UK is now able to negotiate its own trade deals and has the freedom to set its own regulations. This could make the UK a more attractive destination for investment in certain sectors.

US-EU Trade Disputes

The US and the European Union have been involved in several trade disputes in recent years. The most significant of these disputes involves aircraft subsidies. The US accused the EU of providing illegal subsidies to Airbus, while the EU accused the US of providing illegal subsidies to Boeing. The conflict led to the imposition of tariffs on a range of goods, including aircraft parts, wine, and cheese. The trade disputes between the United States and the European Union, particularly the one involving aircraft subsidies, had a significant impact on the investment flow between the two regions. The imposition of tariffs on a range of goods, including aircraft parts, wine, and cheese, made it more expensive for businesses to import and export these goods between the US and the EU. This led to a decrease in demand for these goods and has made it less profitable for businesses to invest in industries related to these goods. As a result, some businesses reduced their investment in these industries, while others shifted their investment to other regions with lower tariffs and trade barriers. Moreover, the uncertainty surrounding the ongoing trade disputes and the potential for further escalation may have also made some investors more cautious about investing in the US and EU markets, which could impact the investment flow between the two regions.

India-China Trade Disputes

One of the most significant trade disputes between India and China involves the trade of goods, with India imposing tariffs on a range of Chinese goods in response to China’s support of Pakistan, a state on the verge of bankruptcy due to military control of the governance. This conflict has led to a decrease in the trade of goods between the two nations and has had a negative impact on their investment flows. Investors are hesitant to invest in nations that are engaged in trade disputes as they fear that their investments may be impacted negatively.

Conclusion

The above-mentioned risks have the capacity to hinder the global economy in several ways. Trade disruptions arise due to tensions between countries, leading to the imposition of tariffs, sanctions, and other trade barriers. This may result in reduced trade volumes, increased prices, and disruptions to global supply chains, along with reduced investment flows, causing investors to become more cautious during uncertain times. Consequently, there may be a decrease in capital flows, which can adversely affect the economies of developing nations.

The conflicts in Syria, Yemen, and Libya, and tensions between Iran and Saudi Arabia, have the potential to disrupt global energy supplies and generate economic shocks. Similarly, tensions between Russia and the West regarding disputes over Ukraine, Syria, and other issues can disturb global trade, energy supplies, and investment flows, resulting in higher prices and economic shocks. The rivalry between the US and China, who are vying for economic, military, and technological dominance, has been escalating in recent years. The two nations’ rivalry may lead to disruptions in global trade, investment, and technology flows. Restrictions may also be imposed on the transfer of technology and intellectual property, leading to reduced innovation, productivity, and economic growth. Finally, the development of nuclear weapons and ballistic missiles by North Korea poses a significant nuclear threat. High tensions between North Korea and its neighbors, particularly South Korea and Japan, may lead to disruptions. Indian can make these situations favorable. For instance, companies that have diversified their markets and supply chains can benefit. Such companies are less likely to be affected by reduced trade volumes, increased prices, and disruptions to global supply chains. Additionally, companies that have strong ties with countries that are not affected by geopolitical risks can benefit from increased trade with those countries. In terms of specific sectors, companies in the pharmaceutical, IT, and oil and gas sectors are likely to benefit from the prevalent geopolitical scenario. The pharmaceutical sector, which is a major contributor to the economy, can benefit from the disruption of the global supply chain, as many countries may look to reduce their dependence on China and source their pharmaceutical products from other countries, including India. Similarly, Indian IT companies are likely to benefit from the restrictions on the transfer of technology and intellectual property, as these restrictions may lead to increased demand for IT services from Indian companies. Indian companies in the oil and gas sector are likely to benefit from disruptions in global energy supplies, as they can leverage their expertise and resources to fill the gaps left by other suppliers. Thus, companies that have diversified their markets and supply chains, as well as those in the pharmaceutical, IT, and oil and gas sectors, are likely to benefit. Some examples of Indian companies that are known to operate in these sectors include, Sun Pharmaceutical Industries Ltd., Dr. Reddy’s Laboratories Ltd., Cipla Ltd., Lupin Ltd., Tata Consultancy Services Ltd. (TCS), Infosys Ltd., Wipro Ltd., HCL Technologies Ltd., Reliance Industries Ltd., Oil and Natural Gas Corporation Ltd. (ONGC), Bharat Petroleum Corporation Ltd. (BPCL) and Hindustan Petroleum Corporation Ltd. (HPCL).

“Geopolitics is not just a game of power. It is a game of ideas, of influence, of culture. And you are a player whether you know it or not.”

Robert D. Kaplan, American author, and geopolitical expert.

References

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Understanding Geopolitics: The Intersection of Power and Geography

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