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Has COVID-19 changed the political landscape for global business?

Credit, Political Risk and Terrorism
Geopolitical Risk

By Sam Wilkin | November 4, 2020

A potential shift toward nationalist industrial policy may ultimately be the most profound political risk change that comes out of the pandemic.

It’s still early when it comes to governments’ policy responses to the global pandemic. What we’ve seen so far, however, suggests that the responses to the pandemic could alter the situation for companies doing business across borders in fundamental ways.

To see what I mean, consider the world’s response to the last major global crisis, the global financial crisis of 2008. In the wake of that crisis, China announced a major economic recovery package – a combination of government spending and loans totaling about $500 billion.

Lessons from the past

China’s recovery fund was so large that it not only restarted growth in China, but also helped restart growth in much of the rest of the world, particularly resource-exporting countries in Latin America and Africa (as well as Canada and Australia). China’s recovery package was so big, in fact, that it caused serious disruptions in world commodity markets. Oil prices rose to more than $150 a barrel, there were similar spikes in metals and mining prices, and the rising oil prices in turn contributed to a food price shock as countries turned to biofuels.

In the current crisis, China has once again been an early responder in announcing a major economic stimulus program. Adding everything together in China’s pandemic recovery program, it totals roughly $700 billion – which is to say, even larger than the package China announced following the global financial crisis.

Which may lead you to wonder – “why haven’t I heard about this package? And where are the impacts on global commodity markets or economic growth in the rest of the world?”

Which is precisely the point I wish to make. 

This time is different

One reason the impacts have been so muted (outside of China) is that the recovery package this time around is very different than what accompanied the global financial crisis. This time, China’s recovery package, in the main, supports Chinese businesses. Indeed, it’s closely aligned with a program called “Made in China 2025,” which seeks to replace imported foreign technologies with Chinese innovations in sectors such as aerospace, automobiles and especially information technology.

In other words, this recovery package promotes the performance of Chinese companies – to an extent, at the expense of their foreign competitors.

However, it isn’t just China thinking along these lines. Japan was also hit by the pandemic very early on – spare a thought for the Diamond Princess Cruise liner – and the country’s recovery package actually included a fund that paid Japanese companies to relocate their production out of China and back to Japan.

More recently, the European Council has agreed to a breakthrough deal on a common European debt instrument and common recovery fund budget. This deal has triggered a wave of optimism in the euro, but also contains the nub of a European industrial policy. That is, Europe’s recovery fund leans toward a policy stance that would promote “European champions” in sectors such as aerospace and autos, at the expense of their foreign competition.

Even before the pandemic, the United States had been behaving similarly. The current administration has acted against certain Chinese technology companies, in some cases seeking to promote Western technologies instead. Furthermore, circumstances may not change following the recent election as both President Donald Trump and President elect Joe Biden, had talked about reshoring production away from foreign markets and back to the U.S.

Economic nationalism

This shift toward nationalist industrial policy, promoting key firms in strategic industries at the expense of their foreign competition, may ultimately be the most profound political risk shift that comes out of the pandemic (although there are many other candidates, from a tilt toward authoritarianism to a debt crisis in emerging markets).

It is too early to see how far this shift toward economic nationalism will go. Most of the measures the European Council has announced, for instance, would not even begin to take effect until 2021.

But this shift appears to imply significant changes to the open globalization system that multinational businesses have enjoyed. The guiding principle of open globalization was “national treatment” – that a company doing business across borders could expect to be treated in the same way as a domestic company. That principle may not always have been honored, but it was enshrined in innumerable trade deals.

Planning for the new reality 

Around the world, governments have announced pandemic recovery packages that envision a global economy in which the principle of national treatment is dead – just one of COVID-19’s many casualties, and a severe political risk management challenge for companies doing business across borders. It will certainly make for an interesting Davos meeting, whatever form that might take, in a few months’ time.

This challenge to the globalization system comes at a time when international institutions from the World Health Organization (WHO) to the World Trade Organization (WTO) are already struggling, perhaps partly as a result of an absence of U.S. leadership. Even before COVID-19, trade barriers were rising fast around the world. Between 2017 and 2019, barriers doubled from 814 barriers impacting 4.7% of world imports to 1,696 barriers impacting 8.7% of world imports, according to the WTO. For additional perspective, there were only 73 barriers impacting only 0.6% of world imports in 2009.  

How should companies respond? One way to frame thinking is through the use of scenarios. In September, we provided a deep dive on European politics after COVID-19 using such scenario narratives. Using sources like this and thinking from other sectors such as the monthly Global Market Reviews, can provide insight into the potential impacts of such global trends.

In light of a potentially harsher and more challenging business environment brought about by the growing zeal of economic nationalism, companies will at the very least need to review decisions around strategy, investment, growth and expansion and boards of directors will need to be ready to seize the moment and adjust course appropriately. 


Director of Political Risk Analytics, Financial Solutions

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