The full-scale invasion of Ukraine by Russia and the failure of the countries of the Global South to join sanctions against the aggressor have intensified the trend of fragmentation of global trade and the economy as a whole, according to a comprehensive report by Bloomberg Economics. Businesses are now forced to consider potential geopolitical risks — sanctions, supply chain disruptions, blackmail, asset loss — when choosing trading partners or making investment decisions. Such considerations are increasingly preoccupying the CEOs of major companies. According to the authors of the report, since the beginning of 2023, the top managers of American companies in the S&P 500 index used the word 'geopolitics' in their public speeches 12,000 times — three times more frequently than they did prior to the war in 2021. As an example of this new mindset, the agency quotes a recent statement by Tesla and SpaceX co-owner Elon Musk, who rarely follows the trends: 'The best thing we can do right now is build factories in different parts of the world. If difficulties arise in one place, we can maintain production elsewhere.'
The importance of geopolitical risks in global trade has been growing for quite some time, note the economists at Bloomberg. Prior to Russia's invasion of Ukraine,the US-China trade war and the COVID-19 pandemic were catalysts for this process. The war has accelerated the geo-economic divergence between two areas of the global economy: those adhering to sanctions against Russia and those ignoring them. As a result, trade between countries in these two blocs has grown 4-6% slower over the past year and a half compared to trade within each bloc, according to the World Trade Organization.
Western governments point to geopolitical factors for businesses. As an example, Bloomberg cites Germany's recent strategy for developing relations with China. It recommends that major German companies, such as BASF, Volkswagen, Siemens, and others, 'appropriately consider geopolitical risks when making decisions.' The document emphasises that, if such risks materialise, businesses should not expect assistance from the state. This is particularly relevant for Germany, given the scale of losses suffered by local businesses as a result of the rupture of relations with Russia, with which many companies were deeply integrated. However, European (especially German) economic dependence on China is even higher, prompting European governments to adopt containment strategies. The German authorities now want to avoid their economy becoming too heavily reliant on China. As Reuters has reported, this issue, particularly the growing dependence of Europe on China in the new energy sector, will be discussed at the meeting of EU leaders in early October.
This trend is even more evident in the dynamics of long-term investments. According to Bloomberg Economics, over the past two years, approximately 15% of international direct investments in the establishment of new enterprises (greenfield FDI) went to the countries that did not condemn Russia at the United Nations. In contrast, their share of the total amount was around 30% from 2010 to 2019. China and Hong Kong combined accounted for less than 2% in 2022, whereas they exceeded 10% in the 2010-2019 period. On the other hand, the United States witnessed the most significant growth in foreign direct investment in the establishment of new enterprises since the pandemic. Other G7 countries, including the United Kingdom, which exited the EU, have also started to attract more investment.
The economists at Bloomberg argue that the strong growth in the United States is partly attributed to the desire to accelerate the development of strategically important sectors of the economy, such as the semiconductor industry or electric car manufacturing, through foreign investment. However, this desire itself reflects the trend of strategic 'sovereignisation,' and interestingly, the largest investors in this regard are exclusively European and Asian allies (Japan, South Korea, and Taiwan), rather than, for example, China.
Conversely, since the beginning of the Covid-19 pandemic, the United States has cut its direct investment in new businesses in China by 58%, in EU countries by 37%, and in other Asian countries by two-thirds, according to research by the International Monetary Fund (IMF), cited by Bloomberg.
The logic behind this process is quite clear: it was the investments from developed countries that flowed into the Chinese economy and other emerging markets in the 1990s and significantly boosted their economic growth. It was expected that globalisation would reduce political tensions. However, this did not happen. The global trade balance shifted in favour of autocracies, as highlighted in the annual report by the international project V-Dem. Today, they generate 46% of the world's GDP, whereas in 1992, at the peak of the previous wave of democratisation, their share of global trade did not exceed 24%. The share of world trade conducted between democracies has decreased from 74% in 1998 to 47% in 2022. Meanwhile, the export and import activities of autocracies are becoming less dependent on democracies, as they increasingly engage in trade with each other. Conversely, the dependence of democracies on autocracies for trade has doubled over the past 30 years.
In other words, what used to appear as a lever for developed democracies to influence the behaviour of autocratic regimes has now become a constraint for democracies themselves, allowing autocracies to impose their normative values on them.