Opinion

Geopolitics and business

BREAKTHROUGH - Elfren S. Cruz - The Philippine Star

December 6, 2018 | 12:00am

Businessmen are learning that increased global tensions among superpowers are increasingly affecting their businesses. Many times territorial squabbles and ambiguous legal statuses are forcing strategic managers to make business decisions that sound like foreign policy positions. It is becoming necessary to include geopolitical analysis as part of a company’s strategic planning.

For example, the United States is expected to escalate its strategic offensive and trade war against China. Both Trump and the newly elected Democratic majority in the United States share similar protectionist policies and anti-China sentiments. This could result in more tariffs, stronger backing for Taiwan and a more assertive posture in the South China Sea.

In 2019, all signs point to increased geopolitical risk for business. It is anticipated that, citing national security threats, the United States will lean heavily on Europe, Japan, Australia, Canada, South Korea, Taiwan and maybe even ASEAN countries to erect stronger barriers to Chinese investment. This is a tactic that Trump has used against Russia and Iran.

The consequence is that China’s ambition to catch up in critical areas like aerospace and high end semiconductor development will only increase cyber threats to corporations and lead to a more aggressive US policy in cyberspace. This will lead to more supply chain disruptions and heavier fines and lawsuits for data breaches.

Why is all these economic and geopolitical chaos happening? The answer seems to be that in the past couple of decades, the United States has allowed its supply chain to be transferred from their homeland to China. With the apparent rise of China as a rival superpower and the massive losses of American jobs, American leaders – Republicans and Democrats – want to return their supply chain back to the United States as quickly as possible. This urgency for such a complicated process has and will lead to chaos in the world economic order.

The idea of a new Cold War between the United States and China is fast becoming a reality. In Iran, the United States has imposed sanctions that is intended to isolate the country regionally and weaken the country economically in the hope that this will lead to regime change. European countries have begun pulling out their investments. However, China has been reported to have taken over oil and gas projects that have been abandoned by European companies. This is one example that shows that even if the trade war is eventually resolved, other geopolitical tensions will lead to further conflict between the two superpowers.

This new Cold War is being fought differently from the past. During that era, wars and revolutions were the main tools. These were accompanied by ideological propaganda and financing of guerrilla movements. The results were conflicts in Korea, Vietnam, Africa, Central America and the Middle East.

Historically, the United States, during the Cold War focused on small scale technical assistance and training activities. Its big investments were on financing military ventures or supporting friendly governments. After the dissolution of the Soviet Union in 1991, the US development effort shrunk even more. It focused on promoting democracy and market economics in emerging countries. It left the task of investing to the private sector. Even the building of major infrastructure projects was left to development banks and the private sector.

Infrastructure is a high priority in developing countries, but the high costs present insurmountable problems for countries trying to secure financing. The obstacle is not just the price tag but also the unusual cash-flow profile of infrastructure – high upfront costs and very long term returns. There have been reports that in developing countries, infrastructure financing will be in the trillions of dollars through 2030; and will range from 4% to as high as 25% of a country’s GDP. Then there will be recurring costs for operations and maintenance.

China has now learned that building infrastructure is the best and fastest way to make friends overseas. As a Stratfor analyst put it: “China wants to do business with its neighbor. Infrastructure is the first step, followed by trade and investment and industrial cooperation.” In 2007 the China-Africa Development Bank was created. The Belt and Road Initiative started in 2013; and, the Asian Infrastructure Investment Bank in 2016. These has put China in a position to use infrastructure finance as a potent vehicle for economic statecraft.

The rest of the world has now accepted that this is a geopolitical threat to them. Japan has started its own infrastructure investment such as the multibillion dollar Metro Manila subway project. The United States has created the US International Development Finance Corp. for overseas infrastructure funded at $60 billion; but, this is tiny compared to the trillions of dollars China has promised to spend on its Belt and Road Initiative.

This flood of Chinese investments into international markets is forcing development financial institutions such as the World Bank, to rethink their approach to aid. At the same time this Chinese approach to development financing as a geopolitical tool is expected to shape foreign affairs for the next decade. According to Stratfor: “For China, the Belt and Road Initiative is a way to increase connectivity, expand access to natural resources, diversify trade routes and facilitate investment in foreign exchange currency. It will also create work for the country’s state owned enterprises which administer most overseas Chinese infrastructure and have subsidiaries in nearly 200 states and regions...As strategic infrastructure investment opens new doors, moreover, China will slowly expand its military footprint stepping on the United States’ toes along the way.”

All these new geopolitical tools – infrastructure investment, trade wars, economic sanctions and development financing – will only lead to new form of Cold War.