2020 Geostrategic Outlook - Global rebalancing raises uncertainty for business January 2020 - EY
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Geostrategic Business Group 2020 Geostrategic Outlook Global rebalancing raises uncertainty for business January 2020 ey.com/geostrategic
2020 Geostrategic Outlook
A
transformative
age
in geopolitics
2020 Geostrategic Outlook
Contents
Foreword 5
The geopolitical landscape 6
Globalization 9
Technology 10
Demographics 11
Environment 12
Spotlight topics 13
Global trade 14
US-China relations 16
Around the world 18
East Asia and Pacific 19
South Asia 21
Eurasia 23
Europe 25
Middle East and North Africa 27
Sub-Saharan Africa 29
Latin America 31
North America 33
Authors and acknowledgments 35
Endnotes and contacts 36
Note: Unless otherwise noted, all figures are in US dollars.
3
2020 Geostrategic Outlook
geostrategy
ge·o·strat·e·gy
\jē-ō-stradəjē/
(geo)politics + strategy
4
2020 Geostrategic Outlook
Foreword
Volatile. Unpredictable. Risky. Challenging. These are just a few of the words business leaders use to describe the
current political environment in a recent survey on managing political risk that we conducted. More than half of
respondents told us the effect of political risk on their company is higher than it was two years ago. Accordingly,
58% of respondents told us that their board is spending more time on political risk.
We are living in a transformative age of geopolitics, a time when both a fundamental growth driver for global
business — globalization — and the balance of power among the world’s largest economies are changing.
Change brings uncertainty. As this transformation unfolds, a more fragmented global economy may emerge,
marked by higher levels of political risk and greater uncertainty associated with cross-border transactions. This
uncertainty and pace of change challenge leaders to craft long-term, global business strategies. Dynamism, agility,
resilience and new ways to manage risk will all be required to thrive amid this geopolitical disruption. Companies
need to incorporate geopolitics into their strategy. This is what we call “geostrategy.”
To strategize and, ultimately, to act, executives need to understand the deeper forces at work in this
transformative age of geopolitics. It is imperative to go beyond the headlines to understand how the primary
interconnected forces of change impact the geopolitical environment in which companies must navigate.
In this outlook, we dive into these primary forces of change and look at how they are unfolding, geopolitically,
around the world in 2020. We analyze how emerging shifts in globalization, technology, demographics and the
environment affect geopolitics and, ultimately, how these shifts are changing the reality in the key markets in
which businesses operate.
Jay Nibbe
Partner and EY Global Vice Chair
Markets, Ernst & Young LLP
Jon Shames
Partner and EY Global Leader
Geostrategic Business Group, Ernst & Young LLP
Mary K. Cline, PhD
Director and Insights Leader
Geostrategic Business Group, Ernst & Young LLP
5
The
geopolitical
landscape
6 | 2020 Geostrategic Outlook
The geopolitical landscape
Scanning the geopolitical environment is the first step in navigating the transformative
age in geopolitics. In this outlook, we offer our scan of the geopolitical landscape in 2020.
The geopolitical outlook in 2020 will be shaped by what we see as the primary
forces of disruption: globalization, technology, demographics and the environment.
These forces have existed for millennia but are now evolving in new ways.
These primary forces manifest themselves in key issue areas, as well as regionally,
shaping the operating environment for companies. In this report, we explore how these four
forces play out within each region. We also spotlight two cross-cutting geopolitical issues —
global trade and US-China relations — critical to the business environment in 2020.
Geopolitics in a world of regions
Europe
Shifting internal and
external equilibriums
North America
Uncertainty abounds ahead of US election
Middle East and North Africa
Volatility and the risk of disruption
The evolution and interaction of
these forces play out around the globe, Sub-Saharan Africa
Economics and elections
driving the news we see every day. create divergent trajectories
Appreciating these forces can help
bring strategic clarity to the volatile
Latin America
and unstable world of geopolitics in Protests and populists
which businesses operate. drive policymaking
7 | 2020 Geostrategic Outlook
Primary forces
Globalization Technology Demographics Environment
The shift from ever-expanding The fourth industrial revolution Risks to political stability are Climate change is becoming a
globalization toward rising promises long-term gains in rising in countries with very old race against time for government,
regionalization of the global productivity yet is accelerating or young populations, even as business and society to develop
economic and political geopolitical competition and the geopolitical balance of power solutions that prevent the worst
systems is accelerating. exacerbating social and economic shifts in favor of economies consequences of this pre-eminent
grievances at the heart of with sustainable working-age global risk to materialize.
populist movements. populations.
Eurasia
Renewed strategic significance
East Asia and Pacific
Evolving role of China shapes the outlook
South Asia
A delicate balancing act
8 | 2020 Geostrategic Outlook
The geopolitical landscape
Primary forces
Globalization
Emergence of a new regionalism
The assumption that globalization would Organization (WTO) to govern cross-border to see each other as competitors. The EU
continue to expand helped drive global trade. Technology is another area in which and China relationship will continue to be
expansion over the past 30 years; the interoperability of competing regional complex, characterized by both further
companies tied their economic fortunes systems will increasingly affect companies’ economic integration via the Belt and
and strategic outlook to a relatively ability to conduct cross-border business. Road Initiative (BRI) and rising levels of
predictable global system. competition and distrust.
This global rebalancing is also creating new
That is not the world that companies economic blocs and political centers of Complicating geopolitics further is that
face today. The rise of populism has power. This emerging multipolar system while these poles are consolidating
unleashed strong anti-globalization is anchored by the US, China and the power, the nature of power is changing.
sentiments in countries around the world. EU. Each of these economies has smaller Economic clout is becoming a, if not the,
As governments respond, policymakers regional economies within their orbit. And dominant dimension of power, competing
are now prioritizing regional organizations the governments of each bloc will accelerate with military and political capabilities.
and alliances. This has resulted in a shift their efforts so their standards and systems Also, asymmetric conflict — most notably
toward rising regionalization of the global are adopted throughout their spheres of cyber threats — allows countries with
economic and political systems. influence. Witness, for example, the intense lower levels of traditional geopolitical
competition between the US and China in power to wield outsized influence on
On the one hand, the new regionalism the development of 5G wireless networks. the global operating environment.
reflects a continuation of cross-border The EU’s leadership in technological
economic integration. East Asia is a regulation offers another case in point. As these dynamics play out, the rules
key driver of this trend, first with the of the game are shifting, creating new
Comprehensive and Progressive Trans- As the emerging blocs consolidate their uncertainties around global strategies.
Pacific Partnership (CPTPP) and now with power, relations between them will be The proliferation of bilateral and regional
the Regional and Comprehensive Economic volatile. The US is retreating from its trade pacts, declining influence of the
Partnership (RCEP). international leadership, China is playing WTO, rising use of sanctions, intensifying
a bigger role in geopolitics and Europe is competition between major economies
On the other hand, regionalism represents seeking a more cohesive projection of its and expanding political restrictions on
the increasing fragmentation of the global own power. The US and China are being investment all shift business calculations
economy into smaller blocs. The ability challenged to form a new relationship and strategy around global growth
to effectively conduct business across under the more confrontational approach opportunities and risk management. The
certain regions is likely to decrease as to bilateral relations pursued by the US new regionalism will require multinational
these geo-economic blocs integrate more administration. And although transatlantic companies to develop regional supply
fully internally. This is clearly visible in cooperation anchored global stability for chains and tailor products for regional
the declining influence of the World Trade 70 years, the US and EU are beginning consumer markets.
9 | 2020 Geostrategic Outlook
The geopolitical landscape
Primary forces
Technology
Accelerating global competition
The technologies of the fourth industrial Countries that dominate these digital as technology risks coming under fire
revolution promise long-term gains in technologies will occupy a stronger position for contributing to underlying economic
efficiency and productivity, but they relative to their less technologically woes, such as inequality. To maintain
also have disruptive geopolitical and advanced competitors. This is true not domestic political stability in the coming
social consequences. Transportation only in terms of economic competitiveness years, governments will need to manage
and communication costs will drop, and military power, projected through these tensions and collaborate with
while logistics and supply chains will cyber war or remote-controlled drones, companies to retrain workforces to help
become easier to manage. These but also for expanding geo-economic them keep pace with new technologies.
technological improvements hold zones of influence. Technological prowess
the potential to diminish the cost of enhances the ability of a government to Another area in which domestic politics and
international trade, open new markets exercise control over zones of economic technology will increasingly collide is digital
and drive economic growth. and political influence and to determine privacy norms and regulations. As social
the “rules of the road” of political media, connected devices and other digital
At the same time, technology catalyzes and economic cooperation. The US, technologies play an increasingly large role
geopolitical competition. This is China and the EU are at the forefront in people’s lives, public concern about the
especially true in an era of emerging of this competition. None wants to use of their data and necessary safeguards
regionalism in geopolitics. Governments be dependent on technologies that is rising. Governments are taking
are seeking to ensure that they — or could be controlled by foreign political action in various ways, including data
companies headquartered within their influences. This sits at the heart of the localization requirements and new digital
borders — develop the capability to build current debate about which country will privacy laws. These privacy regulations
the crucial technologies of the fourth dominate the rollout of 5G technology. represent another area of geopolitical
industrial revolution. Such technological competition, with the EU currently setting
sovereignty is even more important Although technological advancement the global standard with the General
today because artificial intelligence (AI), is crucial for economic and geopolitical Data Protection Regulation (GDPR).
5G wireless networks and other digital competition, it also creates domestic The US and China will not simply follow
technologies form the backbone of the political risks. One of the most notable risks the EU’s lead, however, so companies
entire 21st century digital economy. is technology’s effect on the labor market. will likely face competing privacy
While estimates of the number of jobs that regulations in the world’s three major
will be destroyed by new technologies vary geo-economic blocs in the coming years.
widely, many economists and policymakers
are concerned about robotics and AI
generating large-scale labor displacement.
This is particularly salient in an era of
populism and anti-globalization sentiments,
10 | 2020 Geostrategic OutlookThe geopolitical landscape
Primary forces
Demographics
Aging catalyzes global rebalancing
We are in the midst of transformative Aging populations present political and education and skills development and
demographic change. Even though the economic challenges. Domestically, aging foster entrepreneurship and private sector
global population is set to climb to almost populations weigh on economic growth job growth. Without such supportive
7.8 billion in 2020, the growth rate is prospects. With fewer working-age people, policies, a youth bulge increases political
slowing significantly, forecast by the UN governments will need to combat economic risk. Countries with a large number of
Population Division at just 0.98% annually stagnation and ensure the sustainability economically inactive or disadvantaged
during the next five years. Even more of pension systems. This includes young people are prone to social unrest.
notably, the global population is getting measures such as raising the retirement Witness the large protests that erupted in
older, with the worldwide median age set age, encouraging greater workforce Chile, Lebanon, Iraq and elsewhere in 2019.
to surpass 30 years for the first time in participation, welcoming immigrants and
2020. As a result, the global working age increasing the fertility rate. Each of these The aging global population is also
population as a share of the total peaked policies comes with political risks and affecting geopolitics through generational
in 2015. But this aging is not equally require significant fiscal resources, making dynamics in two ways. First, is an
distributed, creating risks to domestic implementation difficult and, in some escalating inter-generational conflict over
political stability in countries with either cases, unlikely. Aging could reduce many key policy issues, such as the environment
very old or young populations and shifting countries’ economic clout on the global and the social safety net. Younger
the geopolitical balance of power in favor stage, resulting in corresponding shifts in generations are taking to the streets,
of economies with sustainable working- geopolitical power. afraid that their economic future and the
age populations. ecological environment in which they will
The youngest region in the world is Sub- live are very much at risk. Second, is an
Europe, where 19% of its residents are 65 Saharan Africa, where the median age is emerging generational handoff in political
years of age or older, is the region with by just 18.7 years. South Africa, in fact, is the power. French President Emmanuel Macron
far the oldest population. Japan has the youngest G20 country, with about 45% of and Saudi Crown Prince Mohammad bin
highest elderly population in the world, its population under 25 years old. More Salman are just two notable examples
though, at 28%. Other G20 economies than 40% of the population in India, Mexico, of this trend. We could see a shift in
must also contend with elderly populations Indonesia and Turkey is similarly young. geopolitical relations as the collective
that exceed 20% of their total population, Countries that harness the economic experience of the world’s leaders ceases
among them Italy, Germany and France. potential of this youth bulge may see their to include the height of the Cold War, the
China, Russia and South Korea are also stature on the geopolitical stage rise in the pre-9/11 era and other defining moments.
aging at a rapid rate. coming years. In this interim period in which multiple
generations are in power, the likelihood of
But successful integration of large youth misunderstandings or miscalculations is
populations into the workforce requires higher, creating greater uncertainty and
government policies that both promote volatility in geopolitics.
11 | 2020 Geostrategic OutlookThe geopolitical landscape
Primary forces
Environment
Racing against the clock
Just 30 years after the International Panel Making global governance even more shift the geopolitical balance of power,
on Climate Change issued its first warning challenging are the populist, anti-globalist disadvantaging countries that receive the
that human activities were substantially sentiments in the US, which led to the brunt of its consequences.
increasing the atmospheric concentrations American withdrawal from the Paris
of greenhouse gases, we are beginning to Agreement. This decision left the rest of Climate change may also affect geopolitics
see significant impact today. Greenhouse the signatories at a loss for how to affect by increasing the likelihood of armed
gas emissions have risen at a rate of global change without the world’s largest conflict or causing large-scale migration
1.5% per year over the last decade,1 economy and second-largest polluter.2 flows in the future.
and global mean surface temperature is The way forward is likely to be determined
increasing. The economic consequences by coordination between the EU — which in The fight against climate change is not
of climate change are already significant. December 2019 agreed on a Green Deal just about governments; civil society and
The International Labour Organization that would make Europe the first climate- companies are also engaged. A rising
estimates that nearly 1.2 billion jobs rely neutral continent by 2050 — and China, number of companies are incorporating
directly on the effective management and which is both the world’s largest emitter of sustainability into their core business
sustainability of a healthy environment. greenhouse gases and its largest renewable models, and many companies are also
And climate-related disasters have cost the energy producer. reporting their climate change risks
world an average of almost $200 billion and mitigation strategies to investors.
annually over the last 10 years, according Further complicating the geopolitics of Such actions not only make sense for
to Munich RE. this issue is the fact that the distribution the long-term viability of companies,
of climate change impacts is not equal. but also for short-term performance as
Climate change is a transnational issue Countries with warmer climates, which customers increasingly demand more
that requires a globally collaborative are primarily emerging and frontier environmentally sustainable products.
policy response. It is a race against time markets, suffer more from rising global Civil society is engaged in climate change
for government, business and society temperatures. The International Monetary more broadly as well. This has been
to develop solutions that prevent the Fund estimates that a 1° C increase in the most visible recently in the Fridays for
worst consequences of this pre-eminent median emerging market economy lowers Future movement, catalyzed by Swedish
global risk from materializing. But the economic growth by 0.9 percentage points, teen climate activist Greta Thunberg, in
global rebalancing from a unipolar to a and by 1.2 percentage points for frontier which young students worldwide strike
multipolar world complicates efforts to markets. Natural catastrophes caused by during school on selected days to protest
mitigate climate change because no single a changing climate also have a particularly political inaction on climate change.
country can lead the world on this issue. dramatic effect on people’s livelihoods in
less developed economies, as mitigation
and response efforts are likely to be less
robust. Climate change could, therefore,
12 | 2020 Geostrategic OutlookSpotlight
topics
Global trade and US-China relations
13 | 2020 Geostrategic OutlookSpotlight topics
Global trade
Finding opportunity in uncertainty
There is a new normal in global trade. Trade signed “phase one” agreement, the actions by its second largest member
policy now finds itself in the unprecedented structural nature of the conflict and the (China). Moreover, the recent expiration
role as both the driver of macroeconomic mutual lack of trust mean it is unlikely the of the WTO Appellate Body eviscerates
and geopolitical events and subject to two sides will resolve their fundamental the WTO’s dispute settlement mechanism,
geopolitical considerations as geostrategic differences through some form of “grand which calls into question WTO members’
competition and rivalry between the three bargain.” The new normal, therefore, sets ability to manage the inevitable tensions
major economic blocs increasingly trumps the stage for a fundamentally unstable that will arise. This is problematic for
the rules-based trading system. In this new economic relationship between the world’s companies and countries across the
reality, global economic governance will two largest economies for the foreseeable globe, particularly smaller nations
be more competitive and less cohesive, future. The resulting uncertainty has that have relied on this rules-based
providing a greater role to players besides already contributed to the slowdown in the system to even the playing field.
the US. These developments are likely global economy and is likely to continue to
to become a semi-permanent fixture, provide headwinds for growth. These developments will continue to
prompting companies to reconsider how to impact growth and create tremendous
manage cross-border activities. Brexit and its impact on the EU and the challenges for business. There are some
UK also continue to disrupt international positive trade developments, however, in
Trade policy today is driven by larger trade and the global economy. While the the form of regional trade agreements and
concerns over competition between December 2019 UK election brought some the emergence of potentially new global
countries, national security and the role measure of political clarity, the ability economic governance models.
of technology. Populism and nationalism of the UK and the EU to negotiate a fully
in key markets have also led to changing formed trading relationship by the end of The United States-Mexico-Canada
trade relationships. The US, in particular, 2020 seems unlikely, if not impossible. Agreement (USMCA) is a prime example.
has used trade policy as its tool of choice This will continue to create considerable Although it provides little in the way
to address concerns with other countries’ uncertainty for cross-border trade of goods of new liberalization, it does reconfirm
economic models and trade practices. and services between the UK and the EU. the commitment to the North American
Supply chain disruptions have affected trade bloc — no trivial outcome in the
While the current tensions between the growth prospects for the remaining case of the US trade policy. Trade
US and China may have started on the members of the EU. agreements in Asia (CPTPP and RCEP)
trade front, for instance, trade policy also demonstrate that regional models for
is only one part of US-China tensions. The increasing weakness of the WTO economic integration can move forward,
China and the US are seeking to effectively compounds these disruptions. This even without US participation. And the
decouple bilateral technology linkages vulnerability stems from the realization EU continues to negotiate high-standard
through efforts to prohibit the acquisition that the organization has been unable to agreements across the globe, notably with
of each other’s technology products. rein in measures that were incompatible Japan, Vietnam and the Mercosur nations.
Although China and the US have paused with WTO rules by its largest member Given the new EU Commission’s emphasis
the escalating tariff war with the recently (the US) nor address market-distorting to combine regulation with industrial
14 | 2020 Geostrategic OutlookVarious developments will affect the level of trade policy Exports have stagnated as a share of the global economy since
uncertainty that companies face in 2020 the global financial crisis
Increase Decrease Neutral Goods and services exports as percentage of global gross domestic product
(GDP)
Trade development Impact on uncertainty
30%
Ongoing US-China tensions
Brexit
20%
USMCA
WTO dispute settlement and reform 10%
Conflicts over digital taxes
0%
CPTPP and RCEP trade agreements
2002 2006 2010 2014 2018
Source: EY analysis. Source: EY analysis; UNCTAD; WTO and ITC secretariats’ calculations; World Bank.
Note: Services data included 2005–18.
policies that promote competitiveness, it Operations and supply chain
would appear that Europe is seeking to
provide an alternative economic model to
Global supply chains continue to
characterize the world economy, but Issues to watch
the US and China. An EU that avoids the companies are re-examining them as they
excesses of US unilateralism and China’s respond to new protectionist measures. • Can the world’s two largest
state intervention would help to stabilize For many companies, this means assessing economies, the US and China,
the rules-based trading system. landed costs and optimizing sourcing, define and establish a new economic
production and distribution in a more relationship, or will their relationship
Business implications complicated and fluid environment. continue to engender bilateral and
global uncertainty?
Strategy Reputation and compliance
Companies need to monitor global trade High tariffs in certain sectors incentivize • Will the US focus its more
developments and work through the efforts to misrepresent origin, leading protectionist-oriented policies
impacts on their business. Given the to heightened levels of enforcement and on Europe and seek to rebalance
inherent uncertainties, this becomes less of potential negative effects on growth. The its relationship beyond existing
an exercise in forecasting than in building cost and complexity of compliance will contentious issues (e.g., aircraft
resilience and flexibility into their strategic also rise as new export control regimes manufacturing)?
planning process. Capacity needs to be and further restrictions on cross-border
developed to manage this challenge across investments are put in place. As a result, • What will be the supply chain and
the different corporate functions. companies will need to continue elevating regulatory implications of Brexit?
and prioritizing their compliance functions
Finance and tax and integrate them into the companies’ • Will major countries develop
Both the imposition of new tariffs and political and business risk management. a process for addressing WTO
the reduction of tariffs through regional reform that will restore that
trade integration have a significant organization’s role in the rules-
effect on company finances. Executives based trading system?
should use systems and data tools to
understand how this will impact margins
and revenues and then use tax and
supply chain mitigation strategies to
maximize those within the context of
corporate and operational strategies.
15 | 2020 Geostrategic OutlookSpotlight topics
US-China relations
Navigating strategic interdependence
Over the past few decades, US-China is not the full picture. Bilateral economic signing a limited “phase one” deal in
rapprochement and cooperation interdependence remains strong. January 2020. The modest “phase one”
created one of the world’s most highly Economic impact, loss of growth markets deal relates primarily to trade — removing
interdependent economic relationships. and increase in trade in services all provide some US tariffs on Chinese goods and
Since 2000, the year China joined the WTO, very real disincentives for the complete committing Beijing to increased agricultural
two-way foreign direct investment (FDI) decoupling of these two economies. The purchases. But the shadow of the future
has reached nearly $385 billion.3 In 2018, more accurate characterization of the will weigh on the US-China relationship
China was the US’ largest trading partner Sino-American relationship is, therefore, in 2020. The US Government has a time
with goods and services trade totaling an strategic interdependence. horizon of less than 11 months (i.e., until
estimated $737.1 billion, according to the the presidential election); the Chinese
Office of the U.S. Trade Representative. Locked in strategic interdependence, Government, at least a decade or more,
In addition, the U.S. Department of the US-China relations are increasingly with President Xi Jinping’s term limits
Treasury estimates that China holds defined by growing competition. It has removed. These diverging time horizons will
approximately $1.1 trillion in U.S. become clear that the relationship keep the US-China relationship in a constant
Treasury securities, representing 16.2% between these two powerhouses will state of imbalance and volatility.
of foreign ownership of U.S. treasuries. shape the course of the global economy,
geopolitics and the global business Business implications
Politically, however, the US-China environment for decades to come.
relationship is increasingly strained. Strategy
Beijing seems to see the US as a declining The primary areas of contention are trade, Entering into or expanding in the Chinese
power that is attempting to maintain its market access, intellectual property, market requires business strategies that
political, economic and military dominance currency and Chinese industrial policies. take into account what the US considers
through preventing China’s inevitable And encompassing aspects of many of China’s industrial policies that favor
rise. Meanwhile, in Washington, a political these areas of economic contention is domestic firms over foreign firms, including
argument is being made that China needs technology competition. In addition, non- subsidies, tax breaks, low-cost loans,
even more efforts to move toward a economic areas of contention between the foreign trade and investment barriers,
more open economy and to demonstrate US and China are broad and deep. These technology transfer and joint venturing
a commitment to the rules-based tensions cut across the entire spectrum mandates, and perceived discriminatory
international system. of bilateral political and military relations, IP and technology policies. This policy
including technological security, maritime landscape is shifting, though, with
Efforts to describe this relationship territorial claims, human rights, the supply the new Foreign Investment Law that
as a new “cold war” or as moving of fentanyl and conflicting views on Taiwan came into effect January 1. It further
toward “decoupling” are inaccurate, and Hong Kong. opens the Chinese market and levels
however. While decoupling may help to the playing field for foreign businesses
describe the process of unwinding some The US and China have taken a piecemeal competing with domestic companies,
elements of the US-China relationship, it approach to addressing these issues, potentially creating new opportunities.
16 | 2020 Geostrategic OutlookDespite trade tensions, there has not been a structural US foreign direct investment (FDI) in China has remained
transformation of US trading relationships consistent in recent years w
hile Chinese FDI in the US has
plummeted from 2 016/2017 highs
Share of US goods imports, monthly
China Mexico Japan India US-China FDI flows
European Union Canada South Korea Vietnam Chinese FDI into the US US FDI into China
25% $50b
15% $30b
5% $10b
2017 2018 2019 2002 2006 2010 2014 2018
Source: US Census Bureau. Source: Rhodium Group.
Note: Not seasonally adjusted. Data includes eight largest import partners as of 2018.
Finance and tax Data and intellectual property
Tougher US screening of Chinese
investments will continue to challenge firms
The “phase one” deal includes a provision
on intellectual property addressing areas Issues to watch
in 2020. The U.S. Treasury reports that the such as trade secrets, pharmaceutical-
number of notices filed at the Committee related intellectual property, geographical • Will the “phase one” deal hold?
on Foreign Investment in the United States indications, trademarks and enforcement Will there be a “phase two”
(CFIUS) increased 265% from 65 in 2009 against pirated and counterfeit goods. deal this year?
to 237 in 2017, and remained at a similarly This provision is unlikely to resolve US
high level in 2018. While the US has yet to executives’ long-standing concerns about • What will be the US-China
finalize the lists of technologies that will be effective intellectual property rights in policy position of the leading US
subject to export controls pursuant to the China, however, so companies should presidential candidates? How will
US Export Control Reform Act, these lists continue to implement safeguards. electoral politics impact the Trump
are expected to expand CFIUS’s investment administration’s negotiating tactics?
review authority. Chinese and other foreign Reputation and compliance
companies considering investment into US and Chinese firms face increasing • How will the performance of the
the US need to monitor such rules and pressure to support their home countries Chinese economy in 2020 affect
enforcement trends carefully. and uphold the values of their respective Beijing’s negotiating position?
governments and societies. Where Western
Operations and supply chain and Chinese policy goals and values • What will the U.S. Department of
Despite the “phase one” deal, trade diverge, firms will face pressure to remain Commerce’s formulation of lists
tensions will continue to impose costs on neutral — or pick a side. Either strategy of “emerging” and “foundational”
supply chains between the two countries. poses reputational risks, so executives technologies subject to new export
Perhaps most notably, the US and China should consider the likely risks and rewards controls signal about technological
are both expanding restrictions on of various scenarios before deciding on a decoupling?
certain technology exports or exports to course of action.
specified companies in the other market.
Executives should continue to monitor
tariff and non–tariff barriers to trade
and evaluate supply chain vulnerabilities
more broadly. Paying higher costs,
passing costs along to consumers or
shifting supplier locations are among the
options companies should consider.
17 | 2020 Geostrategic OutlookAround
the world
Geopolitics in a world of regions
18 | 2020 Geostrategic OutlookAround the world
East Asia and Pacific
Evolving role of China shapes the outlook
The rise of China has dominated the The role of the US will continue to loom Demographics
Asian narrative in recent decades. large in the region. Many countries, Beyond the demographic dividend
But Beijing’s tightening control of its notably Australia and several Association East Asia is aging at a rapid rate thanks
economy, the continuing slowdown of Southeast Asian Nations members to dramatic declines in fertility rates in
in economic growth and recent trade (ASEAN), are seeking to balance their recent decades, creating challenges in
tensions with the US have triggered a political and economic interests between maintaining economic growth. In China, the
strategic reassessment of the broader the US and China. One consequence of demographic dividend that helped to propel
footprint many companies have in Asia. the US-China trade tension is that other its rapid economic growth is going into
Asian markets often benefit as companies sharp reverse. Others are further along
Under President Xi Jinping, Beijing no diversify supply chains beyond China. this curve. Japan’s population is already
longer follows the “hide your strength and Vietnam, Thailand, Singapore and Malaysia shrinking, while South Korea’s is forecast to
bide your time” approach in foreign policy. are among the most prominent examples. start shrinking in 2025.
This will be on greater display in 2020 in RCEP, which brings together 15 countries
various arenas. At the same time, Beijing’s of the Asia-Pacific region in a free trade Technology
“redline” topics, such as the continuing agreement to be signed in 2020, is likely to Competing in the global technology race
protests in Hong Kong, are growing, which further reshape geopolitical and economic China, Japan, South Korea and other
could further complicate the business relationships within the region. Asian countries continue to take the
environment in China. lead in building and deploying leading
Primary forces technologies. Among them are 5G
The fierce trade dispute that erupted wireless networks, which will accelerate
between Japan and South Korea in Globalization the economic impact of other fourth
2019 creates the potential for another Playing a central role industrial revolution technologies. Their
geopolitical disruption in Northeast Asia. Arrangements such as RCEP will success in exporting such technologies will
This dispute has highlighted how the solidify Asia’s position in the global largely depend on their ability to set and
region’s complex political history still economic order. Given the region’s control the standards that will enable their
affects the business environment today. strong economic growth and increasing products to compete successfully.
Though tensions receded somewhat by the economic integration, Asian markets
end of 2019, bilateral relations will remain will remain increasingly attractive Environment
volatile. Elsewhere on the Korean peninsula, trade and investment partners for Sharing global responsibility
risks are increasing that the constructive, countries around the world. China is the world’s largest source of
but tentative, dynamic created by the carbon emissions, but also the largest
high-level engagement between the US and renewable energy producer, anticipated to
North Korea will cease. Pyongyang may account for 40% of the total global clean
assume a more confrontational position energy mix by 2022.4 Now that the US has
in 2020, raising the risk profile for South left the Paris Agreement, China will play a
Korea and other neighboring markets. major role at the 2020 UN Climate Change
19 | 2020 Geostrategic OutlookChina’s GDP grew 6% in the third quarter of 2019, a 27-year low The Regional Comprehensive Economic Partnership signatories
account for $24.8 trillion, or 29%, of global GDP
Chinese year-on-year GDP growth, quarterly RCEP signatories
8% Australia
Brunei
Cambodia
China
Indonesia
7%
Japan
Laos
Malaysia
Myanmar
6% New Zealand
Philippines
Singapore
South Korea
Thailand
5% Vietnam
2014 2015 2016 2017 2018 2019
Source: National Bureau of Statistics of China. Source: EY analysis; World Bank; Association of Southeast Asian Nations.
Conference, as its leadership is needed to Operations and supply chain
maintain momentum toward achieving a
robust global climate policy.
Despite the recent “phase one” deal,
US-China trade tensions will continue to Issues to watch
impose costs on supply chains between the
Business implications two countries. Given the risk that the trade • How will the “phase one” trade
tension may ramp up again, companies deal between the US and China
Strategy should continue to explore ways to diversify affect investment, trade flows and
East Asia and Pacific will continue to their production and sourcing locations in geopolitical dynamics across Asia?
be among the key anchors of the global the region. The planned signing of RCEP
economy for the foreseeable future. Many later this year should help facilitate cross- • To what degree will economic
economies in the region are experiencing border flows among its 15 members. interdependencies between Japan
robust growth. Combined with the and South Korea help to stabilize
emergence of a more integrated regional Reputation and compliance bilateral political relations?
economic system, global companies should Executives should closely monitor new
continue to consider the region as a central regulatory announcements from Beijing • How will North Korea’s nuclear
part of their business strategies. and how they are enforcing existing ambitions play out in 2020 and
regulations. Executives must be cognizant beyond?
Data and intellectual property of the reputational risks that may arise in
The US-China trade tensions have their home market as they comply with • To what extent will RCEP consolidate
accelerated Beijing’s push for economic regulations in both mainland China and regional economic relations and
self-sufficiency in select sectors. The most Hong Kong. create a more unified market across
notable of these is technology. Rather than the region?
risk isolating its economy, Beijing is seeking
markets for its indigenous technologies
abroad. Such efforts may enable China
to build spheres of technological and
economic influence within Asia and further
afield. Executives should monitor where
Chinese technologies gain market share,
and adapt their technological and data
operations in those markets accordingly.
20 | 2020 Geostrategic OutlookAround the world
South Asia
A delicate balancing act
As economic growth slows in most South military and the judiciary after the clear from India’s decision to opt out of
Asian countries in 2020, governments Supreme Court in November 2019 blocked the RCEP. Even within South Asia, regional
will need to balance public spending the prime minister’s bid to extend the integration is minimal. According to the
programs with fiscal pressures driven by army chief’s term. And Pakistan’s ability KOF Globalisation Index, South Asia is the
ongoing budget deficits. At the same time, to continue to attract foreign investment second-least globalized region of the world,
the foreign policies of most South Asian will be an open question. Moody’s rating behind only Sub-Saharan Africa.
governments will continue to be dominated agency recently upgraded Pakistan from a
by the need to strike a balance between negative to stable outlook, but investments Technology
India and China. in Pakistan will still carry risk if the country Focus on data privacy
continues to be included on the Financial The most significant technology policy
Even though Prime Minister Narendra Action Task Force’s gray list for money issue in India in 2020 will be data privacy.
Modi governs with a commanding laundering and terrorist financing. Policymakers and the public will continue to
majority following the 2019 elections, debate the privacy and protections citizens
India’s political environment will On a broader scale, geopolitics in South should have for their data and when it is
likely remain volatile in 2020. Slower Asia will continue to be dominated by the acceptable for apps to share data with the
economic growth is one reason for this, tenuous balance of power between the government. This issue is supercharged
particularly given persistent high levels region’s largest country, India, and its by the fact that most Indians’ mobile
of inequality and unemployment. The northern neighbor, China. India remains phones and computers are imported from
mass protests that erupted in the wake of wary of Chinese influence throughout China, leading to suspicions that Beijing is
the government passing the Citizenship South Asia and will keep a close eye on monitoring their activities.
Amendment Bill in December 2019 BRI infrastructure projects in Pakistan,
also cloud India’s political outlook. Bangladesh, Sri Lanka, Nepal and the Demographics
Maldives. These countries also have close An underutilized youth bulge
Sri Lanka’s political outlook largely mirrors political and economic ties with India and Almost half of the regional population
that of India’s after an election fraught with will likely attempt to play China and India (45.6%) will be under 25 years old in
violence brought Gotabaya Rajapaksa, the off one another. Pakistan is the exception, 2020. Such a youth bulge can be a boon
former defense chief during the country’s remaining firmly aligned with China. for economic growth, if new entrants to
civil war, to the presidency in November the working-age population are educated
2019. Both countries now face growing Primary forces and there are jobs to be had. This is
concerns that policies emphasizing currently not the case in much of South
majority rights will intensify sociopolitical Globalization Asia, however. In India, the International
tensions between ethnoreligious groups. Opting out of integration Labour Organization estimates that almost
India will continue to pursue its one-third of youth are not in employment,
In Pakistan, the domestic political independent and somewhat protectionist education or training.
environment will be shaped by tensions policy stance with respect to international
between the civilian government, the trade and investment. This posture is
21 | 2020 Geostrategic OutlookSouth Asia remains one of the world’s least globalized regions Pakistan accounts for more than 40% of Belt and Road Initiative
investment in South Asia
KOF Globalisation Index
BRI investment by country
South Asia Middle East and North Africa East Asia-Pacific
Europe and Central Asia Latin America and Caribbean Sub-Saharan Africa
$60b
North America
$50b
80
$40b
$30b
60
$20b
$10b
40
0
2002 2006 2010 2014 2018 Pakistan India Bangladesh Sri Lanka Nepal Afghanistan Maldives
Source: Savina Gygli, Florian Haelg, Niklas Potrafke and Jan-Egbert Sturm, The KOF Globalisation Index – Revisited, Source: “China Global Investment Tracker,” American Enterprise Institute website,
Review of International Organizations,2019, 14 (3), 543-574. (https://www.aei.org/china-global-investment-tracker/), accessed 2 January 2020.
Note: Data is the total investments in US dollars from 2005–19. Full year 2019 data was not available at time of publication.
Environment surrounding data privacy. This could have
Increasingly unpredictable monsoons
The annual monsoon is perhaps the most
implications for cross-border data flows,
data localization and foreign technology Issues to watch
important driver of economic growth in company access to the Indian market.
South Asia, as all countries in the region • Will India enact a new data privacy
depend upon it for agricultural production. Operations and supply chain law? How will it affect foreign
Global climate change, however, is making With India opting out of the RCEP, South technology firms’ access to the
the monsoon season increasingly erratic. In Asia will not be integrated into the East country?
2019, the rains arrived late and with such Asian supply chain in the foreseeable
intensity that they caused massive flooding future. Sourcing from the region, therefore, • Will governments be able to stabilize
in India, Nepal, Bangladesh and Pakistan. may continue to be less competitive than or reignite economic growth?
In 2020 and beyond, governments what is available from alternative locations.
throughout the region will face challenges Logistics could improve, however, if BRI • How will BRI projects be viewed by
in dealing with the economic and and other infrastructure projects continue the local populations affected by
humanitarian aftermath of unpredictable to move forward. their construction?
monsoons.
Growth • Will India’s budget for 2020, due
Business implications Despite the slowdown in regional to be presented in February, reveal
economies, South Asia will remain one of anything new about the agenda of
Human capital the fastest-growing areas in the world. the second Modi administration?
South Asia enjoys an abundance of labor, Middle-class consumers in India and
making the region an appealing location for beyond enjoy greater purchasing power
labor-intensive manufacturing. Companies than in the past, and this should grow in
should proactively mitigate any socially the coming years. Regulatory barriers to
driven political risks by engaging with these markets could remain high, however,
employees and the communities in which and executives should evaluate whether
they operate. One such strategy is to locate the long-term growth potential outweighs
production in economically disadvantaged these costs.
areas, while another is to partner with local
educational institutions to ensure a strong
pipeline of talent.
Data and intellectual property
Data privacy will be a hot issue in India
in 2020. Executives should closely
monitor the evolution of the debate
22 | 2020 Geostrategic OutlookAround the world
Eurasia
Renewed strategic significance
As the bridge between Asia and Europe, inward focus, has left a vacuum. Russia will Demographics
Eurasia will continue to gain in strategic also continue to build its influence across Seeking immigrants to stabilize
importance, both politically and Western and Central Europe. populations
economically, in 2020 and beyond. Demographic change looms large for
Domestically, politics in many Eurasian Eurasia, as aging populations continue to
After the end of the Cold War, the post- countries continue to be characterized by decline. Once again, Russia is very much
Soviet countries appeared destined autocratic rulers, corruption and a strong at the center of developments. As its
to become less significant actors in a role for the military. In addition, several population declines, the Kremlin has made
global economic system created by and rulers have been in power for decades and it a priority to provide Russian citizenship
dominated by the West. The rise of China, are now seeking to transfer power to their to between 5 million to 10 million migrants
and Asia more broadly, has shifted that chosen successors. Kazakhstan, Tajikistan from countries with a strong Russian-
political and economic outlook. China has and Turkmenistan are notable examples. speaking population.
emerged as a viable commercial alternative And in Russia, President Vladimir Putin has
to the West, with Russian exports to China been in power for 20 years. Although the Technology
multiplying tenfold since 2001, making it constitution currently requires him to step Prioritizing cyber power over broader
Russia’s largest export market behind the down in 2024, Putin’s recent state of the connectivity
EU. With a new gas pipeline that opened in union address included proposed changes Military, nuclear and cyber technology are
December 2019, Russia’s exports to China to the constitution that could enable him to largely the focus of the region’s, and in
are set to grow even further. remain in power for longer. particular Russia’s, technology prowess.
To that end, Russia will remain one of the
China’s BRI, the vast infrastructure Primary forces world’s top cyber powers. In contrast, the
network connecting East Asia with region’s role in the emerging technologies
Europe, is strengthening Eurasia’s Globalization of the fourth industrial revolution will
geopolitical clout. The success of the Uncertain outlook remain limited. Case in point, the EEU’s
BRI ultimately depends on the proactive Slowing growth of key trading partners digital agenda, which promises to develop
support and involvement of Eurasian (China and the major EU economies) an integrated digital infrastructure and
countries, notably that of the dominant weighs on the Eurasian economic outlook. expand Internet access, remains stalled.
regional power, Russia. Nevertheless, Russia is building a strategic
energy relationship with China, opening the Environment
The US–China rivalry and the eroding Power of Siberia pipeline and consolidating Capitalizing on the Polar Silk Road
transatlantic relationship also provide its access to European energy markets Receding ice in the Arctic Sea has opened
Russia with more geopolitical room to by pursuing the Nord Stream 2 project. the prospect that the Northern Sea Route,
maneuver for influence. Moscow will Within the region, the Eurasian Economic which circuits the Russian Arctic coast,
continue to use its more prominent position Union (EEU) continues to face challenges could one day become a global shipping
on the world stage to move into policy in deepening economic integration with artery. Russian ice breakers are active
arenas in which the US, with its current member states. on the route during the summer months,
23 | 2020 Geostrategic OutlookControl of corruption is low but slowly improving for Eurasian countries are becoming crucial transit corridors
many countries in the region between East Asia and Europe
Control of corruption
Norway
Kazakhstan Kyrgyzstan Russia
Tajikistan Turkmenistan Uzbekistan
-0.4 Belarus
Moscow
Russia
-0.8
Ankara
-1.2
Kazakhstan
-1.6 Shanghai
2014 2016 2016 2017 2018 Tehran China
Source: “Worldwide Governance Indicators,” World Bank website, https://info.worldbank.org/governance/wgi, Source: “Belt and Road Europe,” OBOReurope website, https://www.oboreurope.com/en, accessed 3 January 2020.
accessed 3 January 2020.
Note: Scores range from -2.5 (weak) to 2.5 (strong) governance performance.
and a global shipping company conducted Reputation and compliance
an exploratory voyage in 2018. The
commercialization of this so-called Polar
The lack of government transparency
in many Eurasian countries can create Issues to watch
Silk Road would dramatically alter global significant challenges for corporate
shipping routes and shift the geopolitical governance. Any breaches of anti- • How will BRI projects evolve in 2020
dynamic around the Arctic region. corruption laws would cause not only and beyond?
compliance issues, but also reputational
Business implications damage in home markets. Executives need • How sustainable is Russia’s pivot to
to exercise continued due diligence when China, given the strategic rivalry the
Finance and tax conducting business in the region. two countries have for influence in
Russia continues to face US and EU the Eurasia region?
sanctions for its role in the Ukraine
crisis that began in 2014. While the EU’s • How will European companies
sanctions are set to expire at various balance the risk of US sanctions
points in 2020, they are likely to be against opportunities across Eurasia?
extended once again. The US Congress
is also considering additional sanctions • How will data localization policies
on Russia in response to its alleged evolve in Russia and other key
meddling in the 2016 presidential election. countries?
When assessing business prospects in
the region, executives should evaluate • Will any political risks associated with
the likely evolution of these sanctions brittle governments in the region be
to determine Eurasia’s geopolitical risk- realized?
adjusted commercial attractiveness.
Operations and supply chains
China’s BRI holds great promise to
significantly upgrade the region’s
transport infrastructure network, making
it an attractive route for trading goods
between China and Europe. Companies
should monitor the progress of these
infrastructure projects and evaluate
how the BRI affects the economics
of their supply chain logistics.
24 | 2020 Geostrategic OutlookAround the world
Europe
Shifting internal and external equilibriums
Europe is witnessing the most profound To that end, EU policy debates will the EU will continue to be fiercely protective
transformation of its internal politics continue to proactively re-evaluate of the established principles of competition
and external relations since the end of options toward Russia and China in within the single market, it will develop
the Cold War. an effort to improve Europe’s strategic more proactive industrial policies to bolster
sovereignty. Although EU relations European competitiveness abroad.
The rise of extreme populist and nationalist with Russia have been in a stalemate
movements challenges the vision of a more for several years now, France is among Demographics
integrated Europe. This has superseded, if the EU members that are beginning to Political realities of aging
not replaced, Europe’s traditional political question whether Europe needs to rethink With a median age of 43.8 years in 2020,
party landscape, historically dominated by this approach and reopen a strategic Europe is by far the oldest region in the world
social democratic and socialist parties on dialogue with its Eastern neighbor. (North America is the second oldest, at 39.4
the left and centrist and conservative parties years). Rapidly aging societies create vast
on the right. The result has been a further Moreover, although the European political challenges, which include paying
fragmentation of the political spectrum Commission has identified China as a for pensions and maintaining economic
across Europe, hindering coalition building “systemic rival,”5 many EU Member States growth with a smaller labor force. One
and government formation. are engaging proactively with Beijing. Given option would be to increase immigration,
the commercial attractiveness of China’s but this creates political challenges in an
The most prominent example of this economy and converging international age of identity politics and populism.
new political reality is Brexit. The exact interests (such as a commitment to the
contours of the Brexit arrangement, which Iran nuclear deal, China’s increasing Technology
will emerge throughout 2020 and beyond, engagement in Africa and climate change), Seeking technological sovereignty
will not only be crucial for future EU-UK the EU will continue to develop a more As the race for technological supremacy
relations, but also for intra-EU relations. nuanced, pragmatic perspective in its between the US and China heats up,
Brexit will accelerate a significant geopolitical relations with China. Europe is increasingly focused on achieving
reorientation across the political alliances technological sovereignty. Though Europe
within the EU, placing more focus on Primary forces is behind in developing a number of critical
the Franco-German relationship as the technologies, it remains the leader in
gravitational center of European politics. Globalization defining global standards for the new
Aligning economic and political interests generation of technologies (e.g., data
In its external relations, the EU’s The more competitive geopolitical privacy and localization). Europe’s choice
commitment to a rules-based global environment and Europe’s growing concern of suppliers for 5G infrastructure will seek
order will remain robust. But Europe about the increasingly state-centrist and to balance the commercial attractiveness
will increasingly be challenged to nationalist economic policies of the world’s of engaging with China with the security
embrace a more realist perspective in its other major economies have prompted a concerns voiced by the United States.
geopolitical relations given that national reconsideration of its economic strategies
interest-based politics are on the rise. and overall commercial philosophy. Though
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