Publish Date: 14MAR2024
Security & Geopolitical Analyst: Treston Wheat, PhD
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Introduction
As nations, organizations, and communities grapple with the rapid dynamics of global geopolitical changes witnessed over the past couple of years, our team has decided to revisit the COVID-19 pandemic and its role in shaping the current and evolving geopolitical order.
The global COVID-19 pandemic, which commenced in early 2020, would ultimately unleash devastating economic impacts, acting as a catalyst for changing geopolitical trends that have influenced everything from trade to security. While the immediate significant negative health impacts of the pandemic were apparent, it was the response by various governments to the disease that led to shifts in globalization and the balance of power. These effects are interconnected in how they have altered the world, suggesting that the global community is fracturing in a new era of great power competition. This white paper delves into the complex relationship between each negative effect of the pandemic and how it exacerbated the trends of geopolitical rebalancing underway in global politics.
The pandemic disrupted supply chains, leading to inflation, friendshoring, and technology controls. The Federal Reserve's response to inflation adversely affected various countries' currencies and fostered economic rebalancing. Furthermore, friendshoring and technology controls have propelled such rebalancing and the balkanization of technology between the U.S. and China. Consequently, the trend of deglobalization has accelerated by several years due to the pandemic.
Security professionals, corporations, and governments must comprehend the shifts the pandemic has precipitated, as the trends discussed are highly likely to persist through the next decade. Understanding these dynamics is crucial for formulating strategies that navigate the complexities of the changing geopolitical landscape effectively.
Changes to Globalization
Globalization (the economic interconnectedness of the global community) unraveled more quickly due to the pandemic. One of the hallmarks of modern globalization is “just in time” manufacturing where producers only make products to meet demand rather than having surpluses. While this makes the process more efficient and reduces costs, it is a brittle system that easily breaks whenever the pieces are not running perfectly. A survey by Earnst and Young found that due to the pandemic 57% of corporations faced “serious disruptions” to their supply chains, and the pandemic impacted corporations and supply chains in many ways that were not fully expected. For example, ports and terminals became extremely congested, increasing the cost of transportation for consumer goods. Warehouse capacity had been reached in many places, and inland transportation had also been significantly disrupted. The OECD put it this way, “The changes in the trade structure caused by the COVID-19 pandemic in a single year was of a similar magnitude to changes otherwise typically seen over 4-5 years.” Such changes to economic structures, such as the supply chain, would require fundamental alterations to the geopolitical order.
Technology became the progenitor for the changing relationship the U.S. and others had towards trade and the supply chain. Semiconductors (colloquially referred to as chips) are fundamental to all modern economies, but the pandemic severely disrupted the supply chain, impacting everything from computers to cars. The basic problem with semiconductor fabrication is that there are only a handful of companies with the capabilities to manufacture advanced chips. Typically, what happens is companies design chips, and then they send those designs to TSMC (or a few others) to be manufactured. However, the fabricators cannot simply make any design at any time. So, when the pandemic hit and corporations stopped ordering certain chips based on the expectation of reduced demand for their products, they went to the back of the line when they started needing chips again. This highlighted to the U.S. that they needed to increase the manufacturing of semiconductors closer to home, leading to the CHIPS and Science Act that allocated $50 billion to help bring manufacturing to the homeland. The U.S. combined this with export bans to China of advanced semiconductors. Therefore, the pandemic was a direct catalyst for the further balkanization of technology between the United States and China.
The shocks to trade and the supply chain also led governments to rethink their economic relationship with other countries. This was not only an issue of competition, such as problems with China’s manufacturing, but also how that brittleness in manufacturing and transportation indicated a need to alter how countries and corporations approached the global dispersion of trade. That is what has led to “friendshoring” and new relationships between historic foes. Friendshoring refers to the process of bringing manufacturing and other parts of the supply chain to allies (or at least, not enemies). With Executive Order 14017, this became America’s official policy for critical economic areas. Since the summer of 2022, the U.S. has reduced imports of goods in those critical areas from China (16.2% to 15.2% of total imports of those areas), and this trend is highly likely to continue. While friendshoring is the policy of the U.S., the pandemic’s supply chain shock has also led to improved relations with previous enemies. For example, the U.S. has sought to move manufacturing to Vietnam with whom America fought a war only fifty years ago, and the two countries have elevated their relationship to a “strategic partnership.” Supply chain issues caused by the pandemic led to a rethinking of globalization, that is how countries are connected economically, and the U.S. has been at the forefront of this rebalancing with allies and former enemies.
Source: Federal Reserve Bank of St. Louis. FRED Data.
Though a stronger dollar can help U.S. consumers and tourists, most countries experience negative repercussions because of the dollar’s role in international trade. The dollar has risen against the pound, euro, yuan, and yen, and corporations and governments across the world have all been negatively hurt due to this. There are two primary ways a strong dollar hurts other countries: debt and trade. About half of all cross-border loans and international debt securities are priced in dollars, meaning it is harder to pay back that debt with a strong dollar. In addition, a stronger dollar leads to import inflation in other countries, basically having an inverse relationship with U.S. inflation. An example would be that a stronger dollar makes energy imports more expensive for countries as oil is priced in dollars. Many of America’s competitors will have negative impacts with a stronger dollar, and that influences their geopolitical calculations. For example, China’s onshore yuan (renminbi) has been a particular loser against the dollar dropping to a 16-year low due to problems stemming “from a property slump, weak consumer spending, and shrinking credit growth” (discussed below). Chinese state banks have attempted to sell their dollars and buy the yuan to mitigate this problem, but their efforts have not yet been successful. China is not the only country to deal with this problem, and the negative effects from a strong dollar are an important cause of other countries wanting to reduce (or even eliminate) the dollar as a reserve currency.
Stalling Chinese Growth
Since the leadership of Deng Xiaoping, the vast majority of analysts have assumed the rise of China as a global power and peer competitor to the U.S., not just a potential regional hegemon. China had impressive economic growth up through and even during the Great Recession, which prevented that financial crisis from being worse than it could have been. However, the pandemic and the CCP’s response to it have likely stalled the economic growth of the country and are likely causing China to fall into the development trap of getting old before it gets rich (on a per capita basis). As discussed above, supply chain shocks and currency problems have already pushed the U.S. and China towards a rebalancing of power by changing their approaches to geopolitics. However, that is not the complete story when it comes to China, which is facing far greater problems due to the CCP’s policies concerning the pandemic. Those problems are likely to make China far more aggressive in geopolitical issues because it is now losing time for a long-term and measured approach.
Even before the pandemic, China had certain structural issues that attuned analysts knew would create problems over the next decade, but the pandemic was an impetus for further problems. These issues included:
Demographics. China has major demographic problems because of the One Child Policy. Currently, there is an imbalance of men to women in the tens of millions, and in 2022-23 the country experience a population decline.
Regulatory framework. China’s cybersecurity and data laws were already detrimental to technological development because corporations became less likely to invest knowing they could easily lose their intellectual property and data.
Real estate bubble. The speculation in China’s real estate market has led to a bubble years in the making, and problems with corporations like Evergrande could lead to a financial crisis in the country.
Corporate debt. Chinese state-owned companies have debt levels that are too high to be effective long-term players in the market without draining resources by the government propping them up.
IP Theft. The consistent need to steal intellectual property from Western companies was already bad before the pandemic, but now governments and corporations are more willing to fight back against the CCP’s thievery.
When the pandemic was really spreading, the CCP decided to take a “zero COVID” policy approach that exacerbated all the problems mentioned. China’s economic growth significantly declined, and other countries realized they could not rely on China as a reliable trading partner when it came to manufacturing consumer goods. Manufacturing cities in China were completely locked down to contain the virus, which means they were not making products. China’s aggressive foreign policy following the pandemic combined with the historic trends of intellectual property theft and arbitrary regulations forced the U.S. and others to implement policies that furthered the balkanization of technology and moving of supply chains. Some of these trends would likely have led to deglobalization and other economic problems in the long term, but the pandemic sped up the changes, especially because of the CCP’s stringent policy choices in response to the pandemic.
Trend Analysis
The COVID-19 pandemic acted as a fundamental catalyst to changing trends in global politics, and now the world is dealing with a rebalancing of power and de-globalization. Many countries do not want to engage in a redux of the Cold War between the U.S. and China, but the two global powers are essentially forcing that choice upon the world. These blocs will be different, though, because a primary area of consideration is economic growth via trade and technology. America chose various containment policies against China, such as export controls, and is currently attempting to bring more countries into its economic sphere of influence through friendshoring. The point of this is not only to strengthen the supply chain in critical areas, but also to improve relations with countries that already have grievances with China, such as Vietnam. Technologically, the U.S. has tried to move semiconductor fabrication to the homeland or friendlier countries, and E.U. countries are also increasing their domestic investments in these products, such as Germany. China has not been passive in this process, and many of the CCP’s policies have been self-defeating. A totalitarian regime seeks control above all else, and the zero COVID policies demonstrated to the rest of the world that China is probably not a reliable manufacturing partner. On the other hand, other countries have had negative impacts from America’s domestic policy choices (like interest rates) that have contributed to tensions even with allies.
All of this together is an incredibly complex mix of economic, monetary, political, and geopolitical trends that will impact corporations and other clients. There are highly likely to be three major trends that security professionals will need to pay attention to based on the changes from the pandemic.
The U.S. and China will have increased competition in international institutions, currency markets, and spheres of influence. The expansion of BRICS+ is a prime example of this attempted rebalancing against the U.S. and the West that China and other developing countries need. [See here for RileySENTINEL’s analysis of BRICS expansion.] This rebalancing will also take place at the G20, Shanghai Cooperation Organization, the Quad, AIIB, etc. The U.S. dollar’s preeminence even during the pandemic and subsequent strengthening is also leading countries like China, Russia, and Brazil to challenge American hegemony.
Supply chain protection in terms of economic interests and physical security will continue to be in flux and impact the rebalancing. The U.S. and China are highly likely to make political demands based on changes in the supply chain, and middling powers are likely to find this a difficult situation to manage. Corporations are also highly likely to face security issues based on the development of these trading and technology blocs because governments will increasingly be forced to choose sides, impacting regulations and public policy.
Deglobalization will increase over the medium-to-long term because of supply chain changes (e.g., friendshoring) and technological export controls (i.e., the balkanization of technology). The pandemic showed that the world needs to diversify where semiconductors are fabricated, and the U.S. will continue to support production domestically and in allied nations. This also means, though, that China will lose out on advanced chip making and imports, which will lead to China working with its own allies to create a technological bloc and further the rebalancing mentioned in the first trend.
Geopolitics remains a complex area of study, and the pandemic highlights how interconnected issues can lead to major changes on multiple economic and political fronts. What the pandemic did was expose underlying problems in the supply chain, alliances, manufacturing, etc., and by exposing those problems it forced great and middling powers to change their approach to geopolitical competition.
Implications for International Organizations and Risk Management
As this geopolitical report has thoroughly analyzed, the COVID-19 pandemic has been a significant catalyst in reshaping geopolitical trends, with profound implications for organizations operating on a global scale. The pandemic has accelerated the process of deglobalization and has led to a realignment in the balance of power, particularly between major global players like the United States and China. These shifts have significant repercussions for international entities, highlighting the critical need for vigilant risk management and strategic adaptability.
Monitoring Geopolitical Shifts: Organizations with international operations must prioritize the monitoring of geopolitical changes. Even minor shifts in global politics can have ripple effects on international trade, regulatory environments, supply chain stability, and overall risk exposure. The pandemic has shown that geopolitical dynamics are fluid and can change rapidly, underlining the importance of having a robust mechanism to track and analyze these shifts.
Adapting to New Realities: The transition towards deglobalization and the balkanization of technology necessitates a strategic re-evaluation of international operations. Organizations should consider diversifying their supply chains and exploring 'friendshoring' options to mitigate risks associated with geopolitical dependencies. Aligning operations with the evolving global landscape will be crucial for maintaining competitive advantage and operational resilience.
Risk Mitigation Strategies: In this new era of increased great power competition, it is imperative for organizations to develop comprehensive risk mitigation strategies that encompass a wide range of potential scenarios. This involves not only understanding the direct impacts of geopolitical shifts but also anticipating secondary effects, such as changes in currency valuation, regulatory alterations, and potential disruptions in key markets.
Engagement with International Institutions: Active engagement with international institutions and forums can provide valuable insights into emerging trends and policy shifts. It can also offer opportunities for collaboration and influence in shaping the global regulatory environment, which is increasingly important in a world where economic and political blocs are becoming more pronounced.
Scenario Planning: Given the complexity and interconnectedness of global trends, scenario planning becomes an essential tool for organizations. It allows entities to prepare for various potential futures, understanding how different geopolitical shifts could impact operations and strategize accordingly.
Investing in Intelligence and Analysis: To navigate this complex geopolitical landscape effectively, organizations should invest in intelligence gathering and analysis capabilities. This involves not only tracking current events but also understanding deeper geopolitical undercurrents and their implications for international business operations.
Fundamentally, organizations with international presence must not only adapt to the current geopolitical realities but also prepare for an uncertain future. The COVID-19 pandemic has accelerated certain global trends and created new challenges, underscoring the need for agile, informed, and strategic approaches to international risk management. By closely monitoring geopolitical shifts and proactively adjusting strategies, organizations can navigate these complexities and safeguard their operations against the unpredictable nature of global politics.
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