Companies have also started minimizing their geopolitical risks by preferring some sources, using restrictions, or avoiding others altogether. The US is worried about buying and investing in China. There are sanctions on buying from and selling to Russia. Many countries want to promote friend-shoring to minimize dependencies on countries outside their own allies. However, it is not as simple as that. If we don’t understand the trading networks and global supply channels, these kinds of activities are meaningless and misleading.
Do direct restrictions work?
The Economist just wrote that Joe Biden’s China strategy is not working. The US has introduced new policies for trading with China; this started already during Trump’s term. America’s policies include tariffs, export and investment control and especially special measures for sensitive technologies, like AI and microchips. The target is to stop China from developing advanced military technology and also otherwise getting an advantage in the technology area, and on the other hand, limit dependences on Chinese products and production.
The Economist also continues how the US recommends that its friends (including Vietnam and India) and allies avoid trading and doing business with China and prefer friend-shoring. This policy can also look like a success at first glance. The US import of low-cost items from China has dropped significantly, and Chinese firms’ investment in the US has dropped from $48 billion to $3.1 billion in six years. Furthermore, when China was the #1 investment target for Americans in Asia, now it is behind India and Vietnam.
The reality is much more complex
Yet, the reality is much more complex than this, based on The Economist article. For example, the US supply chains have moved to other places, such as India, Mexico and South East Asia. Those places are now more dependent on China than ever. This has actually increased those countries’ economic links to China significantly when they import components from China and then sell products to the US. Many countries are happy to take investments from China and, at the same time, develop exports to the US. This can increase China’s global influence, which is quite the opposite of what American officials think to do.
Same issues with Russian sanctions
We have also seen similar things with Russian sanctions. The export to Russian allies has increased, and also import from countries that are quite linked to Russia. Here is one example: together with its Western allies, Finland introduced strong sanctions against Russia in 2022.
At the same time, its export to Kazakhstan increased by 143%, and 68% of exported goods were items that are on the Russian sanction lists. Is it realistic to think that Finnish companies suddenly had so many more items to export there? Or does this export continue elsewhere? We can find many similar examples in the global trading data.
Supply chains are networks
I wrote earlier that friend-shoring is not such a simple solution. There are three important things to remember when we think of supply chain strategies:
- It is not only from where you buy, but it is the whole network and chain of the components and also ownerships and investments in the supply chain.
- It is rarely possible to buy only from friendly countries, especially some natural resources, and today’s friend can also become tomorrow’s enemy. So, it is much more about building a portfolio and optimizing the risks and benefits in the supply portfolio.
- All this requires proper data and data analytics. It is easy politics to ban some countries and companies, but if you don’t really understand all networks of resources, materials, production capacities, investments, competencies and logistics, it can create an illusion that you are reducing your risk but, in reality, it could be increased.
30 years of globalization
When we have lived 30 years through the globalization phase, but it looks like this kind of basic understanding has been forgotten. Strangely, the Cold War situation was simpler to understand and manage. The communist and Western blocks were more isolated, and many third-party countries (e.g. countries with some important natural resources) were usually associated with one of the blocks.
Global supply chains
However, nowadays, we have a reality with global supply chains related not only to certain physical components but also to competencies, investments and needed services. When managing risks, restricting investments, and exporting to certain countries, we need much more data, understanding, and sophisticated methodology.
Mission Grey has published reports that illustrate some examples of dependencies between countries and also how some changes in the trading relationship and political liberties seem to correlate. For example, the links between Australia and China are interesting to analyze further. Australia is a country that has been politically very free but regularly trades with more authoritarian countries.
Connecting the geopolitical dots
Understanding global networks and managing their associated risks is essential for businesses. In addition, governmental actors and the third sector have much to benefit from network analysis and portfolio management, for example, when planning effective sanctions, regulations, and trade policies.
All this just highlights that all parties need better data and tools to analyze global trade, dependencies and risks. And it is not enough to see risks associated with individual countries but really understand networks and analyze the risk portfolios. You can never minimize risk to zero, but it is important to understand what risks you have, where they are and how to build a portfolio so that you can diversify your risk and recover quickly when some risks are realized.
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