Navigating emerging geopolitical blocs and competing industrial policies will be an essential part of risk management in a volatile global environment argues Jon Berry GAICD, Associate Director of KPMG Australia Geopolitics Hub.
In June 2022, the Australian Securities and Investments Commission (ASIC) included geopolitical risks as a recommended focus area for directors preparing year-end reports. For many Australian firms, this came as a timely reminder. If your business exports products, recruits internationally, relies on imported inputs, or sells to companies that either import or export, then you are exposed to geopolitical risks. These risks include new tariffs and technical barriers in overseas markets, and restrictions on supply of critical inputs. Global tensions can result in citizen anger and calls for companies to take a political stand. Certain major events — such as global conflict — can complicate and trigger many of these risks at once.
Think back to May 2020. Imports of Australian barley into China were suddenly subject to additional tariffs of 80.5 per cent. Australian exporters that already had vessels at sea scrambled to find other buyers. Farmers with crops in the ground watched prices collapse. The entire value chain was impacted — from growers, to traders, to processors, logistics firms, port operators, banks, insurers, labour-hire companies and all the other large-, small- and medium-sized enterprises that sell goods and services to these industries. The move seemed to come out of the blue — but did it? How might directors of those companies that were impacted have foreseen it, or atleast noted increasing risks? What lessons does this episode provide to help anticipate the next crisis?
Unpacking geopolitical risk
The old approach to managing geopolitical risk — a single entry on a risk register marked “geopolitics” — is no longer enough. Directors need to take a systematic approach to understanding the full breadth of challenges and opportunities. Good advice is to step back and observe four key megatrends: structural shifts in the international system, rising mistrust, Industrial Revolution 4.0 and the climate crisis.
Structural shifts in the international system
The rules-based global order is still dominated by the great global powers of seven decades ago. Other rising nations are now calling for a seat at the table. This challenge to the status quo is driving mistrust and strategic competition between fast-growing emerging economies and incumbent powers.
The risks that flow from this megatrend include a global market that is diverging into separate ecosystems. Companies in Australia may need to choose whether to align with opportunities in the established Western market, or with commercial networks anchored by China. The strategy chosen could impact everything from programming languages and technical and environmental standards to currencies, as well as business and legal norms.
Rising mistrust is the attitude of more and more people towards governments and other institutions. This year’s Edelman Trust Barometer referred to a “society locked in a vicious cycle of distrust.” Drivers include feelings of being left behind by globalisation and resentment towards elites. Throw in a global pandemic, plus the ability of social media to disseminate fringe views, and it should be no surprise that rising mistrust is leading to many citizens becoming polarised and seeking alternatives to the mainstream. Populist leaders — who portray themselves as being on the side of the people against the corrupt powers that be — can step into this breach.
Mistrust creates a range of risks for Australian organisations — from the threat of popular unrest abroad disrupting export markets and sources of supply, to protectionist trade settings, as well as local citizen anger triggered by social and political flashpoints — for example, mask/ vaccination mandates and social justice issues. Industrial Revolution 4.0 refers to rapid technological developments — for example, in artificial intelligence, machine learning and blockchain — that will fundamentally change the way countries compete. Major global powers are seeking to dominate these industries.
Australian organisations should consider to what degree they are exposed to this global tech race. What are the upside and downside risks for your organisation? Is your product — or entire industry — at risk of obsolescence? What are the opportunities each tech superpower represents and will your organisation have to choose a side? The climate crisis is driving a wide range of risks for Australian organisations, from the direct impact of extreme weather events to flow-on effects including changing patterns of agriculture and growing numbers of climate refugees. Sea levels are threatening island nations, while retreating Arctic ice cover is exposing new sea lanes and natural resources to which multiple countries stake competing claims.
Directors should consider whether the geopolitical causes and effects of climate change are comprehensively understood. Tracking international climate negotiations can help directors forecast rule changes and predict whether the world will avoid the most catastrophic impacts. Companies with effective pro-climate policies will both contribute to this goal and reap reputational returns. Companies perceived to be poor climate performers will face increasing pressure from their customers, investors and employees to raise their ambitions.
Back to barley
Organisations exposed to Australia’s barley trade that had been tracking geopolitical risk would not have been caught unaware by the tariffs announced in May 2020. Their analysis of rising mistrust would have identified growing tensions between the trading partners in early 2020 — but this data point would have been just one of many.
For years, China’s domestic animal feed producers had been faced with growing pressure, due to an end to price support for corn farmers in 2016, and the mass culling of China’s pig herd following an outbreak of African swine fever in 2019. Australian directors paying attention to how structural changes in the global power balance were playing out at the World Trade Organisation would have also known that the anti-dumping investigation that led to the barley duties was launched back in 2018. They may not have predicted the exact timing of the tariffs, but barley would certainly have been moving up towards the top- right corner of their risk matrices.
The barley episode provides food for thought for other industry sectors. China considered Australian barley producers had been subsidised by the Murray-Darling Sustainable Rural Water Use and Infrastructure Program, which incentivises farmers to use water responsibly. Major beneficiaries of this program include cotton, almond and walnut growers. These industries have not yet faced trade remedy investigations from export jurisdictions, but they may be vulnerable to future challenges.
What are the geopolitical risks that loom for your organisation? What is your approach to managing them? Is geopolitical risk a regular agenda item? Does your board have access to the necessary skills and knowledge to manage these risks? Nine out of 10 respondents to a recent survey of global executives reported they had faced unexpected geopolitical risks in the past 12 months. Be the one in 10 that sees these risks coming.
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