Key geopolitical issues for directors

Monday, 01 February 2021


    Brexit, Beijing, Biden and other pressing geopolitical issues that board directors should be across in 2021, from Greg Earl.

    Disease pandemics might be the topic of the moment for forecasters these days, but a Lowy Institute survey of some of Australia’s key long-term planning documents — the 2013 National Security Strategy, the 2016 Defence White Paper, the 2017 Foreign Policy White Paper and the 2019 Reserve Bank of Australia’s Financial Stability Review — shows how concerns about black swan events can change.

    Pandemic threats received scant or even no attention in those considered long-term outlooks compared with threats including terrorism, environmental disasters and financial shocks. But by August last year, McKinsey Global Institute was warning that a pandemic like COVID-19 could cost the world an estimated US$30 trillion in lost economic activity — twice the cost of a world war.

    By October, Home Affairs Department secretary Michael Pezzullo AO, was moved enough to expand on a 2019 speech that identified seven geopolitical “storms” to outline a new 25-point national risk register. He finished with an extra serving of potential worries — which ranged from a humanity-killing synthetic virus to a volcanic super-eruption that blocked the Sun.

    But despite COVID-19 inspiring such big predictions, perhaps 2021 might be a year for what former US defence secretary Donald Rumsfeld famously once called “known unknowns”.

    Biden v Beijing

    The biggest such “known” geopolitical uncertainty for Australian directors is how Joe Biden’s election as US president will change the fractious US relationship with China and then how this will flow on to Australia. Biden will be a much more traditional American president, focused on restoring old alliances strained by Donald Trump’s erratic, impetuous “America First” approach to the world. He is expected to pick up the telephone to other world leaders to discuss China and thus impose subtle pressure on Beijing to reconsider the assertiveness seen under President Xi Jinping.

    But the underlying fear of economic competition from China is now strongly bipartisan in the US and so Australia will remain squeezed by its different relationships with its main security and economic partners. While Trump could cut trade deals with Xi amid vociferous anti-China rhetoric, a Biden administration will be different. There is likely to be a long and internecine internal debate over whether to revive the sort of realist Democrat approach to China seen under Barack Obama, or shift to a more radical approach, which would involve tougher criticism of China over human rights and economic intervention policies to maintain US technological leadership.

    Running amok

    Social unrest has dropped sharply around the world during the pandemic due to reduced mobility, according to an International Monetary Fund index. But the agency warns: “As the crisis passes, unrest may yet re-emerge in countries where progress on underlying social and political issues has stalled and where the crisis exposes or exacerbates pre-existing problems.”

    This may be particularly relevant to three Asian countries which have struggled to control the pandemic — Indonesia, India, and the Philippines. Australia has been trying to build stronger strategic ties with these nations as part of the effort to diversify from economic dependence on China and has new economic engagement programs under way with Indonesia and India. But business consultant IMA Asia has estimated that the Indian and Philippines economies will be 20 per cent smaller in 2024 than was expected last year due to pandemic-related slower growth. And Indonesia could be 14 per cent smaller.

    All three countries are led by populist and charismatic, democratically elected leaders who have now lost significant credibility due to poor management of the pandemic and may be more vulnerable to shows of public dissatisfaction.

    Net zero rising

    Unexpected carbon neutrality commitments in October by Australia’s two largest energy commodity customers China and Japan have increased the likelihood 2021 will see a range of new commitments to carbon emission promises ahead of the UN Climate Change Conference in Scotland. With the EU already moving towards firmer emission reduction targets for 2030 and 2050, the key issue will be how fast the incoming Biden administration is able to implement its extensive climate change policies. While the Reserve Bank of Australia and the Australian Prudential Regulation Agency have each stepped up their attention to the risk of assets being stranded by changed global regulation, the commitments to neutrality in 2060 by China and 2050 by Japan have made this a more practical prospect. The Investor Group on Climate Change estimates firm action by the Biden administration would mean 70 per cent of Australia’s two-way trade would be subject to mid-century carbon neutrality promises. The Australian government has not yet made that commitment although it maintains it will meet its 2030 commitments.

    Reining in big tech

    Calls to rein in the big technology and social media giants loosely called the FAANGs (after Facebook, Amazon, Apple, Netflix and Google) have been around for years. But they now face an unprecedented constellation of actions around the world pressing for curbs on their power. The Australian Competition and Consumer Commission is at the global cutting edge of part of this movement with its pressure on Facebook and Google to pay media companies for content use. But the key development may be the emergence of bipartisan support in the US for anti-trust action, which is likely to survive any change of president. Republicans and Democrats each have their own issues with the power of these companies.

    With greater regulation seen to have failed, there is now a growing focus on pursuing a break-up via the courts. Meanwhile the Organisation for Economic Cooperation and Development — which may soon be run by former Finance Minister Matthias Cormann who has nominated for its Secretary-General job — is aiming for agreement in 2021 on a US$100b global revamp of multinational taxation, which will curb profit shifting by technology giants. The FAANGs last refuge may be the US security establishment fear that reining in the tech giants would benefit China’s parallel companies, such as Alibaba.

    Brexit or bust?

    The divorce proceedings between Great Britain and the European Union (EU) were often overshadowed by the chaos of the Trump administration. But they actually lasted longer than it. And while COVID-19 was the biggest issue last year, the real black swan event was arguably the failure of world’s two Anglophone world powers to manage the pandemic as they withdrew from multilateral leadership amid poor management at home.

    Australia will be pursuing duelling potential trade deals with the larger EU and a newly independent Britain desperate to show it can prosper after 1 January. However, Britain’s quest to be a more dynamic commercial and strategic player in the world, will depend on how well it overcomes the immediate pressures the pandemic and Brexit have placed on domestic unity. The Office for Budget Responsibility estimates one third of the Brexit economic growth loss has occurred, one third will happen over the next four years, and the remainder during the following decade.

    Greg Earl writes for the Lowy Institute’s The Interpreter, AFA Weekly, and edits Asia Society Australia’s Briefing Monthly.

    Latest news

    This is of of your complimentary pieces of content

    This is exclusive content.

    You have reached your limit for guest contents. The content you are trying to access is exclusive for AICD members. Please become a member for unlimited access.