FOCUS on Geopolitical Tension on Trade

FOCUS on Geopolitical Tension on Trade

Neve Walker

Communications Liaison

Geopolitical tensions and risks that are caused by-elections, polarization, and conflicts within states have unintentionally caused chain reactions that affect the global economy, as well as individual countries. Whether it is increased tariffs or an unstable government, this year especially as been affected negatively. Managing these risks to promote stability is essential for the benefit of the international economy as well as trade, according to The Center for Strategic and International Studies (CSIS). 

CSIS also reports that with the war in Ukraine and in Gaza, along with complications caused by Houthi missile attacks on ships in the Red Sea, geopolitical developments and minimizing the effects on the global economy are key to promoting global economic performance in 2024 and in the future years.

Along with conflicts, elections around the world have significant impacts on the direction the global economy takes. According to the Economic Observatory, at least 64 countries are going to the polls this year, causing potential changes in trade and investment policies as well as created increased uncertainty and political polarization. 

Also reported by the Economic Observatory, increased restrictions because of tensions between countries can disrupt trade flows as well as cause supply chain issues, in developed as well as developing countries. Furthermore, restrictions can also affect commodity prices and lead to shortages of key resources, such as oil and gas, which affects industrial production worldwide. 

The global economy can experience high inflation, significant welfare losses, and lower growth in times of geopolitical tensions says the Economist Observatory. The concept of geopolitics can also refer to internal political affairs, which can influence not only domestic financial markets but global as well. Individual governments are influenced by economic activities such as fiscal politics, and economic and strategic decisions, based on different countries’ priorities and their political orientation. Along with this, rising populism also poses a significant threat to long-term stability and economic performance. Populist governments usually implement short-term solutions and policies at the expense of long-term sustainability. Politicians such as increased government spending and trade protectionism disrupt global trade flow, increasing market volatility and hindering long-term sustainable growth. 

Tensions also contribute to disruptions in the global economy and international supply chain management. According to the International Monetary Fund, years of shock caused by the COVID-19 virus and the Russian invasion of Ukraine has caused countries to reevaluate their trade partners, partially because of economic concerns but also in national security concerns. Geopolitical factors also influence the redirection of foreign direct investment flows. Along with this, some countries are even reevaluating their reliance on the dollar in their reserve holdings and international transactions. 

The World Economic Forum’s most recent Global Risks Report has identified that interstate armed conflicts are among the top five global short-term risks in 2024, ranked fifth. The main proprietor though, is misinformation and social polarization. These risks cause ripple effects like trade disruption and regulatory change, destabilizing the global economy and political structures of markets, especially in Asia. 

As written by Marsh, trade disruption and social and geopolitical tensions create an everchanging and uncertain legal and regulatory environment. Specifically, businesses with people, assets, and investments in volatile markets can be faced with heightened risks. These risks include expropriation, currency inconvertibility or non-transfer, license cancellation, and talent mobility. Marsh also reported that in 2016, the Thai government chose not to renew the mining license of one of Thailand’s largest gold mines, citing environmental and health concerns. Because of this decision, which ultimately caused the mine to close, there was a triggering of legal disputes and compensation claims between the mining company and the government. Furthermore, the Central Bank of Myanmar in 2022 implemented regulations and restrictions on foreign currency flow and exchange requirements, leading to major financial losses for global investors.

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