Multinationals Aren’t Ready for the US-China Clash

A disordered world tests multinational corporations as well as diplomats. Amid trade wars and real wars, great-power struggles and vicious crises, geopolitical and geoeconomic disruptions are mounting. The global risk map has become more crowded, more complex.

Over the past year, I’ve traveled to places including Singapore and Seoul, Tokyo and Delhi, London and Copenhagen, to speak with private-sector audiences. I’ve argued, in these settings, that the global landscape is characterized by eight key features that multinationals will have to navigate. Geopolitics must become a core competency in the C-suite, no less than the White House Situation Room.

First, the world feels so unstable because all the elements of the old order are in flux. The borderless, strategically carefree globalization of the post-Cold War era occurred in a historically benign environment. Democracy and markets were ascendant; US power was unchallenged. Today, we’re back to seesaw battles between rival powers with rival ideologies. Revisionist states, namely the “CRINK” coalition of China, Russia, Iran and North Korea, are roiling regions from one end of Eurasia to the other.

Crises compound as this autocratic axis draws tighter. Chinese dual-use goods, Iranian drones and North Korean troops and missiles all helped Russian leader Vladimir Putin prosecute his war in Ukraine. After Hamas attacked Israel on Oct. 7, 2023, Russian and Iranian assistance made the Houthi threat to international shipping much worse.

The contours of the emerging order are still hazy. What’s clear is that the global risk baseline, with all its market-rattling potential, will stay high even after today’s particular crises have passed.

Second, the one-world economy is dead, and the choice is between two worlds and none. Tariffs, sanctions and drives for self-sufficiency have been fragmenting the world economy for more than a decade. Institutions that presumed political and economic convergence among nations, like the World Trade Organization, are roadkill.

The new cold war between the US and China has made interdependence a source of vulnerability. It has set in motion a great rewiring of trade ties and tech relationships that will play out for years to come. The critical question is whether this rewiring produces a two-worlds scenario, in which a cohesive democratic community confronts the Chinese-led autocracies, or whether President Donald Trump’s tariff offensive will break the free world, too.

As South Korea’s trade negotiator, Yeo Han-Koo, argued when we appeared together in Seoul in September, the members of the democratic world can meet China’s economic scale only by integrating their own innovation ecosystems and industrial bases. But Trump’s administration wavers between heeding that reality and pursuing protectionism in all directions.

Third, as the US remakes its alliances, the great global hedge is underway. The Trump administration is aggressively renegotiating America’s security pacts by demanding that allies in Europe and the Western Pacific spend far more on defense. It exacts massive investment pledges, lopsided trade deals, and other economic tribute.

Squint, and you can see the logic: These moves could ultimately produce better-armed allies around Eurasia’s margins, reducing the risk of wars that shatter regions and shake the global economy. If they energize American reindustrialization, they might also sustain the US economic leadership that underwrites security guarantees around the world.

The dangers are that excessive economic demands could prove politically toxic for allied publics, and that deferring too much security responsibility to frontline nations might make them question US commitment. Leaders in Copenhagen, Berlin, or Warsaw might say they still have faith in NATO. But surely they wonder if Washington will truly be there when the crisis comes.

Thus, hedging is the new normal. European countries are urgently rearming and trying, albeit more slowly, to wean themselves off reliance on US weapons. Saudi Arabia is seeking Pakistani protection amid questions about US reliability. Among officials and think-tankers I spoke to in Seoul and even Tokyo, stirrings over acquiring nuclear weapons are getting louder.

Fourth, strongman politics make corporate strategy harder and international politics less predictable. This is the strongman’s moment: From Trump to Xi Jinping, Vladimir Putin to Narendra Modi, leaders who dominate their countries’ politics, shatter norms and guardrails, and cultivate cults of personality are running the most powerful, energetic states.

That trend challenges corporations by upending legal and regulatory frameworks and forcing them to court the strongman’s favor. It also creates the potential for diplomatic whiplash, as geopolitics become personalized. Most business leaders I met in Delhi, earlier this year, expected relatively smooth sailing in US-India relations, only for the two giant democracies to fall out when their strongmen leaders collided over whether Trump deserved the Nobel Peace Prize.

Fifth, technology is concentrating power and turbocharging tensions. The tech future is bipolar, not multipolar: America and China are the only countries that can lead the AI revolution, even if a host of middle powers aims to profit from it. When it comes to tech, argues former State Department Policy Planning Staff Director Salman Ahmed, most countries “will be caught between two titans” engaged in an epic struggle for “economic, military and geopolitical dominance.”

The possibility that we’re approaching a major breakthrough, to artificial general intelligence, gives debates about export controls and other tech restrictions still-greater urgency. It makes the US-China contest sharper, more fateful. In the post-Cold War era, technological progress was supposed to unleash global peace and prosperity. Today, it fuels great-power insecurity by threatening to leave losers far behind.

There follows a sixth reality: The Sino-American cease-fire that Trump and Xi negotiated last month is doomed. The two countries are competing fiercely to dominate the frontiers of innovation. China is rapidly accumulating military might to overturn US power in the Pacific. Its cyberattacks burrow deep into America’s critical infrastructure.

Temporary truces are possible because neither side is ready for all-out decoupling. But China is preparing for that eventuality. It has honed the tools, such as formidable rare-earth export controls, that can help it win a high-stakes contest in economic coercion, or perhaps even keep the US from interfering with a military conflict in the Taiwan Strait. The strategic mistrust is too severe for lasting stability to take hold.

“The two sides will inevitably find themselves facing another downturn in relations,” Zack Cooper, one of America’s top Asia hands, told me. Expect a long-term decline in the relationship, punctuated by periodic crises that make markets and supply chains shudder. Don’t write off the possibility of a war that would violently rip East Asia and the world economy apart.

Seventh, the uber-uncertainty of our moment is that American power is enduring but American purpose is elusive. America’s share of the world economy is roughly what it was in the 1970s. America’s AI companies churn out the most sophisticated models. No other country comes close to US military reach.

But the superpower has been showing less interest in sustaining an open global economy, promoting democratic values, providing public goods like freedom of navigation, or upholding vital rules of the road like the prohibition on adding territory by force. Some of these shifts predate Trump; the effects will outlast him.

Different doesn’t have to mean disastrous. Even if the US defines its interests in more transactional terms, it could still balance rival powers and help defend a decent world. Or, as one seasoned Singaporean diplomat speculated, America could descend into a more aggressive, destructive form of nationalism, tearing down the trade system and global norms on which so many countries depend.

An America that remains constructively engaged can mitigate global instability. An America that becomes a revisionist superpower will mostly make things worse.

All this leads to a final fact: Volatility brings opportunity as well as peril. We have seen, in recent years, how geopolitical turbulence washes through the world economy. Consider how the war in Ukraine upended food and energy markets, or how tensions over Taiwan are shaking up the global semiconductor stack.

Geopolitical expertise is no longer a luxury for corporate decision-makers, because strategic and economic instability have become so intertwined.

But reordering also brings creation. New applications of technology, whether drones or AI, and new levels of defense spending promise exciting, if deadly, innovations. Competitions for technological primacy could also spur tremendous human progress.

Actors who fear for the future of the global economy are exploring new relationships, such as a trade pact linking the European Union to the Comprehensive and Progressive Trans-Pacific Partnership. US-China tensions could foster new alliances to secure rare-earth supply chains and other strategic materials.

Even the post-Oct. 7 upheaval in the Middle East has an upside: It has produced, for the moment, a region where advances in regional integration and prosperity are possible, because the forces of extremism and Iranian imperialism have been dealt brutal blows.

Geopolitics is a stern discipline, but it need not be a dismal one. Mapping the contours of our disordered world is the key to identifying the risks corporate leaders must manage, as well as the opportunities they might exploit.

 

Source: https://www.aei.org/op-eds/multinationals-arent-ready-for-the-us-china-clash/