26 April 2023

Global geo-politics: taking stock


Geoff Cook, Chair of Mourant Consulting, takes a closer look at global geo-politics – looking at the US strengthening its relationships with allies, the war in Ukraine, and the Chinese president visiting Russia to strengthen their economic and military ties. 

 

The global political landscape continues to evolve, with shifting power dynamics and changing alliances having far-reaching implications for the global economy and international finance centres (IFCs).

Notwithstanding the global news generated by the recent arraignment of Donald Trump, and the associated political fallout, the United States continues to lead the western liberal democracies. US actions and policies having a significant impact on other nations and the global economy. And, despite the increasingly acrimonious battle between the Democrats and Republicans, the US remains the world’s most powerful political, military, and economic force, acting as a barometer for the world economy.

Recently, the US has been focused on strengthening its relationships with its allies in the face of increasing competition from China. The Biden administration has been working to build a coalition of liberal democracies to counter China and promote the post WWII rules-based international system. This effort has taken on new urgency in the light of China’s increasingly confident foreign policy and its efforts to challenge the US-led world order.

 

Trade agreements

In addition to the US efforts to build a coalition of liberal democracies, there have also been recent developments regarding international trade agreements. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) is making headlines, with the US declining to express any meaningful interest in joining the agreement despite Japan’s encouragement, and from the UK which recently joined. Interestingly, British IFCs should benefit through the UK’s accession.

Joining would be a major shift for the US, which withdrew from the original Trans-Pacific Partnership (TPP) agreement under the previous administration. Given the US propensity to prioritise ‘Made in America’ over trade agreements, and its current trade stand-off with China, the prospects for change are slim. The CPTPP is a trade agreement between 12 countries in the Asia-Pacific region, and its members represent some of the world’s most attractive growth economies. Still, potential US participation in the CPTPP could have far-reaching implications for the global economy and international trade.

This development is particularly relevant in the context of recent commentary by Martin Wolf in the Financial Times, who argues that “waging war on trade will be costly”. He notes that globalisation has brought significant benefits to the world, including increased economic growth, reduced poverty, and improved standards of living. However, Wolf also acknowledges the challenges posed by globalisation, such as income inequality and environmental degradation. Despite these challenges, he argues that the solution is not to turn inward and restrict trade, but rather to address the root causes of these problems and work together to find solutions.

The other major player in the global landscape, China, has been increasing its political and economic reach in recent years. its Belt and Road Initiative, which aims to invest in infrastructure and promote economic development across Asia, has raised concerns among many countries, especially in the West. The US and its allies have accused China of using the initiative to gain strategic advantage and expand its sphere of influence.

President Xi recently visited Russia, where he and Vladimir Putin signed several agreements aimed at strengthening their countries’ economic and military ties. This visit underscores the growing partnership between China and Russia, which is likely to have significant implications for the global landscape.

 

India – emerging key player

In addition to the US, China, and Russia, India has also emerged as a key player on the global stage. Prime Minister Modi is working to establish India as a major participant in the world and to attract inward investment. India has recently assumed the presidency of the G20 and joined the Quad, a four-nation pact aimed at deepening economic and military ties between the US, Japan, Australia, and India. However, India’s refusal to condemn Russia, which is complicated by its historic economic and military ties, is a sore point with the West. This ambivalence will see all nations courting India.

The global geo-political landscape is further complicated by mounting pressures impacting international relations, including the ongoing conflict in Ukraine, supply chain pressures, protectionism, and disagreement over big tech and digital taxation.

The war in Ukraine continues to be a major source of tension between Russia and the West, with the latter imposing rafts of economic sanctions on Russia in response to its actions in Ukraine. The conflict has also resulted in a major refugee crisis, which has put further strain on adjacent countries and the global community.

Supply chain pressures are another major issue impacting the global landscape, with the COVID-19 pandemic highlighting the vulnerability of many supply chains and the need for greater resilience. This led to a growing trend towards protectionism, with many countries looking to reduce their dependence on foreign supply chains and to build up their domestic industries. This trend is likely to continue with potentially far-reaching implications for the global economy and international trade.

Finally, there is a growing disagreement over big tech and digital taxation, as the EU leads the way in its efforts to establish a level playing field for digital taxation. The EU has been pushing for a Global Business Tax, which would increase the tax obligations of multinational corporations operating in the region. The US, on the other hand, has been more cautious, relying on the assumption that GILTI (global intangible low-taxed income) will be grandfathered and that moves on book income tax will not be challenged. This disagreement is likely to continue to be a source of tension, as countries seek to ensure that big tech companies pay their fair share of taxes.

 

Complexities in Europe

The situation in Europe remains complex, with the ongoing Northern Ireland Brexit-linked negotiations and the rise of far-right nationalist movements complicating the political landscape. The EU is also grappling with the continued economic fallout from the COVID-19 pandemic, with many countries facing significant budget constraints and struggling to fund their recovery efforts. In addition, there is growing concern about the impact of the pandemic on the EU’s single market, as some countries seek to protect their domestic industries and restrict cross-border trade through a proliferation of foreign direct investment screening regimes.

Another development in the global geo-political landscape is Africa’s growing influence. African leaders have been advocating for a greater role in global tax developments, and the African Union has been working to promote the interests of African countries in international forums. The African Union has been pushing for a more equitable global tax system, which would take account of the needs of developing countries, providing them with a greater voice in global tax policy.

Despite these challenges, there are also positive forces at play that could help to mitigate many of the headwinds facing the global community. For example, the growing trend towards sustainability and the drive to reduce carbon emissions will address some of the environmental challenges posed by globalisation. In addition, the rise of new technologies such as artificial intelligence and blockchain look set to create new opportunities for economic growth and improved living standards.

There are other positive forces at play that could help to mitigate some of the global headwinds and support the growth of cross-border trade and international finance.

One of the most significant is the apparent passing of peak inflation, which has been a major concern for many countries. In the US, for example, inflation has been on the rise due to substantially increased infrastructure and welfare spending which have been accompanied by calls for the wealthy to shoulder a greater proportion of the burden of rebuilding the economy. However, recent data suggests that inflation may be starting to recede, which could provide some relief from near term cost pressures.

 

Interest rate outlook

In addition to the apparent peaking of inflation, there is also growing optimism about the prospects for interest rates and trade. The US Federal Reserve has been signalling that it may start to temper the size and frequency of interest rate increases, which could help keep inflation under control and support the growth of the US economy. At the same time, there is growing optimism about the prospects for international trade, with the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and other trade agreements helping to create new opportunities for cross-border trade and investment.

The rise of new technologies such as artificial intelligence (AI) and blockchain are also providing new opportunities for economic growth and improved standards of living. For example, blockchain could help to create new opportunities for cross-border trade by reducing the cost and complexity of cross-border transactions and providing greater transparency and security. AI certainly has great potential to drive innovation and improve efficiency in a range of industries, from finance and healthcare to transportation and manufacturing.

The global geo-political landscape is constantly evolving, with the actions and policies of major players such as the US, China, India, and the EU, having far-reaching implications for the global economy and international finance centres. The UK’s recent accession to the CPTPP and Africa’s efforts to increase its influence in global tax developments are just two recent examples of the many developments shaping the global landscape. Wolf’s insights serve as a reminder of the importance of open, fair, and transparent systems of trade and the dangers of protectionism.

Despite the myriad challenges facing the global community, cross-border trade and investment remain resilient. Notwithstanding the ongoing conflict in Ukraine, supply chain pressures, protectionism, and disagreement over big tech and digital taxation, cross-border trade continues to play a critical role in the global economy, due in large part to the ongoing efforts of international organisations and governments to promote open, fair, and transparent systems of trade and investment.

 

WTO: record trade expected

According to the World Trade Organization (WTO), global trade in goods is expected to exceed $25 trillion by the end of 2023. While growth has been tempered by recent events, this represents an increase and is a testament to the resilience of cross-border trade in the face of ongoing challenges. The WTO also reports that cross-border trade in services is expected to surpass $8 trillion by the end of 2023, further highlighting the importance of this sector to the global economy.

In recent years, there has also been a growing focus on the importance of north-south investment flows, with many developing countries seeking to attract investment from the developed world. These flows can help to promote economic growth and development in the developing world, as well as promoting greater stability and cooperation in the global economy.

In conclusion, the global geo-political landscape and the resilience of cross-border trade and investment will be impacted by a range of factors, including the actions and policies of major players such as the US, China, India, and the EU, as well as the ongoing efforts of international organisations and governments to promote open, fair, and transparent systems of trade and investment.

Despite these challenges, cross-border trade and investment remain an important component of the global economy, which are likely to continue to play a critical role in promoting growth, development, and stability. The WTO predicts that global trade will grow further – a positive sign for the future of cross-border trade and for the investment routed through IFCs.

 

Geoff Cook

Geoff Cook, Chair of Mourant Consulting in Jersey

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