US-China Rivalries Add to a New Geo-Strategic Environment

The impact of the year 2020 will have ripple effects for decades to come. An unprecedented global pandemic has become an inflection point for accelerating existing trends and driving underlying geopolitical tensions into the center of the world stage.

Of the many existing trends compounded by the pandemic, from corporate consolidation to increased adoption of technology, none has arguably been more prominent than the rise of the US-China rivalry as a defining force in the international system. The increasingly adversarial relationship between the world’s two largest economies has changed the geo-strategic environment in which both countries and corporations operate, shifting standards for government intervention in boardroom decision-making, changing the priorities of supply-chain composition, and creating new reputational risks and pressure on other countries to pick sides in geopolitical rivalries. 

From the disruptions of COVID-19 and widespread social unrest to the dramatic deterioration of US-China relations, an array of risks for global value chains have emerged over the past eight months, prompting a rebalancing that is likely to privilege resilience and national security in the future. The United States and China have each responded to increased bilateral hostility with a focus on building domestic capacity, an effect most prominently seen in the United States’ reckoning with its dependence on China for pharmaceutical products and in Chinese concern over its reliance on US semiconductor technology.

The effect has not been confined to these countries. Around the world, a focus on resiliency, diversification, and domestic self-sufficiency have been boosted by the pandemic, fueled both by logistical recognition of a heightened risk environment and nationalist instincts against foreign reliance. As supply chains evolve over the coming years, they are likely to reflect real and perceived risk of US-China economic decoupling, as well as a broader rise of protectionist tendencies and geopolitical mistrust.

The past year has also shown that supply chains and industries scrutinized over national security concerns are subject to change. COVID-19 has increased focus on medical industries and supply chains, drawing unprecedented attention to drug supplies and medical-testing data. Changing technology landscapes create additional moving targets that in turn generate national security concerns; perceived risk around data privacy, new technology, and issues surrounding raw materials such as rare earth metals have proven fluid and will likely expand as countries build more comprehensive definitions of security risk. 

The new geopolitical context increases the likelihood of more government intervention in commercial affairs, as private sector entities lose perceived independence from political rivalries. Rather than a global company headquartered in the United States or China, firms are increasingly seen as a US or Chinese company operating globally. Expectations regarding future government conduct must adjust to this new environment. For example, the US TikTok ban and Chinese restrictions on choice Australian goods have demonstrated the extent to which businesses can be caught in the crossfire of geopolitical rivalries.

Heightened uncertainty surrounds predicting government action and its impact on global enterprise, as we enter a period in which political tensions seem increasingly likely to translate into sanctions, tariffs, detentions of corporate leaders, export controls, and novel supply-chain requirements. Moreover, this environment of amplified polarization extends to public opinion, ushering in a new set of reputational risks driven by both government demands and public scrutiny. The pressure to take a stand on key issues, from sovereignty to ethics, is pushed not only by governments but also by the broader public. Different domestic markets, especially in the United States and China, are on a trajectory to become increasingly distinct, elevating the difficulty of balancing the divergent demands of international consumers. 

US-China relations may exit their current tailspin as US elections and China’s indicated desire for dialogue offer possibilities for stabilization. However, intensified mistrust and unwillingness to make concessions in key areas, from Chinese sovereignty claims to US demands for ethical business practices, will challenge any meaningful improvement of relations. This persistence of great power competition will continue to shape the rules, norms, and opportunities of international business for what could be years to come.

Companies must reckon with the shift that’s pushing corporate identities away from the global and toward the national. Changes in great power competition should be seen within the wider context of an array of accelerating trends, including increasing socioeconomic inequality, widespread social unrest, a quickly changing landscape of business competition, and many others that will take years to fully understand. The many overlapping social and economic shifts that have been propelled by the pandemic and its fallout combine to promise further volatility and uncertainty as the world enters a new decade. 

While the extent to which 2020 will accelerate existing trends remains uncertain, it will be impossible to return to the world stage of just nine months ago. Corporate boards will need to factor a changing arena of geopolitical risk, characterized by heightened uncertainty, increased government intervention, and amplified protectionism and international fragmentation, into decision-making.