Navigating geopolitical risks and global opportunities in a turbulent age

May 2025 | SPOTLIGHT | RISK MANAGEMENT

Financier Worldwide Magazine

May 2025 Issue

For most of the past 75 years, spreading globalisation and worldwide economic development have enabled businesses and financial investors to build extended commercial networks and efficient supply chains with remarkable breadth and stability.

That period of stability is over, with the resurgence of nationalism, great power competition, fragmenting alliances and new trade barriers. One of the biggest challenges is uncertainty. Skilfully navigating heightened geopolitical risks and managing in the face of uncertainty require three key tools: historical context, geographic diversity and contingency planning.

Historical context

In a world marked by well-established rules, stable alliances and low barriers to trade and capital flows, companies could afford to be relatively sanguine about global trends. Cross-border investment has always been susceptible to political risk. Some countries have more stable regimes, respect property rights and the rule of law, and have transparent rules governing trade, investment, taxation, labour and commerce. Other countries have governments, laws or policies that are less stable, transparent or predictable.

Geopolitical risks are different than political risk, and hence require different planning. Specifically, geopolitical risks are harder to mitigate, in that they impact larger systems and geographies and are not susceptible to corporate lobbying, communications strategies or other avenues of potential influence.

Understanding the historical context of modern international trends and threats to world order aids in predicting the direction of future trends. Typically, historical thinking is backward-looking, learning from experience. For instance, trade flows over the next few years may be affected by threats of tariffs and counter-tariffs, even if the tariffs and import duties that materialise are less or have broad exceptions.

As the US has recently imposed tariffs on steel and aluminium imports and other imported products, Canada and Europe have threatened counter-tariffs, causing President Trump to threaten further tariff increases. Tariffs function economically like a tax paid by importers. Tariffs squeeze manufacturer’s profits when relying, directly or indirectly, on global supply chains for inputs. The cost of tariffs, in whole or part, unavoidably trickle down to consumers. The resulting cost increases can dampen demand, reducing economic growth and activity.

The US Smoot-Hawley Tariff Act of 1930, intended to protect American farmers and manufacturers from foreign competition, together with retaliatory counter-tariffs from US trading partners, exacerbated the Great Depression. Total US exports fell from $7bn in 1929 to $2.5bn in 1932, while imports from Europe decreased from $1.3bn to $390m.

Today, international trade makes up about 25 percent of US gross domestic product (GDP), based on statistics from the World Bank for 2023. For comparison, international trade accounts for over 45 percent of GDP in Japan, India or Latin America and 96 percent of GDP for nations in the European Union (EU). Onshoring manufacturing to rely more on domestic supply chains can be difficult or expensive where it is possible at all.

Based on historical precedent, businesses dependent on imported components or other goods or on export markets for revenues must consider modifying their approaches to investment, supply chains and business development, with the expectation that a prolonged trade war is likely to result in lower sales, higher costs and underutilised capacity.

In contrast, an historical perspective may also look forward, assessing the challenges and opportunities that long-term trends might take. Take energy, for example. The energy transition may be controversial in some political corners and fossil fuel use is still increasing globally. Nonetheless, the trend to adopt new decarbonisation technologies and policies continues.

According to the International Energy Agency, global investment in clean energy totalled $2 trillion in 2024, twice the amount invested in fossil fuels, and is accelerating at a faster rate. Solar photovoltaic accounts for more than half of all new investment in power generation in 2023 and 2024. Savvy investors and planners realise the potential for profits and first-mover advantages offered by new investment in clean technology like renewable power and in other innovative technologies that make energy generation, transmission, storage and use more efficient, cleaner, more reliable and affordable.

Longer-term demographic trends like low or declining birth rates and higher barriers to immigration (both legal and informal immigration) will crimp productive capacity and consumer demand in Europe, the US, China and Japan over coming decades. Compounded with risk associated with climate change and extreme weather events, these changes require farsighted planning and an understanding of how seemingly uncorrelated risks may intersect.

Key to forecasting the geopolitical impact of macrotrends on future profits and valuations is an understanding of the interplay between political power, macroeconomics, geography, trade, natural resources, labour markets and shifting alliances.

Geographic diversity

Geopolitical uncertainties may increase costs or chill investment. They also highlight the benefits of geographic diversity. Supply chains, for instance, may be vulnerable to trade battles, sanctions or war. Diversifying sources of supply allows companies to shift nimbly as needed, maintaining production and limiting the impacts of unexpected interruptions.

Similarly, building redundancy into supply chains and increasing inventories enhances resilience, though not without cost. Added warehousing, logistics needs and supplier or vendor negotiations take time and money. On the revenue side, for companies that are expanding, it may make sense to diversify their customer base and sales channels into different markets, segments or countries, or to add goods or services that cover a broader range of offerings that are less dependent on a single market or supplier. Granularity in planning and execution is key, always with a long-term view.

Contingency planning

Contingency planning starts with risk identification. Shifting geopolitical conditions increase certain types of risks more than others. They also change the ways that risks may relate to each other and impair government responsiveness in dealing with risks as they arise.

Enterprises and industries do not exist in silos or vacuums. Exogenous shocks can reveal surprising interconnections. When the global COVID-19 pandemic affected manufacturing of semiconductor chips in Asia, automobile production in the US and Europe stalled.

When the Russian invasion of Ukraine resulted in the siege and destruction of the large Azovstal steel plant in Mariupol in 2022, manufacturing of semiconductors and other critical components was threatened. As the Taipei Times reported at the time, “Azovstal is one of only a handful of facilities in the world capable of producing the materials needed to cost-effectively make noble gases such as neon, krypton, xenon and helium, which are critical for global manufacturing”.

To manage risks related to geopolitics and other risks, companies should devise scenarios that test their resilience, and then design and implement contingency plans accordingly. They should consider potential disruptions that could jeopardise business continuity. It is important to distinguish between sudden emergencies and more sustained interruptions. Proactive risk management is essential.

Also key is to identify risks with an understanding of probability, magnitude and degree of correlation. For each identified risk, companies should create a detailed action plan, then evaluate it and amend it as needed. Clear communications protocols should be in place, considering the risk that key personnel or systems may not always be available. Backup plans and responsibilities should be accessible, clear, reviewed and regularly updated.

Wars often target highways and bridges, energy grids and other critical infrastructure. Geopolitical tensions and shifting alliances may also jeopardise cross-border movements of goods, services, capital and labour.

For example, the US is a net importer of energy from Canada. Based on data from the US Energy Information Administration, the US has long depended on electricity imports from Canada, which is the largest source of US energy imports. In 2023, the US imported approximately 33 terawatt-hours of electricity from Canada. The announced or threated tariffs by the US on Canadian imports in Q1 2025 raised the spectre of retaliation by Canada or the Province of Ontario that could raise power prices or even interrupt supplies to the US Northeast and upper Midwest.

Contingency planning for power users in affected areas might include arranging for backup generation, building financial reserves, or protective measures to quickly reduce power demand or shift to alternative sites in a crisis.

Geopolitical friction may increase cyber risk, too, both from state actors and from non-state actors. Geopolitical challenges and frayed alliances with less sharing of sensitive intelligence information could reduce the abilities of governments to defend from cyber attacks their own systems and the critical infrastructure on which business depends.

The National Institute of Standards and Technology (NIST) in the US Department of Commerce has created the NIST Cybersecurity Framework 2.0, which is a useful guide to recommended approaches and steps that should be taken to prevent, monitor and respond to cyber attacks and malware. It breaks down into six levels the steps that should be taken: govern, identify, protect, detect, respond and recover. The UK and EU have similar directives for network and information systems and data protection.

Conclusion

In summary, rising geopolitical risk increases the need for businesses and investors to seek multidisciplinary, expert advice on the direction and nature of potential global changes in a long-term context, both historical and predictive.

Managers, executives and board directors should assess the specific ways in which a changing world may impact their cash flows, profitability, balance sheet, workforce and customers. They should seek geographic diversity and redundancy in their operations, supply chains and markets for greater resilience and flexibility.

And they should also create and regularly update contingency plans to manage disruptions if they occur, and to estimate and, when required, disclose material risks to business continuity and financial performance.

Allan Marks is a lecturer at the University of California, Berkeley and UCLA and a senior fellow at Columbia University. He can be contacted by email: atmarks@law.berkeley.edu.

Allan Marks

University of California