Geostrategic Business Group

2020 Geostrategic Outlook Global rebalancing raises uncertainty for business

January 2020

ey.com/geostrategic 2020 Geostrategic Outlook A transformative age in geopolitics 2020 Geostrategic Outlook

Contents

Foreword 5

The geopolitical landscape 6

Globalization 9

Technology 10

Demographics 11

Environment 12

Spotlight topics 13

Global trade 14

US-China relations 16

Around the world 18

East Asia and Pacific 19

South Asia 21

Eurasia 23

Europe 25

Middle East and North Africa 27

Sub-Saharan Africa 29

Latin America 31

North America 33

Authors and acknowledgments 35

Endnotes and contacts 36

Note: Unless otherwise noted, all figures are in US dollars.

3 2020 Geostrategic Outlook

geostrategy ge·o·strat·e·gy \jē-ō-stradəjē/ (geo)politics + strategy

4 2020 Geostrategic Outlook

Foreword

Volatile. Unpredictable. Risky. Challenging. These are just a few of the words business leaders use to describe the current political environment in a recent survey on managing political risk that we conducted. More than half of respondents told us the effect of political risk on their company is higher than it was two years ago. Accordingly, 58% of respondents told us that their board is spending more time on political risk.

We are living in a transformative age of geopolitics, a time when both a fundamental growth driver for global business — globalization — and the balance of power among the world’s largest economies are changing.

Change brings uncertainty. As this transformation unfolds, a more fragmented global economy may emerge, marked by higher levels of political risk and greater uncertainty associated with cross-border transactions. This uncertainty and pace of change challenge leaders to craft long-term, global business strategies. Dynamism, agility, resilience and new ways to manage risk will all be required to thrive amid this geopolitical disruption. Companies need to incorporate geopolitics into their strategy. This is what we call “geostrategy.”

To strategize and, ultimately, to act, executives need to understand the deeper forces at work in this transformative age of geopolitics. It is imperative to go beyond the headlines to understand how the primary interconnected forces of change impact the geopolitical environment in which companies must navigate.

In this outlook, we dive into these primary forces of change and look at how they are unfolding, geopolitically, around the world in 2020. We analyze how emerging shifts in globalization, technology, demographics and the environment affect geopolitics and, ultimately, how these shifts are changing the reality in the key markets in which businesses operate.

Jay Nibbe Partner and EY Global Vice Chair Markets, Ernst & Young LLP

Jon Shames Partner and EY Global Leader Geostrategic Business Group, Ernst & Young LLP

Mary K. Cline, PhD Director and Insights Leader Geostrategic Business Group, Ernst & Young LLP

5 The geopolitical landscape

6 | 2020 Geostrategic Outlook The geopolitical landscape

Scanning the geopolitical environment is the first step in navigating the transformative age in geopolitics. In this outlook, we offer our scan of the geopolitical landscape in 2020.

The geopolitical outlook in 2020 will be shaped by what we see as the primary forces of disruption: globalization, technology, demographics and the environment. These forces have existed for millennia but are now evolving in new ways.

These primary forces manifest themselves in key issue areas, as well as regionally, shaping the operating environment for companies. In this report, we explore how these four forces play out within each region. We also spotlight two cross-cutting geopolitical issues — global trade and US-China relations — critical to the business environment in 2020.

Geopolitics in a world of regions

Europe Shifting internal and external equilibriums North America Uncertainty abounds ahead of US election

Middle East and North Africa Volatility and the risk of disruption

The evolution and interaction of these forces play out around the globe, Sub-Saharan Africa Economics and elections driving the news we see every day. create divergent trajectories Appreciating these forces can help bring strategic clarity to the volatile Latin America and unstable world of geopolitics in Protests and populists which businesses operate. drive policymaking

7 | 2020 Geostrategic Outlook The geopolitical landscape

Primary forces

Globalization Technology Demographics Environment The shift from ever-expanding The fourth industrial revolution Risks to political stability are Climate change is becoming a globalization toward rising promises long-term gains in rising in countries with very old race against time for government, regionalization of the global productivity yet is accelerating or young populations, even as business and society to develop economic and political geopolitical competition and the geopolitical balance of power solutions that prevent the worst systems is accelerating. exacerbating social and economic shifts in favor of economies consequences of this pre-eminent grievances at the heart of with sustainable working-age global risk to materialize. populist movements. populations. Geopolitics in a world of regions

Eurasia Renewed strategic significance

East Asia and Pacific Evolving role of China shapes the outlook

South Asia A delicate balancing act

Latin America Protests and populists drive policymaking

8 | 2020 Geostrategic Outlook The geopolitical landscape Primary forces

Globalization Emergence of a new regionalism

The assumption that globalization would Organization (WTO) to govern cross-border to see each other as competitors. The EU continue to expand helped drive global trade. Technology is another area in which and China relationship will continue to be expansion over the past 30 years; the interoperability of competing regional complex, characterized by both further companies tied their economic fortunes systems will increasingly affect companies’ economic integration via the Belt and and strategic outlook to a relatively ability to conduct cross-border business. Road Initiative (BRI) and rising levels of predictable global system. competition and distrust. This global rebalancing is also creating new That is not the world that companies economic blocs and political centers of Complicating geopolitics further is that face today. The rise of populism has power. This emerging multipolar system while these poles are consolidating unleashed strong anti-globalization is anchored by the US, China and the power, the nature of power is changing. sentiments in countries around the world. EU. Each of these economies has smaller Economic clout is becoming a, if not the, As governments respond, policymakers regional economies within their orbit. And dominant dimension of power, competing are now prioritizing regional organizations the governments of each bloc will accelerate with military and political capabilities. and alliances. This has resulted in a shift their efforts so their standards and systems Also, asymmetric conflict — most notably toward rising regionalization of the global are adopted throughout their spheres of cyber threats — allows countries with economic and political systems. influence. Witness, for example, the intense lower levels of traditional geopolitical competition between the US and China in power to wield outsized influence on On the one hand, the new regionalism the development of 5G wireless networks. the global operating environment. reflects a continuation of cross-border The EU’s leadership in technological economic integration. East Asia is a regulation offers another case in point. As these dynamics play out, the rules key driver of this trend, first with the of the game are shifting, creating new Comprehensive and Progressive Trans- As the emerging blocs consolidate their uncertainties around global strategies. Pacific Partnership (CPTPP) and now with power, relations between them will be The proliferation of bilateral and regional the Regional and Comprehensive Economic volatile. The US is retreating from its trade pacts, declining influence of the Partnership (RCEP). international leadership, China is playing WTO, rising use of sanctions, intensifying a bigger role in geopolitics and Europe is competition between major economies On the other hand, regionalism represents seeking a more cohesive projection of its and expanding political restrictions on the increasing fragmentation of the global own power. The US and China are being investment all shift business calculations economy into smaller blocs. The ability challenged to form a new relationship and strategy around global growth to effectively conduct business across under the more confrontational approach opportunities and risk management. The certain regions is likely to decrease as to bilateral relations pursued by the US new regionalism will require multinational these geo-economic blocs integrate more administration. And although transatlantic companies to develop regional supply fully internally. This is clearly visible in cooperation anchored global stability for chains and tailor products for regional the declining influence of the World Trade 70 years, the US and EU are beginning consumer markets.

9 | 2020 Geostrategic Outlook The geopolitical landscape Primary forces

Technology Accelerating global competition

The technologies of the fourth industrial Countries that dominate these digital as technology risks coming under fire revolution promise long-term gains in technologies will occupy a stronger position for contributing to underlying economic efficiency and productivity, but they relative to their less technologically woes, such as inequality. To maintain also have disruptive geopolitical and advanced competitors. This is true not domestic political stability in the coming social consequences. Transportation only in terms of economic competitiveness years, governments will need to manage and communication costs will drop, and military power, projected through these tensions and collaborate with while logistics and supply chains will cyber war or remote-controlled drones, companies to retrain workforces to help become easier to manage. These but also for expanding geo-economic them keep pace with new technologies. technological improvements hold zones of influence. Technological prowess the potential to diminish the cost of enhances the ability of a government to Another area in which domestic politics and international trade, open new markets exercise control over zones of economic technology will increasingly collide is digital and drive economic growth. and political influence and to determine privacy norms and regulations. As social the “rules of the road” of political media, connected devices and other digital At the same time, technology catalyzes and economic cooperation. The US, technologies play an increasingly large role geopolitical competition. This is China and the EU are at the forefront in people’s lives, public concern about the especially true in an era of emerging of this competition. None wants to use of their data and necessary safeguards regionalism in geopolitics. Governments be dependent on technologies that is rising. Governments are taking are seeking to ensure that they — or could be controlled by foreign political action in various ways, including data companies headquartered within their influences. This sits at the heart of the localization requirements and new digital borders — develop the capability to build current debate about which country will privacy laws. These privacy regulations the crucial technologies of the fourth dominate the rollout of 5G technology. represent another area of geopolitical industrial revolution. Such technological competition, with the EU currently setting sovereignty is even more important Although technological advancement the global standard with the General today because artificial intelligence (AI), is crucial for economic and geopolitical Data Protection Regulation (GDPR). 5G wireless networks and other digital competition, it also creates domestic The US and China will not simply follow technologies form the backbone of the political risks. One of the most notable risks the EU’s lead, however, so companies entire 21st century digital economy. is technology’s effect on the labor market. will likely face competing privacy While estimates of the number of jobs that regulations in the world’s three major will be destroyed by new technologies vary geo-economic blocs in the coming years. widely, many economists and policymakers are concerned about robotics and AI generating large-scale labor displacement. This is particularly salient in an era of populism and anti-globalization sentiments,

10 | 2020 Geostrategic Outlook The geopolitical landscape Primary forces

Demographics Aging catalyzes global rebalancing

We are in the midst of transformative Aging populations present political and education and skills development and demographic change. Even though the economic challenges. Domestically, aging foster entrepreneurship and private sector global population is set to climb to almost populations weigh on economic growth job growth. Without such supportive 7.8 billion in 2020, the growth rate is prospects. With fewer working-age people, policies, a youth bulge increases political slowing significantly, forecast by the UN governments will need to combat economic risk. Countries with a large number of Population Division at just 0.98% annually stagnation and ensure the sustainability economically inactive or disadvantaged during the next five years. Even more of pension systems. This includes young people are prone to social unrest. notably, the global population is getting measures such as raising the retirement Witness the large protests that erupted in older, with the worldwide median age set age, encouraging greater workforce Chile, Lebanon, Iraq and elsewhere in 2019. to surpass 30 years for the first time in participation, welcoming immigrants and 2020. As a result, the global working age increasing the fertility rate. Each of these The aging global population is also population as a share of the total peaked policies comes with political risks and affecting geopolitics through generational in 2015. But this aging is not equally require significant fiscal resources, making dynamics in two ways. First, is an distributed, creating risks to domestic implementation difficult and, in some escalating inter-generational conflict over political stability in countries with either cases, unlikely. Aging could reduce many key policy issues, such as the environment very old or young populations and shifting countries’ economic clout on the global and the social safety net. Younger the geopolitical balance of power in favor stage, resulting in corresponding shifts in generations are taking to the streets, of economies with sustainable working- geopolitical power. afraid that their economic future and the age populations. ecological environment in which they will The youngest region in the world is Sub- live are very much at risk. Second, is an Europe, where 19% of its residents are 65 Saharan Africa, where the median age is emerging generational handoff in political years of age or older, is the region with by just 18.7 years. South Africa, in fact, is the power. French President Emmanuel Macron far the oldest population. Japan has the youngest G20 country, with about 45% of and Saudi Crown Prince Mohammad bin highest elderly population in the world, its population under 25 years old. More Salman are just two notable examples though, at 28%. Other G20 economies than 40% of the population in India, Mexico, of this trend. We could see a shift in must also contend with elderly populations Indonesia and Turkey is similarly young. geopolitical relations as the collective that exceed 20% of their total population, Countries that harness the economic experience of the world’s leaders ceases among them Italy, Germany and France. potential of this youth bulge may see their to include the height of the Cold War, the China, Russia and South Korea are also stature on the geopolitical stage rise in the pre-9/11 era and other defining moments. aging at a rapid rate. coming years. In this interim period in which multiple generations are in power, the likelihood of But successful integration of large youth misunderstandings or miscalculations is populations into the workforce requires higher, creating greater uncertainty and government policies that both promote volatility in geopolitics.

11 | 2020 Geostrategic Outlook The geopolitical landscape Primary forces

Environment Racing against the clock

Just 30 years after the International Panel Making global governance even more shift the geopolitical balance of power, on Climate Change issued its first warning challenging are the populist, anti-globalist disadvantaging countries that receive the that human activities were substantially sentiments in the US, which led to the brunt of its consequences. increasing the atmospheric concentrations American withdrawal from the Paris of greenhouse gases, we are beginning to Agreement. This decision left the rest of Climate change may also affect geopolitics see significant impact today. Greenhouse the signatories at a loss for how to affect by increasing the likelihood of armed gas emissions have risen at a rate of global change without the world’s largest conflict or causing large-scale migration 1.5% per year over the last decade,1 economy and second-largest polluter.2 flows in the future. and global mean surface temperature is The way forward is likely to be determined increasing. The economic consequences by coordination between the EU — which in The fight against climate change is not of climate change are already significant. December 2019 agreed on a Green Deal just about governments; civil society and The International Labour Organization that would make Europe the first climate- companies are also engaged. A rising estimates that nearly 1.2 billion jobs rely neutral continent by 2050 — and China, number of companies are incorporating directly on the effective management and which is both the world’s largest emitter of sustainability into their core business sustainability of a healthy environment. greenhouse gases and its largest renewable models, and many companies are also And climate-related disasters have cost the energy producer. reporting their climate change risks world an average of almost $200 billion and mitigation strategies to investors. annually over the last 10 years, according Further complicating the geopolitics of Such actions not only make sense for to Munich RE. this issue is the fact that the distribution the long-term viability of companies, of climate change impacts is not equal. but also for short-term performance as Climate change is a transnational issue Countries with warmer climates, which customers increasingly demand more that requires a globally collaborative are primarily emerging and frontier environmentally sustainable products. policy response. It is a race against time markets, suffer more from rising global Civil society is engaged in climate change for government, business and society temperatures. The International Monetary more broadly as well. This has been to develop solutions that prevent the Fund estimates that a 1° C increase in the most visible recently in the Fridays for worst consequences of this pre-eminent median emerging market economy lowers Future movement, catalyzed by Swedish global risk from materializing. But the economic growth by 0.9 percentage points, teen climate activist Greta Thunberg, in global rebalancing from a unipolar to a and by 1.2 percentage points for frontier which young students worldwide strike multipolar world complicates efforts to markets. Natural catastrophes caused by during school on selected days to protest mitigate climate change because no single a changing climate also have a particularly political inaction on climate change. country can lead the world on this issue. dramatic effect on people’s livelihoods in less developed economies, as mitigation and response efforts are likely to be less robust. Climate change could, therefore,

12 | 2020 Geostrategic Outlook Spotlight topics

Global trade and US-China relations

13 | 2020 Geostrategic Outlook Spotlight topics

Global trade Finding opportunity in uncertainty

There is a new normal in global trade. Trade signed “phase one” agreement, the actions by its second largest member policy now finds itself in the unprecedented structural nature of the conflict and the (China). Moreover, the recent expiration role as both the driver of macroeconomic mutual lack of trust mean it is unlikely the of the WTO Appellate Body eviscerates and geopolitical events and subject to two sides will resolve their fundamental the WTO’s dispute settlement mechanism, geopolitical considerations as geostrategic differences through some form of “grand which calls into question WTO members’ competition and rivalry between the three bargain.” The new normal, therefore, sets ability to manage the inevitable tensions major economic blocs increasingly trumps the stage for a fundamentally unstable that will arise. This is problematic for the rules-based trading system. In this new economic relationship between the world’s companies and countries across the reality, global economic governance will two largest economies for the foreseeable globe, particularly smaller nations be more competitive and less cohesive, future. The resulting uncertainty has that have relied on this rules-based providing a greater role to players besides already contributed to the slowdown in the system to even the playing field. the US. These developments are likely global economy and is likely to continue to to become a semi-permanent fixture, provide headwinds for growth. These developments will continue to prompting companies to reconsider how to impact growth and create tremendous manage cross-border activities. Brexit and its impact on the EU and the challenges for business. There are some UK also continue to disrupt international positive trade developments, however, in Trade policy today is driven by larger trade and the global economy. While the the form of regional trade agreements and concerns over competition between December 2019 UK election brought some the emergence of potentially new global countries, national security and the role measure of political clarity, the ability economic governance models. of technology. Populism and nationalism of the UK and the EU to negotiate a fully in key markets have also led to changing formed trading relationship by the end of The United States-Mexico-Canada trade relationships. The US, in particular, 2020 seems unlikely, if not impossible. Agreement (USMCA) is a prime example. has used trade policy as its tool of choice This will continue to create considerable Although it provides little in the way to address concerns with other countries’ uncertainty for cross-border trade of goods of new liberalization, it does reconfirm economic models and trade practices. and services between the UK and the EU. the commitment to the North American Supply chain disruptions have affected trade bloc — no trivial outcome in the While the current tensions between the growth prospects for the remaining case of the US trade policy. Trade US and China may have started on the members of the EU. agreements in Asia (CPTPP and RCEP) trade front, for instance, trade policy also demonstrate that regional models for is only one part of US-China tensions. The increasing weakness of the WTO economic integration can move forward, China and the US are seeking to effectively compounds these disruptions. This even without US participation. And the decouple bilateral technology linkages vulnerability stems from the realization EU continues to negotiate high-standard through efforts to prohibit the acquisition that the organization has been unable to agreements across the globe, notably with of each other’s technology products. rein in measures that were incompatible Japan, Vietnam and the Mercosur nations. Although China and the US have paused with WTO rules by its largest member Given the new EU Commission’s emphasis the escalating tariff war with the recently (the US) nor address market-distorting to combine regulation with industrial

14 | 2020 Geostrategic Outlook Various developments will affect the level of trade policy Exports have stagnated as a share of the global economy since uncertainty that companies face in 2020 the global financial crisis

Increase Decrease Neutral Goods and services exports as percentage of global gross domestic product (GDP) Trade development Impact on uncertainty 30% Ongoing US-China tensions

Brexit 20% USMCA

WTO dispute settlement and reform 10%

Conflicts over digital taxes 0% CPTPP and RCEP trade agreements

2002 2006 2010 2014 2018

Source: EY analysis. Source: EY analysis; UNCTAD; WTO and ITC secretariats’ calculations; World Bank. Note: Services data included 2005–18.

policies that promote competitiveness, it Operations and supply chain would appear that Europe is seeking to Global supply chains continue to provide an alternative economic model to characterize the world economy, but Issues to watch the US and China. An EU that avoids the companies are re-examining them as they excesses of US unilateralism and China’s respond to new protectionist measures. • Can the world’s two largest state intervention would help to stabilize For many companies, this means assessing economies, the US and China, the rules-based trading system. landed costs and optimizing sourcing, define and establish a new economic production and distribution in a more relationship, or will their relationship Business implications complicated and fluid environment. continue to engender bilateral and global uncertainty? Strategy Reputation and compliance Companies need to monitor global trade High tariffs in certain sectors incentivize • Will the US focus its more developments and work through the efforts to misrepresent origin, leading protectionist-oriented policies impacts on their business. Given the to heightened levels of enforcement and on Europe and seek to rebalance inherent uncertainties, this becomes less of potential negative effects on growth. The its relationship beyond existing an exercise in forecasting than in building cost and complexity of compliance will contentious issues (e.g., aircraft resilience and flexibility into their strategic also rise as new export control regimes manufacturing)? planning process. Capacity needs to be and further restrictions on cross-border developed to manage this challenge across investments are put in place. As a result, • What will be the supply chain and the different corporate functions. companies will need to continue elevating regulatory implications of Brexit? and prioritizing their compliance functions Finance and tax and integrate them into the companies’ • Will major countries develop Both the imposition of new tariffs and political and business risk management. a process for addressing WTO the reduction of tariffs through regional reform that will restore that trade integration have a significant organization’s role in the rules- effect on company finances. Executives based trading system? should use systems and data tools to understand how this will impact margins and revenues and then use tax and supply chain mitigation strategies to maximize those within the context of corporate and operational strategies.

15 | 2020 Geostrategic Outlook Spotlight topics

US-China relations Navigating strategic interdependence

Over the past few decades, US-China is not the full picture. Bilateral economic signing a limited “phase one” deal in rapprochement and cooperation interdependence remains strong. January 2020. The modest “phase one” created one of the world’s most highly Economic impact, loss of growth markets deal relates primarily to trade — removing interdependent economic relationships. and increase in trade in services all provide some US tariffs on Chinese goods and Since 2000, the year China joined the WTO, very real disincentives for the complete committing Beijing to increased agricultural two-way foreign direct investment (FDI) decoupling of these two economies. The purchases. But the shadow of the future has reached nearly $385 billion.3 In 2018, more accurate characterization of the will weigh on the US-China relationship China was the US’ largest trading partner Sino-American relationship is, therefore, in 2020. The US Government has a time with goods and services trade totaling an strategic interdependence. horizon of less than 11 months (i.e., until estimated $737.1 billion, according to the the presidential election); the Chinese Office of the U.S. Trade Representative. Locked in strategic interdependence, Government, at least a decade or more, In addition, the U.S. Department of the US-China relations are increasingly with President Xi Jinping’s term limits Treasury estimates that China holds defined by growing competition. It has removed. These diverging time horizons will approximately $1.1 trillion in U.S. become clear that the relationship keep the US-China relationship in a constant Treasury securities, representing 16.2% between these two powerhouses will state of imbalance and volatility. of foreign ownership of U.S. treasuries. shape the course of the global economy, geopolitics and the global business Business implications Politically, however, the US-China environment for decades to come. relationship is increasingly strained. Strategy Beijing seems to see the US as a declining The primary areas of contention are trade, Entering into or expanding in the Chinese power that is attempting to maintain its market access, intellectual property, market requires business strategies that political, economic and military dominance currency and Chinese industrial policies. take into account what the US considers through preventing China’s inevitable And encompassing aspects of many of China’s industrial policies that favor rise. Meanwhile, in Washington, a political these areas of economic contention is domestic firms over foreign firms, including argument is being made that China needs technology competition. In addition, non- subsidies, tax breaks, low-cost loans, even more efforts to move toward a economic areas of contention between the foreign trade and investment barriers, more open economy and to demonstrate US and China are broad and deep. These technology transfer and joint venturing a commitment to the rules-based tensions cut across the entire spectrum mandates, and perceived discriminatory international system. of bilateral political and military relations, IP and technology policies. This policy including technological security, maritime landscape is shifting, though, with Efforts to describe this relationship territorial claims, human rights, the supply the new Foreign Investment Law that as a new “cold war” or as moving of fentanyl and conflicting views on Taiwan came into effect January 1. It further toward “decoupling” are inaccurate, and Hong Kong. opens the Chinese market and levels however. While decoupling may help to the playing field for foreign businesses describe the process of unwinding some The US and China have taken a piecemeal competing with domestic companies, elements of the US-China relationship, it approach to addressing these issues, potentially creating new opportunities.

16 | 2020 Geostrategic Outlook Despite trade tensions, there has not been a structural US foreign direct investment (FDI) in China has remained transformation of US trading relationships consistent in recent years while Chinese FDI in the US has plummeted from 2016/2017 highs Share of US goods imports, monthly

China Mexico Japan India US-China FDI flows European Union Canada South Korea Vietnam Chinese FDI into the US US FDI into China

25% $50b

15% $30b

5% $10b

2017 2018 2019 2002 2006 2010 2014 2018

Source: US Census Bureau. Source: Rhodium Group. Note: Not seasonally adjusted. Data includes eight largest import partners as of 2018.

Finance and tax Data and intellectual property Tougher US screening of Chinese The “phase one” deal includes a provision investments will continue to challenge firms on intellectual property addressing areas Issues to watch in 2020. The U.S. Treasury reports that the such as trade secrets, pharmaceutical- number of notices filed at the Committee related intellectual property, geographical • Will the “phase one” deal hold? on Foreign Investment in the United States indications, trademarks and enforcement Will there be a “phase two” (CFIUS) increased 265% from 65 in 2009 against pirated and counterfeit goods. deal this year? to 237 in 2017, and remained at a similarly This provision is unlikely to resolve US high level in 2018. While the US has yet to executives’ long-standing concerns about • What will be the US-China finalize the lists of technologies that will be effective intellectual property rights in policy position of the leading US subject to export controls pursuant to the China, however, so companies should presidential candidates? How will US Export Control Reform Act, these lists continue to implement safeguards. electoral politics impact the Trump are expected to expand CFIUS’s investment administration’s negotiating tactics? review authority. Chinese and other foreign Reputation and compliance companies considering investment into US and Chinese firms face increasing • How will the performance of the the US need to monitor such rules and pressure to support their home countries Chinese economy in 2020 affect enforcement trends carefully. and uphold the values of their respective Beijing’s negotiating position? governments and societies. Where Western Operations and supply chain and Chinese policy goals and values • What will the U.S. Department of Despite the “phase one” deal, trade diverge, firms will face pressure to remain Commerce’s formulation of lists tensions will continue to impose costs on neutral — or pick a side. Either strategy of “emerging” and “foundational” supply chains between the two countries. poses reputational risks, so executives technologies subject to new export Perhaps most notably, the US and China should consider the likely risks and rewards controls signal about technological are both expanding restrictions on of various scenarios before deciding on a decoupling? certain technology exports or exports to course of action. specified companies in the other market. Executives should continue to monitor tariff and non–tariff barriers to trade and evaluate supply chain vulnerabilities more broadly. Paying higher costs, passing costs along to consumers or shifting supplier locations are among the options companies should consider.

17 | 2020 Geostrategic Outlook Around the world

Geopolitics in a world of regions

18 | 2020 Geostrategic Outlook Around the world

East Asia and Pacific Evolving role of China shapes the outlook

The rise of China has dominated the The role of the US will continue to loom Demographics Asian narrative in recent decades. large in the region. Many countries, Beyond the demographic dividend But Beijing’s tightening control of its notably Australia and several Association East Asia is aging at a rapid rate thanks economy, the continuing slowdown of Southeast Asian Nations members to dramatic declines in fertility rates in in economic growth and recent trade (ASEAN), are seeking to balance their recent decades, creating challenges in tensions with the US have triggered a political and economic interests between maintaining economic growth. In China, the strategic reassessment of the broader the US and China. One consequence of demographic dividend that helped to propel footprint many companies have in Asia. the US-China trade tension is that other its rapid economic growth is going into Asian markets often benefit as companies sharp reverse. Others are further along Under President Xi Jinping, Beijing no diversify supply chains beyond China. this curve. Japan’s population is already longer follows the “hide your strength and Vietnam, Thailand, Singapore and Malaysia shrinking, while South Korea’s is forecast to bide your time” approach in foreign policy. are among the most prominent examples. start shrinking in 2025. This will be on greater display in 2020 in RCEP, which brings together 15 countries various arenas. At the same time, Beijing’s of the Asia-Pacific region in a free trade Technology “redline” topics, such as the continuing agreement to be signed in 2020, is likely to Competing in the global technology race protests in Hong Kong, are growing, which further reshape geopolitical and economic China, Japan, South Korea and other could further complicate the business relationships within the region. Asian countries continue to take the environment in China. lead in building and deploying leading Primary forces technologies. Among them are 5G The fierce trade dispute that erupted wireless networks, which will accelerate between Japan and South Korea in Globalization the economic impact of other fourth 2019 creates the potential for another Playing a central role industrial revolution technologies. Their geopolitical disruption in Northeast Asia. Arrangements such as RCEP will success in exporting such technologies will This dispute has highlighted how the solidify Asia’s position in the global largely depend on their ability to set and region’s complex political history still economic order. Given the region’s control the standards that will enable their affects the business environment today. strong economic growth and increasing products to compete successfully. Though tensions receded somewhat by the economic integration, Asian markets end of 2019, bilateral relations will remain will remain increasingly attractive Environment volatile. Elsewhere on the Korean peninsula, trade and investment partners for Sharing global responsibility risks are increasing that the constructive, countries around the world. China is the world’s largest source of but tentative, dynamic created by the carbon emissions, but also the largest high-level engagement between the US and renewable energy producer, anticipated to North Korea will cease. Pyongyang may account for 40% of the total global clean assume a more confrontational position energy mix by 2022.4 Now that the US has in 2020, raising the risk profile for South left the Paris Agreement, China will play a Korea and other neighboring markets. major role at the 2020 UN Climate Change

19 | 2020 Geostrategic Outlook China’s GDP grew 6% in the third quarter of 2019, a 27-year low The Regional Comprehensive Economic Partnership signatories account for $24.8 trillion, or 29%, of global GDP

Chinese year-on-year GDP growth, quarterly RCEP signatories 8% Australia Brunei Cambodia China Indonesia 7% Japan Laos Malaysia Myanmar 6% New Zealand Philippines Singapore South Korea Thailand 5% Vietnam 2014 2015 2016 2017 2018 2019

Source: National Bureau of Statistics of China. Source: EY analysis; World Bank; Association of Southeast Asian Nations.

Conference, as its leadership is needed to Operations and supply chain maintain momentum toward achieving a Despite the recent “phase one” deal, robust global climate policy. US-China trade tensions will continue to Issues to watch impose costs on supply chains between the Business implications two countries. Given the risk that the trade • How will the “phase one” trade tension may ramp up again, companies deal between the US and China Strategy should continue to explore ways to diversify affect investment, trade flows and East Asia and Pacific will continue to their production and sourcing locations in geopolitical dynamics across Asia? be among the key anchors of the global the region. The planned signing of RCEP economy for the foreseeable future. Many later this year should help facilitate cross- • To what degree will economic economies in the region are experiencing border flows among its 15 members. interdependencies between Japan robust growth. Combined with the and South Korea help to stabilize emergence of a more integrated regional Reputation and compliance bilateral political relations? economic system, global companies should Executives should closely monitor new continue to consider the region as a central regulatory announcements from Beijing • How will North Korea’s nuclear part of their business strategies. and how they are enforcing existing ambitions play out in 2020 and regulations. Executives must be cognizant beyond? Data and intellectual property of the reputational risks that may arise in The US-China trade tensions have their home market as they comply with • To what extent will RCEP consolidate accelerated Beijing’s push for economic regulations in both mainland China and regional economic relations and self-sufficiency in select sectors. The most Hong Kong. create a more unified market across notable of these is technology. Rather than the region? risk isolating its economy, Beijing is seeking markets for its indigenous technologies abroad. Such efforts may enable China to build spheres of technological and economic influence within Asia and further afield. Executives should monitor where Chinese technologies gain market share, and adapt their technological and data operations in those markets accordingly.

20 | 2020 Geostrategic Outlook Around the world

South Asia A delicate balancing act

As economic growth slows in most South military and the judiciary after the clear from India’s decision to opt out of Asian countries in 2020, governments Supreme Court in November 2019 blocked the RCEP. Even within South Asia, regional will need to balance public spending the prime minister’s bid to extend the integration is minimal. According to the programs with fiscal pressures driven by army chief’s term. And Pakistan’s ability KOF Globalisation Index, South Asia is the ongoing budget deficits. At the same time, to continue to attract foreign investment second-least globalized region of the world, the foreign policies of most South Asian will be an open question. Moody’s rating behind only Sub-Saharan Africa. governments will continue to be dominated agency recently upgraded Pakistan from a by the need to strike a balance between negative to stable outlook, but investments Technology India and China. in Pakistan will still carry risk if the country Focus on data privacy continues to be included on the Financial The most significant technology policy Even though Prime Minister Narendra Action Task Force’s gray list for money issue in India in 2020 will be data privacy. Modi governs with a commanding laundering and terrorist financing. Policymakers and the public will continue to majority following the 2019 elections, debate the privacy and protections citizens India’s political environment will On a broader scale, geopolitics in South should have for their data and when it is likely remain volatile in 2020. Slower Asia will continue to be dominated by the acceptable for apps to share data with the economic growth is one reason for this, tenuous balance of power between the government. This issue is supercharged particularly given persistent high levels region’s largest country, India, and its by the fact that most Indians’ mobile of inequality and unemployment. The northern neighbor, China. India remains phones and computers are imported from mass protests that erupted in the wake of wary of Chinese influence throughout China, leading to suspicions that Beijing is the government passing the Citizenship South Asia and will keep a close eye on monitoring their activities. Amendment Bill in December 2019 BRI infrastructure projects in Pakistan, also cloud India’s political outlook. Bangladesh, Sri Lanka, Nepal and the Demographics Maldives. These countries also have close An underutilized youth bulge Sri Lanka’s political outlook largely mirrors political and economic ties with India and Almost half of the regional population that of India’s after an election fraught with will likely attempt to play China and India (45.6%) will be under 25 years old in violence brought Gotabaya Rajapaksa, the off one another. Pakistan is the exception, 2020. Such a youth bulge can be a boon former defense chief during the country’s remaining firmly aligned with China. for economic growth, if new entrants to civil war, to the presidency in November the working-age population are educated 2019. Both countries now face growing Primary forces and there are jobs to be had. This is concerns that policies emphasizing currently not the case in much of South majority rights will intensify sociopolitical Globalization Asia, however. In India, the International tensions between ethnoreligious groups. Opting out of integration Labour Organization estimates that almost India will continue to pursue its one-third of youth are not in employment, In Pakistan, the domestic political independent and somewhat protectionist education or training. environment will be shaped by tensions policy stance with respect to international between the civilian government, the trade and investment. This posture is

21 | 2020 Geostrategic Outlook South Asia remains one of the world’s least globalized regions Pakistan accounts for more than 40% of Belt and Road Initiative investment in South Asia KOF Globalisation Index BRI investment by country South Asia Middle East and North Africa East Asia-Pacific Europe and Central Asia Latin America and Caribbean Sub-Saharan Africa $60b North America

$50b 80

$40b

$30b 60 $20b

$10b

40 0 2002 2006 2010 2014 2018 Pakistan India Bangladesh Sri Lanka Nepal Afghanistan Maldives

Source: Savina Gygli, Florian Haelg, Niklas Potrafke and Jan-Egbert​ Sturm, The KOF Globalisation Index – Revisited, Source: “China Global Investment Tracker,” American Enterprise Institute website, Review of International Organizations, 2019, 14 (3), 543-574.​ (https://www.aei.org/china-global-investment-tracker/), accessed 2 January 2020. Note: Data is the total investments in US dollars from 2005–19. Full year 2019 data was not available at time of publication.

Environment surrounding data privacy. This could have Increasingly unpredictable monsoons implications for cross-border data flows, The annual monsoon is perhaps the most data localization and foreign technology Issues to watch important driver of economic growth in company access to the Indian market. South Asia, as all countries in the region • Will India enact a new data privacy depend upon it for agricultural production. Operations and supply chain law? How will it affect foreign Global climate change, however, is making With India opting out of the RCEP, South technology firms’ access to the the monsoon season increasingly erratic. In Asia will not be integrated into the East country? 2019, the rains arrived late and with such Asian supply chain in the foreseeable intensity that they caused massive flooding future. Sourcing from the region, therefore, • Will governments be able to stabilize in India, Nepal, Bangladesh and Pakistan. may continue to be less competitive than or reignite economic growth? In 2020 and beyond, governments what is available from alternative locations. throughout the region will face challenges Logistics could improve, however, if BRI • How will BRI projects be viewed by in dealing with the economic and and other infrastructure projects continue the local populations affected by humanitarian aftermath of unpredictable to move forward. their construction? monsoons. Growth • Will India’s budget for 2020, due Business implications Despite the slowdown in regional to be presented in February, reveal economies, South Asia will remain one of anything new about the agenda of Human capital the fastest-growing areas in the world. the second Modi administration? South Asia enjoys an abundance of labor, Middle-class consumers in India and making the region an appealing location for beyond enjoy greater purchasing power labor-intensive manufacturing. Companies than in the past, and this should grow in should proactively mitigate any socially the coming years. Regulatory barriers to driven political risks by engaging with these markets could remain high, however, employees and the communities in which and executives should evaluate whether they operate. One such strategy is to locate the long-term growth potential outweighs production in economically disadvantaged these costs. areas, while another is to partner with local educational institutions to ensure a strong pipeline of talent.

Data and intellectual property Data privacy will be a hot issue in India in 2020. Executives should closely monitor the evolution of the debate

22 | 2020 Geostrategic Outlook Around the world

Eurasia Renewed strategic significance

As the bridge between Asia and Europe, inward focus, has left a vacuum. Russia will Demographics Eurasia will continue to gain in strategic also continue to build its influence across Seeking immigrants to stabilize importance, both politically and Western and Central Europe. populations economically, in 2020 and beyond. Demographic change looms large for Domestically, politics in many Eurasian Eurasia, as aging populations continue to After the end of the Cold War, the post- countries continue to be characterized by decline. Once again, Russia is very much Soviet countries appeared destined autocratic rulers, corruption and a strong at the center of developments. As its to become less significant actors in a role for the military. In addition, several population declines, the Kremlin has made global economic system created by and rulers have been in power for decades and it a priority to provide Russian citizenship dominated by the West. The rise of China, are now seeking to transfer power to their to between 5 million to 10 million migrants and Asia more broadly, has shifted that chosen successors. Kazakhstan, Tajikistan from countries with a strong Russian- political and economic outlook. China has and Turkmenistan are notable examples. speaking population. emerged as a viable commercial alternative And in Russia, President Vladimir Putin has to the West, with Russian exports to China been in power for 20 years. Although the Technology multiplying tenfold since 2001, making it constitution currently requires him to step Prioritizing cyber power over broader Russia’s largest export market behind the down in 2024, Putin’s recent state of the connectivity EU. With a new gas pipeline that opened in union address included proposed changes Military, nuclear and cyber technology are December 2019, Russia’s exports to China to the constitution that could enable him to largely the focus of the region’s, and in are set to grow even further. remain in power for longer. particular Russia’s, technology prowess. To that end, Russia will remain one of the China’s BRI, the vast infrastructure Primary forces world’s top cyber powers. In contrast, the network connecting East Asia with region’s role in the emerging technologies Europe, is strengthening Eurasia’s Globalization of the fourth industrial revolution will geopolitical clout. The success of the Uncertain outlook remain limited. Case in point, the EEU’s BRI ultimately depends on the proactive Slowing growth of key trading partners digital agenda, which promises to develop support and involvement of Eurasian (China and the major EU economies) an integrated digital infrastructure and countries, notably that of the dominant weighs on the Eurasian economic outlook. expand Internet access, remains stalled. regional power, Russia. Nevertheless, Russia is building a strategic energy relationship with China, opening the Environment The US–China rivalry and the eroding Power of Siberia pipeline and consolidating Capitalizing on the Polar Silk Road transatlantic relationship also provide its access to European energy markets Receding ice in the Arctic Sea has opened Russia with more geopolitical room to by pursuing the Nord Stream 2 project. the prospect that the Northern Sea Route, maneuver for influence. Moscow will Within the region, the Eurasian Economic which circuits the Russian Arctic coast, continue to use its more prominent position Union (EEU) continues to face challenges could one day become a global shipping on the world stage to move into policy in deepening economic integration with artery. Russian ice breakers are active arenas in which the US, with its current member states. on the route during the summer months,

23 | 2020 Geostrategic Outlook Control of corruption is low but slowly improving for Eurasian countries are becoming crucial transit corridors many countries in the region between East Asia and Europe

Control of corruption Norway Kazakhstan Kyrgyzstan Russia Tajikistan Turkmenistan Uzbekistan

-0.4 Belarus

Moscow Russia -0.8 Ankara

-1.2 Kazakhstan

-1.6 Shanghai 2014 2016 2016 2017 2018 Tehran China

Source: “Worldwide Governance Indicators,” World Bank website, https://info.worldbank.org/governance/wgi, Source: “Belt and Road Europe,” OBOReurope website, https://www.oboreurope.com/en, accessed 3 January 2020. accessed 3 January 2020. Note: Scores range from -2.5 (weak) to 2.5 (strong) governance performance.

and a global shipping company conducted Reputation and compliance an exploratory voyage in 2018. The The lack of government transparency commercialization of this so-called Polar in many Eurasian countries can create Issues to watch Silk Road would dramatically alter global significant challenges for corporate shipping routes and shift the geopolitical governance. Any breaches of anti- • How will BRI projects evolve in 2020 dynamic around the Arctic region. corruption laws would cause not only and beyond? compliance issues, but also reputational Business implications damage in home markets. Executives need • How sustainable is Russia’s pivot to to exercise continued due diligence when China, given the strategic rivalry the Finance and tax conducting business in the region. two countries have for influence in Russia continues to face US and EU the Eurasia region? sanctions for its role in the Ukraine crisis that began in 2014. While the EU’s • How will European companies sanctions are set to expire at various balance the risk of US sanctions points in 2020, they are likely to be against opportunities across Eurasia? extended once again. The US Congress is also considering additional sanctions • How will data localization policies on Russia in response to its alleged evolve in Russia and other key meddling in the 2016 presidential election. countries? When assessing business prospects in the region, executives should evaluate • Will any political risks associated with the likely evolution of these sanctions brittle governments in the region be to determine Eurasia’s geopolitical risk- realized? adjusted commercial attractiveness.

Operations and supply chains China’s BRI holds great promise to significantly upgrade the region’s transport infrastructure network, making it an attractive route for trading goods between China and Europe. Companies should monitor the progress of these infrastructure projects and evaluate how the BRI affects the economics of their supply chain logistics.

24 | 2020 Geostrategic Outlook Around the world

Europe Shifting internal and external equilibriums

Europe is witnessing the most profound To that end, EU policy debates will the EU will continue to be fiercely protective transformation of its internal politics continue to proactively re-evaluate of the established principles of competition and external relations since the end of options toward Russia and China in within the single market, it will develop the Cold War. an effort to improve Europe’s strategic more proactive industrial policies to bolster sovereignty. Although EU relations European competitiveness abroad. The rise of extreme populist and nationalist with Russia have been in a stalemate movements challenges the vision of a more for several years now, France is among Demographics integrated Europe. This has superseded, if the EU members that are beginning to Political realities of aging not replaced, Europe’s traditional political question whether Europe needs to rethink With a median age of 43.8 years in 2020, party landscape, historically dominated by this approach and reopen a strategic Europe is by far the oldest region in the world social democratic and socialist parties on dialogue with its Eastern neighbor. (North America is the second oldest, at 39.4 the left and centrist and conservative parties years). Rapidly aging societies create vast on the right. The result has been a further Moreover, although the European political challenges, which include paying fragmentation of the political spectrum Commission has identified China as a for pensions and maintaining economic across Europe, hindering coalition building “systemic rival,”5 many EU Member States growth with a smaller labor force. One and government formation. are engaging proactively with Beijing. Given option would be to increase immigration, the commercial attractiveness of China’s but this creates political challenges in an The most prominent example of this economy and converging international age of identity politics and populism. new political reality is Brexit. The exact interests (such as a commitment to the contours of the Brexit arrangement, which Iran nuclear deal, China’s increasing Technology will emerge throughout 2020 and beyond, engagement in Africa and climate change), Seeking technological sovereignty will not only be crucial for future EU-UK the EU will continue to develop a more As the race for technological supremacy relations, but also for intra-EU relations. nuanced, pragmatic perspective in its between the US and China heats up, Brexit will accelerate a significant geopolitical relations with China. Europe is increasingly focused on achieving reorientation across the political alliances technological sovereignty. Though Europe within the EU, placing more focus on Primary forces is behind in developing a number of critical the Franco-German relationship as the technologies, it remains the leader in gravitational center of European politics. Globalization defining global standards for the new Aligning economic and political interests generation of technologies (e.g., data In its external relations, the EU’s The more competitive geopolitical privacy and localization). Europe’s choice commitment to a rules-based global environment and Europe’s growing concern of suppliers for 5G infrastructure will seek order will remain robust. But Europe about the increasingly state-centrist and to balance the commercial attractiveness will increasingly be challenged to nationalist economic policies of the world’s of engaging with China with the security embrace a more realist perspective in its other major economies have prompted a concerns voiced by the United States. geopolitical relations given that national reconsideration of its economic strategies interest-based politics are on the rise. and overall commercial philosophy. Though

25 | 2020 Geostrategic Outlook 42% of Europeans view the EU positively, down slightly from Changing of the guard in Europe the last two surveys yet above post-European debt crisis low New EU leaders shift the bloc’s policy agenda Perception of the European Union

Total “positive” Total “negative” Ursula von der Leyen President of the European Commission Neutral Don’t know Mainstreaming a green agenda 60% Charles Michel President of the European Council 42% 40% 37% Maintaining the EU’s unity Josep Borrell High Representative of the Union for Foreign Affairs and Security Policy 20% 20% Strengthening multilateralism and a rules-based global order

Christine Lagarde 0% President of the European Central Bank 2006 2010 2014 2018 2019 Reforming the ECB

Source: “Public opinion in the European Union,” Standard Eurobarometer 92, autumn 2019. Source: EY analysis.

Environment Finance and tax Blending sustainability with Europe’s climate policies are likely to create competitiveness new opportunities and markets, but they Issues to watch Climate change protests have received will also impose new costs on companies overwhelming public support, leading to operating within the bloc. Companies • Will populist political parties the acceleration of legislation implementing will need to monitor new climate change continue to grow in power, and what national commitments under the Paris regulations and ensure that they are in consequences will they have on Agreement. While staking a strong compliance. Executives should engage with policymaking? Have we seen “peak leadership position on climate change policymakers and other stakeholders (at populism” in Europe? regulations — the European Green Deal the local and EU levels) to inform the policy will make Europe the first climate-neutral debate on key areas that enable businesses • How will Brexit shift the EU’s continent — will likely position the EU to continue to grow and innovate in a internal policy dynamic, and what economy well in the long run, it could sustainable and competitive way. In consequences will it have for Franco- also lead to short-term competitiveness addition, executives should be aware of German relations? How will it shape challenges. the growing attention their investors and the UK’s approach and focus on consumers are paying to climate change. Commonwealth economic partners Business implications and politics? Operations and supply chain Strategy European economic growth remains • How aggressively will the European The ongoing realignment of Europe and dependent on a well-functioning global Commission move forward with its EU Member States creates challenges trade regime. This includes both industry, technology and climate for corporate strategy. Executives must maintaining access to traditional markets in policies? account for the instability of transatlantic the Americas and building new markets in affairs and Europe’s evolving relations emerging economies, particularly in Asia. • What effect will the US presidential with China, Russia and other emerging With the WTO increasingly undermined as elections have on the future shape of economies when designing their strategies the custodian of global trade regulation, the transatlantic alliance? for the region. Perhaps the most notable executives must be aware that Europe’s issue that companies should monitor in regional trade relationships will become • How will EU members’ relationships this regard is how the EU balances its more prominent in securing market access. with Russia and China evolve, and to relationship with the US and China on 5G what degree will this cause tensions infrastructure. among EU members?

26 | 2020 Geostrategic Outlook Around the world

Middle East and North Africa 2010 Volatility and the risk of disruption

The politics of the Middle East and North its supply coming from the Middle East. As Primary forces Africa will remain fragmented and volatile a result, China is increasing its diplomatic in 2020 and beyond. The shifting dynamic engagement in the region, taking an Globalization of geopolitics requires governments in the extremely cautious approach to local Geopolitical tensions affect region to seek a new balance, likely altering political and security challenges. economic flows business environments in those markets. The region’s economic outlook will be Russia will also continue to present itself clouded by its proximity to geopolitical Geopolitics within the region will likely as a regional power broker, maintaining its risks. These include US-Iran tensions, the be even more volatile in 2020. As the presence in Syria and seeking to extend trade tension between the US and China, aftermath from the recent US killing of its influence in the Gulf region. The EU politically driven oil price volatility and an Iranian general continues to play out, will remain active in promoting gradual international sanctions. Persistent regional there is an elevated risk of further attacks economic and political reforms throughout tensions, such as the Saudi-led blockade — conventional, cyber or other asymmetric North Africa to help reduce inward of Qatar, further complicate cross-border methods — either by or against Iran. The migration to Europe. economic flows. fate of the Joint Comprehensive Plan of Action (JCPOA) and its effect on global Fragile domestic politics will also continue Demographics oil markets will create significant business to cloud the outlook throughout 2020. Dramatically shifting fertility rates uncertainties throughout 2020. In addition, The Syrian civil war goes into its ninth year, According to The World Bank, fertility while the blockade that Saudi Arabia, the the Libyan into its sixth and the Yemeni rates have dropped dramatically across United Arab Emirates, Bahrain and Egypt into its fourth year — all with no apparent the Middle East from about seven births have imposed on Qatar since 2017 might end in sight. Popular unrest swept through per woman in the 1960s to about three be lessened in 2020, tensions are likely to Algeria, Lebanon, Iraq and Iran in 2019, today. The average fertility rate in Iran remain high. And Israeli-Palestinian peace and underlying sociopolitical dynamics dropped even more dramatically from will remain as distant as it has ever been. suggest more protests are likely this year. above six births per woman in the early And Israel is heading for an unprecedented 1980s to about two today. While youth Importantly for future policy stances, third election within a year after party unemployment remains a pressing issue the involvement of international players leaders once again failed to form a coalition today, lower fertility rates will, over in the region is shifting. Even though the government. This just adds to the growing time, reduce some of the pressure on US is less dependent on energy from the uncertainty facing the region’s business governments to create jobs as they seek to Gulf, thanks to the development of its and investor communities. accommodate a growing labor force. shale gas industry, the US still maintains a strong military presence in the region — Technology and, in fact, is increasing its presence in Opportunity and risk an effort to contain Iran. In contrast, since Technology is a double-edged sword in the 2015, China has become the biggest global region. On the one hand, the attack on Saudi importer of crude oil, with almost half of Arabian oil installations last summer was

27 | 2020 Geostrategic Outlook Persistent low global oil prices will create fiscal pressures GCC economic complexity is in the middle of the pack of the world’s for oil exporters largest oil exporters

World oil prices, per barrel Economic complexity index rankings

Gulf Cooperation Council (GCC) states $110 1.5

1.0

$90 0.5 Iran Qatar Nigeria Kazakhstan Kuwait Oman 0.0 Bahrain $70

-0.5 Russia Canada

-1.0 Saudi Arabia Saudi

$50 Forecast States United

-1.5

2010 2012 2014 2016 2018 2020 2022 2024 Emirates Arab United

Source: International Monetary Fund, World Economic Outlook Database, October 2019. Source: “The Atlas of Economic Complexity,” Center for International Development at Harvard University website, Note: Global oil prices are presented as the simple average of three spot prices in US dollars per barrel: http://atlas.cid.harvard.edu, accessed 3 January 2020. Dated Brent, West Texas Intermediate and the Dubai Fateh. Note: Index values are for latest available year (2017) and range from -2.13 (least complex) to 2.28 (most complex).

conducted with the launch of drones and gas markets. Executives should closely missiles, which highlights the destabilizing monitor these situations throughout the consequences of the proliferation of year and develop contingency plans to Issues to watch military technology. On the other hand, the ensure the continuity of operations. Middle East seeks to be a stakeholder in • How will Iran’s nuclear ambitions play the unfolding fourth industrial revolution. Strategy out, and what consequences will they To that end, Israel has developed a robust, The Middle East continues to be a have for regional balance of power home-grown tech ecosystem, and Gulf geopolitical hotspot, with various trade and dynamics? investors are vying to present themselves as investment sanctions significantly affecting powerful backers of the global tech industry. whether and how multinational companies • Will Saudi Arabia make progress on can do business there. The US maintains a its economic reform agenda? Environment strict sanctions policy on Iran, for instance, Need for economic diversification while the embargo against Qatar has • How will the shifting involvement As a key producer of the world’s oil, the forced Doha to adjust its external economic of great powers in regional politics Gulf region is exposed to the outcomes of relations. Companies need to tailor their affect the viability of current supply global climate change and the geopolitics strategies to the current political realities in chains and operations? around it. Climate change not only affects the region, while also designing strategies demand for oil exports as a result of the to be agile enough to adapt to future shifts • Will Israel’s politicians be able to form energy transition to renewables, but also in a volatile geopolitical environment. a stable government after elections affects energy costs of Gulf countries. The in March? International Energy Agency estimates that Finance and tax almost one-fifth of the growth in global Economic and financial diplomacy that energy use in 2018 was due to hotter tie outside powers to the Middle East will summers driving up demand for cooling. remain a prominent element in the region’s business environment. While this has been Business implications the case for decades when it comes to the politics of oil, financial assets are now also Operations and supply chain being used to build and support alliances Business activities across the Middle East with strong external players. Executives will remain exposed to disruptions caused should keep in mind that capital allocation by military conflicts and large-scale social decisions will continue to be driven by such unrest. The consequences will ripple political calculations. through the global air travel, shipping and energy industries. Shipping disruptions in the Gulf of Aden and Persian Gulf have a particularly harmful impact on the oil and

28 | 2020 Geostrategic Outlook Around the world

Sub-Saharan Africa Economics and elections create divergent trajectories

The political and economic fortunes In contrast, Rwanda, Ethiopia, Cote Primary forces of countries in Sub-Saharan Africa will d’Ivoire, Uganda and Kenya are among increasingly diverge throughout 2020, the fastest-growing economies in the Globalization intensifying the need for a market-by- region because they are less dependent Losing momentum on the AfCFTA market approach to doing business in on commodity exports, have better Although the African Continental Free the region. South Africa and Nigeria, the governance, or both. Several of these Trade Agreement (AfCFTA) was signed region’s two largest economies, have the countries have elections in 2020, though. to much fanfare in 2019, it is only a most troubled outlook, while elections Ethiopia’s election could highlight ongoing framework agreement. Rules of origin, elsewhere will create policy uncertainty. ethnic divisions in the country, despite the tariff concessions and the like still need government’s efforts to promote unity. In to be negotiated. As always, the devil is in In South Africa, social tensions will Cote d’Ivoire, the president may decide to the details. With so many regional powers likely rise as the government attempts run for a third term, which would postpone facing elections and internal governance to implement much-needed structural an expected generational handoff of power challenges, there is likely to be little to no reforms as the economy continues to and could provoke unrest. Kenyans may progress on the AfCFTA in 2020. stagnate. The ruling African National also get the chance to vote in a referendum Congress party’s popularity will likely slide on proposed changes to the country’s Technology further, opening it up to challenges from executive branch of government. Politicization of internet use the Economic Freedom Fighters and other Even as internet penetration is rising political movements. If the government’s Geopolitical maneuvering also plays rapidly, almost half of African governments reform efforts fail, the risk of a more an important role in Sub-Saharan have imposed network blackouts in recent populist policy agenda will rise. Africa’s 2020 outlook, as China, years, primarily in attempts to quell social Russia, Europe and the US vie for unrest. Unsurprisingly, the less democratic Political risk is also high in Nigeria. The IMF influence.Much of this new geopolitical the government, the more likely it is to forecasts that economic growth will be only competition in Africa comes in the form order telecommunications companies to about 2.5% in 2020, despite — or perhaps of foreign investment, particularly in disrupt internet access. Some governments because of — the government asserting infrastructure. While such investment are taking less dramatic measures to control more control over the economy. The land provides a welcome economic boost, internet content instead, including through border trade ban imposed in August 2019 it also risks creating tensions between imposing taxes on social media apps. will likely continue, complicating supply Sub-Saharan African countries that align chains and dampening economic potential. themselves with rival external powers. Demographics The government’s task to deliver promised Opportunities and challenges of a benefits to the public will be made more youth bulge difficult by low global commodity prices In 2020, fully 42% of the Sub-Saharan and rapid population growth. African population will be under the age of 15, compared with just 25% of the global population. Whether this youth

29 | 2020 Geostrategic Outlook Divergent economic growth across the region Sub-Saharan Africa’s dramatic youth bulge provides both opportunities and challenges

Annual GDP growth Share of population by age group

Less than 15 years old 15–64 years old 65 years old or older Rwanda 10% Forecast 3% Ethiopia 9.3% Côte d’Ivoire 8% Tanzania 54.9% 6% Uganda 65.2% Kenya 4% Ghana Nigeria 2% 42.1% South Africa 25.4%

2017 2018 2019 2020 2021 2022 Sub-Saharan Africa World

Source: International Monetary Fund, World Economic Outlook Database, October 2019. Source: United Nations, Department of Economic and Social Affairs, Population Division (2019), World Population Prospects 2019.

bulge translates into greater economic is needed. Such political risk analysis is growth will depend on whether government particularly important when commodity policies support education and training, prices decrease because fiscal pressures Issues to watch promote entrepreneurship and enable increase, raising the risk of social unrest private-sector job creation. The risk of and dramatic shifts in policy. • Will South African President future social unrest will rise if young Cyril Ramaphosa succeed in Africans lack economic opportunities. Operations and supply chain pushing through his economic With so many elections occurring reform agenda? Environment throughout the region in 2020, the risk Growing climate change vulnerabilities of social unrest is high, particularly in • How will the populations view the The majority of Sub-Saharan African countries with weak economic growth or transparency of the electoral process countries are at extreme risk of climate in which electoral irregularities occur. Any in Ethiopia, Cote d’Ivoire and other change. Already, the increased frequency significant social unrest is likely to disrupt countries that are holding elections? and severity of droughts, floods and business operations, particularly in major extreme storms is worsening food and cities, creating the need for executives to • Will negotiators make progress water insecurity, facilitating the spread prepare contingency plans. In addition, on crucial details of the AfCFTA? of diseases, causing forced migration although the AfCFTA offers great promise And how will Nigeria’s role and increasing the appeal of militant to establish integrated supply chains across in the AfCFTA evolve? groups such as Al-Shabaab. If national the continent, executives should keep governments struggle to address climate in mind that this is a future vision, not a • To what extent will the economic change issues, the likelihood of additional current reality. and geopolitical interests of external climate change protests — led by the powers clash in Sub-Saharan Africa younger urban generations — will rise. Human capital in 2020? Labor is abundant in markets throughout Business implications Sub-Saharan Africa, but finding the right • How will the young, urban talent could prove challenging in some middle classes affect politics Growth markets. To capitalize on excess labor, and policymaking in countries Sub-Saharan African markets are companies should consider partnering throughout the region? diverse and their diverging political and with local educational institutions to economic trajectories will become even provide training in needed skills. This would more apparent in 2020 and beyond. not only improve the talent pipeline, but Companies cannot take a one-size-fits-all also help reduce sociopolitical tensions by approach to market entry or expansion in providing greater economic opportunities the region. Rather, a market-by-market to the local population. assessment of growth potential, including an analysis of the impact of political risk,

30 | 2020 Geostrategic Outlook Around the world

Latin America Protests and populists drive policymaking

Latin America was uncharacteristically Peronist government more leeway, as Peru. In 2020, Ecuador may also join the late to join the populist wave that began President Alberto Fernández only came to bloc, which would mark the first expansion in 2016, but the region is more than power in December 2019. since it was established in 2012. Mercosur, making up for its tardiness now. Political a trade agreement among Argentina, and economic grievances are bringing The highest level of political risk in the Brazil, Paraguay and Uruguay, will also populists to power and sending the region will continue to be in Venezuela. be in the spotlight as animosities between masses to the streets. These two forces The increasingly authoritarian government the presidents of its two largest members will shape policymaking in key countries of President Nicolás Maduro has presided threaten the future of the bloc. throughout the region in 2020, creating over an economy that has been shrinking uncertainty for the business environment. since 2014. In 2020, the opposition Technology President of the National Assembly, Juan Strategic decisions on undersea cable Street protests erupted in several Guaidó, will likely continue to be frustrated A planned undersea fiber optic cable that countries in 2019, including Chile, by his efforts to unseat Maduro. This will connect Asia to South America via Colombia, Ecuador and Bolivia. While the will result in further deterioration in the Chile raises strategic questions about how proximate causes differed, the underlying economic and political environment, even to finance this project, who will control the issues were similar — all of which will as China and Russia continue to support infrastructure and how secure it will be. continue to be politically salient in 2020. the Maduro regime. This cable could get caught up in broader These include enduring high levels of US-China technology tensions. inequality, persistent low economic growth The role of these external actors points to and political corruption scandals. Further a broader trend of geopolitical competition Demographics street protests are therefore likely, in Latin America. While the US still views A flood of Venezuelan refugees which will result in governments shifting Latin America as its backyard, China As the economic crisis in Venezuela policies to address popular demands. has become an increasingly important continues, more Venezuelans will join the Some of these policy shifts could prove investment partner for the region. almost 5 million of their countrymen who consequential for businesses, such as Chinese demand for Latin American have already fled abroad. The biggest Chilean President Sebastián Piñera’s move commodity exports could fall, however, as recipients of these refugees will continue to increase the country’s minimum wage. Beijing seeks to manage a slowdown in its to be neighboring countries, most notably domestic economy. Colombia, Peru and Chile. A lack of Policymaking is also likely to be somewhat international aid for this refugee crisis volatile in Mexico, Brazil and Argentina, Primary forces will further exacerbate social and political thanks to populist governments. In Mexico tensions in these and other host nations and Brazil, where the current governments Globalization throughout Latin America. have been in power for more than a year Pushing the Pacific Alliance and Mercosur already, popular discontent is likely to The regional trade liberalization agenda will rise if they fail to deliver on their electoral continue to be led by the Pacific Alliance promises. Argentines may give the new countries: Chile, Colombia, Mexico and

31 | 2020 Geostrategic Outlook Most of Latin America’s major economies remain dependent Through October 2019, 4.5 million refugees and migrants on commodity exports have left Venezuela

Commodities as a percentage of merchandise exports Venezuelan refugees and migrants by country

Fuel Agriculture Ores and metals Venezuela Colombia 1,400k Venezuela Ecuador 330k Colombia Brazil Peru 212k Peru 860k

Chile

Chile Ecuador 371k

Brazil

0% 20% 40% 60% 80% 100%

Source: World Bank. Source: International Organization for Migration. Note: Latest available data presented for each country.

Environment business growth and expansion Commodity dependence conundrum opportunities in the region, particularly for Latin America’s major economies remain consumer-facing companies. Executives Issues to watch largely dependent on commodity exports, need to take lower growth trajectories for including hydrocarbons, metals and Latin American markets into account when • Will the new government in Argentina agricultural products. The extraction setting growth targets for the region. reach agreement with international of these resources both contributes to debtors or implement a more populist environmental degradation and is at risk Finance and tax economic policy agenda? from future climate change effects and Argentina’s new government is likely to policies. Despite this interdependence, reorient economic policies, which will • Will indigenous communities and governments throughout the region have affect the country’s international financial other groups draw more attention to yet to prioritize climate change, focusing position and its cost of capital. More the climate change agenda in 2020? instead on more immediately salient issues, broadly, populist governments may impose such as inequality. higher taxes on companies or mandate • How will the political, economic new regulations granting greater domestic and humanitarian crisis in Venezuela Business implications control of key industries. Executives should continue to unfold? monitor any such policy proposals closely Operations and supply chain and conduct scenario analysis to determine • Will the geopolitical alignment of Widespread protests would likely disrupt how these changes would affect their Latin American countries shift operations and supply chains in major companies’ finances and operations. further from the US to China? urban areas throughout the region. In such situations, continuous communication with Reputation and compliance company employees will be crucial. As the Companies in the extractive industries Pacific Alliance countries continue their have long faced reputational risks in liberalization agenda, the falling costs of dealing with indigenous communities producing in or sourcing from these markets throughout Latin America. These risks may present new business opportunities. are likely to intensify in 2020 as global Executives should monitor developments attention to climate change continues around Mercosur closely. The trading bloc to rise. The Venezuelan refugee crisis presents both upside and downside risk. similarly poses reputational risks — on the upside as well as the downside — for Growth companies that are involved in refugee After dramatic gains for the middle class relocation, service provision or employing during the previous global commodity displaced Venezuelans. Executives boom, Latin America’s economy has should engage with local stakeholders sputtered. This, in turn, has reduced to proactively manage these risks.

32 | 2020 Geostrategic Outlook Around the world

North America Uncertainty abounds ahead of US election

North America will remain a source of Relationships with the country’s top three Technology political and economic volatility in 2020, trade partners will evolve in 2020 as part A trust crisis especially in the run-up to the November of the USMCA and US-China “phase one” Data-reliant technologies are becoming election in the US. Canada will be more trade deals. ubiquitous, raising concerns about the use stable, but will continue to be challenged and misuse of consumer data and creating to balance its foreign policies between its Canadian policy will similarly remain the need for revamped governance relationship with the US and its objectives focused on the economy. Entering his structures. Barring a crisis, the US elsewhere. second term, Prime Minister Justin Congress will not take legislative action in Trudeau will work to strengthen trade an election year, though, instead ramping This will be a monumental year for the relations, manage an economy at risk of up criticism of data-rich businesses on the US, as an impeached president vies for entering recession and devise climate- campaign trail. Use of AI is only likely to re-election. A Democratic winner in the oriented policies that do not alienate intensify distrust. presidential election could herald a wave provinces that rely on natural resource of socially minded, perhaps ultra-liberal, exports. Renewed separatist movements, Demographics programs. A Trump victory, however, such as oil-rich Alberta’s “Wexit,” will Shifting foreign talent base would provide a renewed mandate for continue to create political volatility. Between 2016 and 2018, applications for the “America First” agenda. While these two key US visa programs fell, seemingly in implications will not play out until 2021, Primary forces response to inordinate processing backlogs the uncertain political future will affect the and an intimidating political environment. business environment in 2020. Globalization Meanwhile, Canada attracted more than Diverging global aims 20,000 high-skilled immigrants in the first Maintaining economic momentum will The Trump administration will continue two years of a new work permit program. remain the top US domestic policy to focus on bolstering American Ottawa will likely accelerate efforts to objective. The US outpaces the rest of producers and shielding low-skilled attract foreign students and workers in the G7 economies in growth, and equity labor from competition, even if it 2020, recognizing the economic potential. markets regularly reach record highs. But results in disengagement from the business investment has cooled in the global economy. In contrast, Canada Environment context of geopolitical tensions and mixed will continue to pursue expanding trade Divides around climate change economic signals. The administration is relations, particularly in Asia (where While some US states have enacted therefore likely to focus on incentivizing it is a CPTPP member) and Europe measures to combat climate change, there business investment in 2020. And it will (through the Canada-EU Comprehensive remains skepticism at the federal level, continue to favor statecraft rooted in Economic and Trade Agreement). even as the US faces pressure to do more economic leverage as its primary form of as a key source of emissions. By contrast, foreign policy, at the expense of diplomacy. the issue remains a top political concern Sanctions, CFIUS reviews and tariffs in Canada, as the country has experienced are likely to continue making headlines. double the global average of warming

33 | 2020 Geostrategic Outlook The 2020 US presidential election will be determined Canada and Mexico are the US’s second and third largest goods by voters in swing states trading partners, respectively

US two-way trade in goods Swing states that voted Obama in 2012, Trump in 2016 Other swing states Canada Mexico

MN $600b WI NH MI IA PA NV OH $400b CO VA NC

$200b

FL 0 1994 2000 2006 2012 2018

Source: FiveThirtyEight. Source: U.S. Census Bureau.

according to the Council of Canadian Growth Academies. There is also a generational Public pressure is growing to reform divide in both countries, with youth antitrust enforcement to address evolving Issues to watch increasingly demanding leaders put more business models and the importance of resources toward climate action. network effects in a digital economy. Any • Will the Federal Reserve continue changes would likely rely less on consumer making cuts to the federal funds Business implications welfare as the sole determinant of antitrust rate? And how rapidly? violations. Technology companies are Finance and tax particularly vulnerable, as many grow • Which foreign policy issues will US corporate debt is at an all-time high, revenues through collecting users’ data receive focus from US presidential at around $10 trillion for large companies, rather than dollars. Companies should candidates? and a growing portion is held in low- consider whether potential M&A deals grade bonds. An economic slowdown could be construed as anticompetitive • How will traditional and social media could distress financially overextended under likely future antitrust policies. companies navigate potential foreign businesses. Moreover, as US businesses influence attempts on the 2020 US paid taxes at one of the lowest rates Data and intellectual property election? on record in 2019, corporations are Partisan gridlock and a Congress likely to continue to attract public ire struggling to keep pace with the evolving • Will Canada join its Five Eyes partners from the political left — and perhaps technological age are pushing US states in restricting Chinese telecoms from more broadly in a future downturn. to take the lead on regulatory issues installing 5G technology? from privacy and clean energy policies Reputation and compliance to drug pricing and more. For instance, • Will an increasing focus on climate A Pew Research Center report finds that the California Consumer Privacy Act, change lead to investments in most Americans do not trust business which came into effect in January, will upgrading physical infrastructure? leaders to act in the best interests of become the effective national standard the public. Coupled with historically on data privacy given its application to high income inequality and a populist any business dealing with Californians. surge, societal anger toward political and Companies will need to increasingly business elites is likely to rise. Boycotts follow state-level legislative agendas. of businesses viewed as harming the public good will likely increase in tandem. Executives should find ways to demonstrate their commitment to the communities they serve and the issues they care about.

34 | 2020 Geostrategic Outlook 2020 Geostrategic Outlook

Authors

Mary K. Cline, PhD Insights Leader, Geostrategic Business Group Ernst & Young LLP

Courtney Rickert McCaffrey Deputy Insights Leader, Geostrategic Business Group Ernst & Young LLP

Kyle P. Lawless Associate Director, Geostrategic Business Group Ernst & Young LLP

Sven Behrendt, PhD Senior Advisor, Geostrategic Business Group Ernst & Young AG

Acknowledgments

The authors would like to thank the following individuals for their assistance with this report:

Jason Adam, Jonas Akelis, Jon Alterman, Antonio Barroso, Douglas Bell, Ruchi Bhowmik, Ben-Ari Boukai, Igor Buyan, Robert Carroll, Scott Chapski , Luis Cornago, Patrick Dawson, John de Yonge, Anne Fruhauf, Gurbaksh Gandhi, Rich Goode, Mark Gregory, Steven Haines, John Hallmark, Matt Hanify, Tobias Harris, Bob Herrera-Lim, Andrew Hobbs, Bruce Holt, Erica Hurtt, Gautam Jaggi, John Jarrett, Kevin Kajiwara, Christine Le, Malte Liewerscheidt, Mario Marconini, Anne McCormick, Doug Milbrodt, Sampada Mittal, Bridget Neill, Jay Nibbe, Aditi Phandis, Michael Pifko, Shreya Popli, Alexandra Rogan, Bob Schellhas, Jon Shames, Sanjeev Singhal, Dan Staps, Shauna Steele, Andrius Tursa, Oliver Voigt, Tim Volkmann, Ben Wareing, Nicholas Watson and Gabriel Wildau.

35 2020 Geostrategic Outlook

Endnotes

1. Emissions Gap Report 2019, Executive Summary, United Nations Environment Programme, 2019. 2. CO2 Emissions from Fuel Combustion, International Energy Agency, 31 October 2019. 3. “The US-China Investment Hub,” Rhodium Group, 2 December 2019. 4. Rob Smith, Three countries are leading the renewable energy revolution, World Economic Forum, 26 February 2018. 5. “European Commission and HR/VP contribution to the European Council: EU-China — A strategic outlook,” European Commission website, 12 March 2019.

Unless otherwise noted, the source for all economic growth forecasts is the International Monetary Fund and the source for all demographics data is the United Nations Population Division.

Contacts

Jon Shames Regional contacts EY Global Leader Geostrategic Business Group Scott Sarazen Ernst & Young LLP Americas [email protected] Geostrategic Business Group Ernst & Young LLP Mary K. Cline, PhD [email protected] Insights Leader Geostrategic Business Group Oliver Jones Ernst & Young LLP EMEIA [email protected] Geostrategic Business Group Ernst & Young LLP [email protected]

Nobuko Kobayashi Asia-Pacific Geostrategic Business Group Ernst & Young Transaction Advisory Services Co., Ltd. [email protected]

36

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