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2020 Geostrategic Outlook Global Rebalancing Raises Uncertainty for Business

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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 influenceon 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
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