Topic 1
Top development
Summits highlight shifts in multilateralism and the potential for increased international financing.
What happened
The primary outcome of the BRICS summit¹ in August was to expand membership to six new countries: Saudi Arabia, Argentina, Egypt, Ethiopia, Iran and the UAE. Similarly, one of the key outcomes of the G20 leaders’ summit² in September was the African Union (AU) becoming a permanent member of the G20.
The G20 leaders’ declaration also reflected concerns of the so-called Global South, including emphasizing the need to address global food insecurity, highlighting the importance of climate change and sustainable finance and affirming territorial integrity and sovereignty (without explicitly citing Russia’s actions in Ukraine).
The United Nations (UN) General Assembly later in September included a similar focus on international financing for the Sustainable Development Goals (SDGs) and other global priorities. However, US President Joe Biden was the only leader of a UN Security Council permanent member to attend the General Assembly opening this year, which called into question the UN’s relevance as a multilateral forum in the current environment.
What’s next
The willingness of EU countries and the US to tone down the language regarding the war in Ukraine in the G20 leaders’ declaration reflects the growing geopolitical power of the Global South. This more even distribution of power can also be seen in the ever-expanding agenda of the G20 leaders’ summits – with the first Declaration in 2008 containing only 3,540 words compared to about 14,400 in 2023.
The G20’s agenda is likely to continue to expand as the number and significance of transnational challenges continues to rise, and the G20 is seen as the leading international forum for addressing such issues given the institutional challenges of making progress in larger multilateral organizations (e.g., the UN and the World Trade Organization).
Developed markets will nevertheless continue to try to elevate the role of traditional multilateral institutions, partly to counter the rise of alternative China-led institutions in addressing the issues of most relevance to emerging and frontier market governments. The US will lead the charge to expand funding for the World Bank.³ And governance reform to expand the voting rights of developing countries at the World Bank and the International Monetary Fund (IMF) is likely to rebound to renewed prominence on the international agenda.⁴
Additional members expanding the financial power of the BRICS’s New Development Bank (NDB), G20 support for expanded World Bank funding and the newly announced India-Middle East-Europe Economic Corridor suggest that emerging market and developing countries may have access to greater financing for development projects in the coming years.⁵ Many analysts expect the upcoming 2023 United Nations Climate Change Conference or Conference of the Parties of the UNFCCC (commonly referred to as COP28) to similarly focus on greater financing for the Loss and Damage Fund (established at COP27) and renewable energy technologies.⁶
The membership expansions in both the BRICS and the G20 will increase the geopolitical and economic leverage of the Middle East and Africa, respectively, in those institutions. These developments reflect these regions’ crucial roles in the ongoing global energy transition, in terms of oil and gas as bridge fuels and of critical minerals for high-capacity batteries.
Business impact
Major sectors affected include energy, infrastructure, construction, and government.
The emergence of “real” multilateralism is likely to reinforce existing trends regarding economic diversification and supply chain resiliency. Geopolitical swing states such as India, Vietnam, the UAE and Turkey are likely to play larger roles in global supply chains. Executives should explore the market and investment opportunities introduced by these geopolitical shifts, taking into account potential reputational and compliance risks associated with their home market government’s policies.
The planned increase in funding by international lenders is likely to create opportunities in the commodities, energy, infrastructure and construction sectors throughout emerging and frontier markets. Such investment opportunities may be most robust in the Middle East, Africa and parts of Asia in the near term. Government policymakers and business executives should monitor these developments and seek to capitalize on funding opportunities for economic development or energy transition projects.
As multilateralism shifts in an era of heightened geopolitical tensions, this could create difficulties in global policy coordination, elevating the uncertainty and severity of any future transnational crises. This could, in turn, have negative implications for business revenue and growth opportunities in markets around the world.
For more information, contact Courtney Rickert McCaffrey.
Topic 2
Sectors in focus: manufacturing and energy
EU Carbon Border Adjustment Mechanism enters its transitional phase with an uncertain future.
What happened
On 1 October, the EU’s Carbon Border Adjustment Mechanism (CBAM) began being phased in, with a full entry into force scheduled for 2026.7 CBAM aims to reduce the risk of “carbon leakage” by taxing certain carbon-intensive imports from outside of the EU.
The introduction of CBAM comes at a time when several EU member states, including Germany, Italy and Austria, are backtracking on previously agreed green initiatives, such as the 2035 combustion engine ban.⁸
Poland has legally challenged several soon-to-be-implemented EU green regulations, such as binding annual emission targets, as too burdensome and has also requested the annulment of CBAM.⁹
What’s next
Poland’s demands, though unlikely to be successful, reflect the increasing worry about the EU’s green ambitions negatively affecting the competitiveness of EU economies. The green agenda will increasingly be challenged as policymakers seek to appeal to the concerns of some households and industries ahead of the European Parliament elections in May 2024.
The EU will continue to work with G7 countries, including the US and Canada, to advance a global carbon-pricing framework to avoid CBAM-related trade tensions. Other countries, such as the UK and Switzerland, may introduce similar measures. But some EU trading partners, including China, India and Indonesia, will likely continue to oppose the CBAM as a “border tax” and may introduce trade countermeasures such as similar carbon levies and other tariffs on EU imports.10, 11, 12
Business impact
The transitional phase of CBAM introduces reporting obligations for the energy and manufacturing sectors, specifically EU-based importers of cement, iron and steel, aluminium, fertilizers, electricity and hydrogen. Although no tariffs will be implemented yet, these reporting requirements will require greater supply chain transparency and could increase compliance costs.
Starting from 2026, these sectors – and potentially more covered by the Emissions Trading System (ETS), including chemical and paper – are set to incur an estimated 20% to 35% tariffs on designated imports. However, companies with exposure to the EU will likely face continued uncertainty about CBAM’s implementation due to both internal and external resistance.¹³
For more information, contact Famke Krumbmüller or Alenka Turnsek.
Topic 3
Other issues we are watching
Argentina’s election outlook, Poland’s populist shift, and Chinese policy changes
Argentina’s economic crisis creates an uncertain election outcome
In July, the International Monetary Fund (IMF) signed a new agreement with Argentina. But the country faces its most serious economic situation in years, with inflation estimated at 124%, foreign exchange reserves at a very low level, and an economy showing signs of contraction, in part due to the most severe drought in decades.14, 15 The crisis has sparked growing popular support for radical solutions ahead of the 22 October general elections. The current leader in the presidential race, libertarian economist Javier Milei, promises to dollarize the Argentine economy, make important changes to the Central Bank and significantly reduce fiscal spending. The presidential race remains highly fluid, however, and it is likely to go to a second-round runoff vote in November.
Regardless of who ultimately wins, the depth of the economic crisis will require difficult decisions for the next government. Even if the new president and Congress agree to commit to major reforms, their implementation will be complex. Argentina’s official membership in the BRICS as of January 2024 could open additional international funding options, but there are no quick fixes. Companies should expect continued economic and policy uncertainty in the near term.
Poland’s next government may further embrace populist policies
On 15 October, Poland’s parliamentary elections are expected to be very tight and leave neither the incumbent national-conservative party (Law and Justice or PiS, 37%) nor the main opposition Civic Coalition (30%) with an absolute majority. A PiS-led government may form as a fragile coalition with the far-right Confederation party (11%). It is possible the parties fail to form a government, which would lead to another election. The growing influence of the Confederation party reflects a broader European trend of rising popular support for far-right parties catering to voters impacted by high inflation and weak economic growth.16
A fragile PiS-led coalition government would increase the risk of political instability due to disagreements, which may encourage PiS to focus on upholding public support via more populist welfare policies and agricultural subsidies, as well as continued politicization of monetary policy decisions. EU-funded projects may experience more delays as Brussels withholds funds amid growing tensions with Warsaw regarding energy policy, the rule of law, and Poland’s protectionist trade measures on Ukrainian agricultural products. A Civic Coalition-led government could pursue some reforms, for instance judiciary reform, but would face institutional resistance from PiS-affiliated officials.
For more information, contact Famke Krumbmüller.
Chinese policy moves may provide short-term opportunities
Amid China’s slow post-pandemic recovery and rising geopolitical tensions, Beijing has been focusing on taking policy measures to attract foreign investment, boost the private sector, and revitalize the domestic capital market.17,18, 19 While targeted stimulus policies can be effective in lifting investor confidence and market sentiment in the short run, the long-term outlook for the Chinese economy will depend on how successfully the government addresses deeper structural issues such as an over-reliance on investment, weak domestic consumption and a shrinking labor force.
International businesses investing and operating in China could see opportunities stemming from the Chinese government seeking to enhance intellectual property protection, increase fiscal and tax support for foreign-invested companies and streamline the management mechanism for cross-border data flows. However, geopolitical complexities and restrictive investment and trade policies driven by national security concerns – both inside and outside China – will likely continue to weigh on companies’ decisions when it comes to doing business in and with China.
For more information, contact Courtney Rickert McCaffrey.
Topic 4
Geostrategic indicator of the month
Working days lost to strike
The indicator
Work stoppages have become more frequent in 2023. In mid-September, for instance, the United Auto Workers (UAW) went on strike in the US, affecting automakers General Motors, Ford, and Stellantis.20 This follows a trend of strikes in various sectors in the US in recent months, which has been dubbed the “hot strike summer.” There has also been a wave of labor actions elsewhere in 2023, including in the UK, Germany, France and Australia.
Business impact
The surge in labor strikes can be attributed in large part to the escalating cost of living, as well as economic shifts associated with the energy transition and new use cases for emerging technologies. Frequent or prolonged work stoppages can disrupt companies’ operations and supply chains, as well as generate risks related to workforce stability. Work stoppages can also generate reputational risks for companies, particularly if public opinion aligns with the workers' cause.
Additional EY contributors to this article include Alessandro Faini, Yi Y Xie and Jay Young.
In this series
Geostrategic Analysis:
September 2023
Talent markets, BRICS expansionary efforts, European corporate taxation, instability in West Africa, and more.
Geostrategic Analysis:
July 2023
Russian instability, automotive industrial policies, Nigeria’s new president, Saudi-China ties and more.
Geostrategic Analysis:
June 2023
Fiscal pressures on indebted governments, effects of banking turmoil, the G7 summit and more.
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Summary
The EY Geostrategic Business Group (GBG) provides its take on key geopolitical developments and the impact of these political risks on international business. Each monthly EY Geostrategic Analysis issue includes assessments of recent or upcoming geopolitical risk events and what they mean for companies across sectors and geographies.
