The dark shadow of geopolitics

Smoke billowing during Israeli shelling in Rafah on the southern Gaza Strip late last year. The Middle East conflict is on the verge of widening and it has already affected commercial shipping in the Red Sea leading to the Suez Canal, a route that carries 12% of global trade. — AFP

THE world has many issues to worry about but geopolitics remains the top concern because of its devastating effect on the global economy.

Geopolitics is the No. 1 risk in the world today, said Jamie Dimon, the boss of JPMorgan Chase & Co, in an interview in late 2023.

Fast forward to this year and attendees of the World Economic Forum (WEF), at its recent annual meeting in Davos, Switzerland, were optimistic about gradually receding inflation, but there was also much discussion on how geopolitics continues to cast a shadow on global trade and investment.

Even climate change events cannot be discounted as they often overlap with geopolitics in issues such as resources (including food security), pollution and refugees.

The preoccupation with geopolitics is justified.

The Middle East conflict is on the verge of widening in a region that produces about a third of the world’s crude oil and accounts for about half of all proven reserves. It has already affected commercial shipping in the Red Sea leading to the Suez Canal, a route that carries 12% of global trade.

This has global implications on energy markets and also on shipping costs in terms of freight and insurance rates. There is also the matter of how longer routes will affect availability of transport, disrupting supply chains.

As the International Monetary Fund (IMF) noted last October, commodities are particularly vulnerable to trade barriers because their production is concentrated in a few regions and countries, causing energy crises and affecting lower-income countries. The problem is exacerbated by under-investment in fossil fuel development that is not matched by an increase in renewable energy (RE).

The latest United Nations Conference on Trade and Development (Unctad) report on investments says RE project financing deals fell 17%. In terms of value, there was a 10% drop, the first decline in the number of new projects since the Paris Agreement in 2015.

Geopolitics impacts capital flows, financial markets, trade and investments. The IMF says geoeconomic fragmentation has intensified, giving rise to trade blocs that hamper multilateral cooperation and could see annual global GDP falling by up to 7% over the longer term.

The October 2023 World Edonomic Outlook (WEO) update showed global trade grew a marginal 0.9% in 2023 compared to 5.1% the previous year.

An indicator of how geopolitics has played a role in affecting global trade is rising trade barriers. According to the IMF, countries imposed almost 3,000 new restrictions compared to fewer than 1,000 in 2019. Despite the projected growth of 3.5% in 2024, global trade will still be well below the 4.9% average from 2000 to 2019.

The Malaysia External Trade Development Corp (Matrade) cited geopolitical uncertainties as among factors that pulled exports lower. In 2023, exports totalled RM1.42 trillion, down by 8% from the previous year. A high-base effect contributed to a 7.3% decrease in overall trade to RM2.63 trillion.

Matrade data showed exports to China shrank by 8.7% to RM192.21bil while overall trade with China fell by 7.3% to RM450.84bil. Imports from China declined by 6.2% to RM258.63bil.

With 17.1% of Malaysia’s total trade, China has remained Malaysia’s biggest trading partner since 2009. A combination of the US-China trade war and property market woes continue to weigh on China’s outlook and will affect trading partners.

A 3% increase in global FDI from 2022 to US$1.37 trillion in 2023 masked the cautious undercurrent, according to data from Unctad. Unctad reports that the increase was mainly due to investment inflows to Luxembourg and Netherlands, although if these investments were removed from the headline numbers, there would be an 18% contraction.

The US-China trade war and the Russia-Ukraine war are also fragmenting investments globally. Investments in semiconductors and rare earths are two examples. The investment numbers don’t look promising and this will impact economic growth, which in turn will affect business opportunities and trade, and subsequently, employment.

According to Unctad data, there was a 6% decline in global greenfield project announcements, a 21% decline in international project finance deals and a 16% decline in cross-border mergers and acquisitions. The number of international investment projects announced in developing countries in Sustainable Development Goals (SDGs)-related sectors such as infrastructure, renewables, water and sanitation, food security, health and education remained flat.

The WEF’s Global Risks Report 2024, projecting risks over a shorter two-year period and a longer 10-year period, slotted “interstate armed conflict” as a new entrant into its two-year projections and ranked fifth for likely impact or severity over the period. This risk is amplified by recent technological advances, which enables non-state actors as well as state actors to access tools for disruption and conflict, the report noted.

The report said participants in the Global Risks Perception Survey 2023-2024 have a predominantly negative outlook over the short term and a long-term outlook that will worsen. The survey was conducted in September 2023, before the Israel-Hamas conflict erupted.

This article first appeared in Star Biz7 weekly edition.