War, Politics Eclipse Economics on Davos Leaders’ Minds

Never mind interest rates, inflation or recession. The economic concerns that usually preoccupy the global elite at their annual gathering in Davos are taking a back seat to hot war in Ukraine and the Middle East, cold war between the West and China and watershed elections from India to the U.S.

For government and business leaders, it is a disorienting departure from a world in which fortunes were mainly driven by financial forces. The World Economic Forum, which hosts the meeting, is now the de facto world geopolitical forum.

“There’s a higher-level issue than the economy, which is geopolitics,” said Christian Mumenthaler, chief executive of reinsurance giant Swiss Re, which insures risks around the world. Geopolitics hasn’t been so big an economic threat since the height of the first Cold War in the 1980s, he said.

“We’re starting this year with the longest list I ever recall of potential disruptions,” said Christian Ulbrich, chief executive of real-estate company JLL, which operates around the world. “You really have to run your organisation in an extremely agile way so that you can react immediately.”

Longtime Davos attendees came of age in a world in which products, capital and people flowed ever more freely. But globalisation began fragmenting in 2016 when Britain voted to leave the European Union and Donald Trump was elected president—and who went on to withdraw from a global climate accord and a trade pact with Pacific nations and then hike tariffs sharply, especially on China.

Deglobalisation has gathered speed with the pandemic, Russia’s invasion of Ukraine, the intensifying rivalry between the U.S and China and the newfound appeal of industrial policy—governments directing resources to favoured home industries. That is over and above the hazards thrown up by the natural world, such as extreme weather.

The upshot is that political events that were once peripheral to business leaders’ concerns are now central, especially when optimism is high that major economies will lower inflation without recession, so-called soft landings.

The U.S. election is on everyone’s minds because of the potential for Trump to return to the White House. On Monday, Trump won the first Republican nominating contest, in Iowa, by a wide margin.

“Every conversation begins with a query about my assessment of the outcome of Iowa, who’s going to win New Hampshire, and what are the odds of Trump 2.0,” said Tim Adams, president of the Institute of International Finance, a Washington-based group of international banks, and a former senior Treasury official under President George W. Bush. The questions are driven by trepidation, curiosity and fear that “the U.S. retreats, engages in protectionism, isolationism.”

One European bank chief said he has conducted “game-boarding exercises” to figure out how a Trump administration could play out for his business.

The U.S. election is one of many taking place this year, and for some companies, it isn’t necessarily the most salient. Last Saturday, Taiwan elected as president the candidate most opposed by Communist-ruled China, which is pressing for reunification with the self-governing island. Taiwan is home to Taiwan Semiconductor Manufacturing Co., the world’s dominant supplier of the most advanced microchips.

Many major tech companies depend on those chips. They must reckon with the possibility that military or economic coercion by China, or even war that draws in the U.S., could interrupt that supply. U.S. restrictions on investment and trade related to crucial technologies, including chips, have already disrupted what was once one of the world’s most integrated industries.

The threat to the chip supply “is a risk. That needs to be factored into all analyses you can do,” said Börje Ekholm, chief executive of Swedish telecommunications manufacturer Ericsson. The company has been focused on diversifying its supply chain for semiconductors and other parts since 2018, he said. “You also need to think about how you’re going to manage the situation where chip supply will be constrained.”

Gita Gopinath, the No. 2 official at the International Monetary Fund, said business leaders are worried about geopolitics interfering with trade and investment for good reason: “Fragmentation is a reality, it’s not just a threat.”

While trade has slowed everywhere since Russia’s invasion of Ukraine, it has slowed down more between blocs of allied countries—such as between the West and China or Russia—than within blocs. She said this shows that efforts to confine trade restrictions to strategic sectors, such as high tech, are failing, and a more general decoupling between blocs might be under way.

A study released by the McKinsey Global Institute Wednesday echoed the IMF’s findings. China, Germany, the United Kingdom and the U.S. have all reoriented trade toward allies or nonaligned countries like Mexico and Vietnam, it said

China’s share of U.S. imports of laptop computers and mobile phones, though not subject to tariffs, fell between 2017 and 2022, with much of that share going to Vietnam, the report said. Mexico, it noted, became the largest trade partner of the U.S. last year. Germany all but halted imports of natural gas from Russia while vastly increasing imports from Norway, a fellow member of the North Atlantic Treaty Organization.

That politics, not economics, might govern where companies sell and invest is a new reality that is taking some getting used to. Mike Henry, chief executive of Australian coal and mineral company BHP, said the company has always advocated free trade as the most efficient way to bring commodities to market. “A world of open trade and where countries are able to compete on natural advantage—that’s the world of the past. That’s not the reality we live in today.”

A few years ago China, upset with Australia for demanding an inquiry into Covid’s origins, cut many imports from the country, including coal from BHP, which saw its sales there fall. Though relations between Australia and China have since improved, BHP has since found other markets for that coal. Still, Henry said that in time, economic factors such as shipping rates will once again influence where it sells.

Some executives see hopeful signs, in particular that a rapprochement between China and the U.S. that began last fall will continue, in part because China is trying to help its faltering economy.

Geopolitical tensions also have beneficiaries. After artificial intelligence, the loudest buzz in Davos might be directed at India. Many executives called it their most promising foreign market, and its appeal has only grown now that Russia and much of China are off limits.

“When disruptions take place, people are trying to hedge,” said Hardeep Singh Puri, India’s minister of oil and gas. “But India has a growth story of its own. That is what is driving interest in India.”

For some companies, geopolitical tensions are weighing on employees, not just management. “People are concerned about what’s going on in the world,” JLL’s Ulbrich said. Conflict, or the threat of it, in Europe, Israel/Gaza and China weighs on people, he added. “They don’t know what’s going to happen and look to other people, leaders, for what’s going to happen, but leaders don’t know either.”

—Chip Cutter and Alex Frangos contributed to this article.

For years, global companies showcased their Chinese operations as a source of robust growth. A burgeoning middle class, a stream of people moving to cities, and the creation of new services to cater to them—along with the promise of the further opening of the world’s second-largest economy—drew companies eager to tap into the action.

Then Covid hit, isolating China from much of the world. Chinese leader Xi Jinping tightened control of the economy, and U.S.-China relations hit a nadir. After decades of rapid growth, China’s economy is stuck in a rut, with increasing concerns about what will drive the next phase of its growth.

Though Chinese officials have acknowledged the sputtering economy, they have been reluctant to take more than incremental steps to reverse the trend. Making matters worse, government crackdowns on internet companies and measures to burst the country’s property bubble left households and businesses scarred.

Lowered Expectations

Now, multinational companies are taking a hard look at their Chinese operations and tempering their outlooks. Marriott International narrowed its global revenue per available room growth rate to 3% to 4%, citing continued weakness in China and expectations that demand could weaken further in the third quarter. Paris-based Kering , home to brands Gucci and Saint Laurent, posted a 22% decline in sales in the Asia-Pacific region, excluding Japan, in the first half amid weaker demand in Greater China, which includes Hong Kong and Macau.

Pricing pressure and deflation were common themes in quarterly results. Starbucks , which helped build a coffee culture in China over the past 25 years, described it as one of its most notable international challenges as it posted a 14% decline in sales from that business. As Chinese consumers reconsidered whether to spend money on Starbucks lattes, competitors such as Luckin Coffee increased pressure on the Seattle company. Starbucks executives said in their quarterly earnings call that “unprecedented store expansion” by rivals and a price war hurt profits and caused “significant disruptions” to the operating environment.

Executive anxiety extends beyond consumer companies. Elevator maker Otis Worldwide saw new-equipment orders in China fall by double digits in the second quarter, forcing it to cut its outlook for growth out of Asia. CEO Judy Marks told analysts on a quarterly earnings call that prices in China were down roughly 10% year over year, and she doesn’t see the pricing pressure abating. The company is turning to productivity improvements and cost cutting to blunt the hit.

Add in the uncertainty created by deteriorating U.S.-China relations, and many investors are steering clear. The iShares MSCI China exchange-traded fund has lost half its value since March 2021. Recovery attempts have been short-lived. undefined undefined And now some of those concerns are creeping into the U.S. market. “A decade ago China exposure [for a global company] was a way to add revenue growth to our portfolio,” says Margaret Vitrano, co-manager of large-cap growth strategies at ClearBridge Investments in New York. Today, she notes, “we now want to manage the risk of the China exposure.”

Vitrano expects improvement in 2025, but cautions it will be slow. Uncertainty over who will win the U.S. presidential election and the prospect of higher tariffs pose additional risks for global companies.

Behind the Malaise

For now, China is inching along at roughly 5% economic growth—down from a peak of 14% in 2007 and an average of about 8% in the 10 years before the pandemic. Chinese consumers hit by job losses and continued declines in property values are rethinking spending habits. Businesses worried about policy uncertainty are reluctant to invest and hire.

The trouble goes beyond frugal consumers. Xi is changing the economy’s growth model, relying less on the infrastructure and real estate market that fueled earlier growth. That means investing aggressively in manufacturing and exports as China looks to become more self-reliant and guard against geopolitical tensions.

The shift is hurting western multinationals, with deflationary forces amid burgeoning production capacity. “We have seen the investment community mark down expectations for these companies because they will have to change tack with lower-cost products and services,” says Joseph Quinlan, head of market strategy for the chief investment office at Merrill and Bank of America Private Bank.

Another challenge for multinationals outside of China is stiffened competition as Chinese companies innovate and expand—often with the backing of the government. Local rivals are upping the ante across sectors by building on their knowledge of local consumer preferences and the ability to produce higher-quality products.

Some global multinationals are having a hard time keeping up with homegrown innovation. Auto makers including General Motors have seen sales tumble and struggled to turn profitable as Chinese car shoppers increasingly opt for electric vehicles from BYD or NIO that are similar in price to internal-combustion-engine cars from foreign auto makers.

“China’s electric-vehicle makers have by leaps and bounds surpassed the capabilities of foreign brands who have a tie to the profit pool of internal combustible engines that they don’t want to disrupt,” says Christine Phillpotts, a fund manager for Ariel Investments’ emerging markets strategies.

Chinese companies are often faster than global rivals to market with new products or tweaks. “The cycle can be half of what it is for a global multinational with subsidiaries that need to check with headquarters, do an analysis, and then refresh,” Phillpotts says.

For many companies and investors, next year remains a question mark. Ashland CEO Guillermo Novo said in an August call with analysts that the chemical company was seeing a “big change” in China, with activity slowing and competition on pricing becoming more aggressive. The company, he said, was still trying to grasp the repercussions as it has created uncertainty in its 2025 outlook.

Sticking Around

Few companies are giving up. Executives at big global consumer and retail companies show no signs of reducing investment, with most still describing China as a long-term growth market, says Dana Telsey, CEO of Telsey Advisory Group.

Starbucks executives described the long-term opportunity as “significant,” with higher growth and margin opportunities in the future as China’s population continues to move from rural to suburban areas. But they also noted that their approach is evolving and they are in the early stages of exploring strategic partnerships.

Walmart sold its stake in August in Chinese e-commerce giant JD.com for $3.6 billion after an eight-year noncompete agreement expired. Analysts expect it to pump the money into its own Sam’s Club and Walmart China operation, which have benefited from the trend toward trading down in China.

“The story isn’t over for the global companies,” Phillpotts says. “It just means the effort and investment will be greater to compete.”

Corrections & Amplifications

Joseph Quinlan is head of market strategy for the chief investment office at Merrill and Bank of America Private Bank. An earlier version of this article incorrectly used his old title.

War, Politics Eclipse Economics on Davos Leaders’ Minds

Hot and cold wars, fragmenting trade and key elections fuel anxiety at annual forum

Multinationals like Starbucks and Marriott are taking a hard look at their Chinese operations—and tempering their outlooks.

Lowered Expectations

Behind the Malaise

Sticking Around