War, Politics Eclipse Economics on Davos Leaders’ Minds
Hot and cold wars, fragmenting trade and key elections fuel anxiety at annual forum
Hot and cold wars, fragmenting trade and key elections fuel anxiety at annual forum
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.
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Donald Trump will retake office in a global economy substantially transformed from eight years ago—one much more reliant on the U.S.
It means that the president-elect’s plans, including across the board tariffs, could pack an even greater wallop on other countries than the first round of “America First” economic policy. It also gives Trump much more leverage in negotiations over trade policy.
Strong growth since the pandemic has expanded the U.S.’s weight in the global economy. Its share of output among the Group of Seven wealthy nations is higher than at any point since at least the 1980s, International Monetary Fund data shows.
Growth in China, the world’s second-largest economy, has slowed. Germany, the largest European economy, is contracting. Many poorer economies are buckling under the weight of high debt.
U.S. gains in global output partly reflect the strong dollar, which pushes up the value of American output relative to that of foreign economies. But they also result from substantial increases in U.S. productivity compared with the rest of the world.
The changes in the global economy have made America, not China, the premier destination for foreign direct investment, enlarging the exposure that foreign companies have to the U.S. economy and changes in government policy. A booming U.S. stock market has attracted huge flows of investment dollars.
“The fact that much of the rest of the world is now struggling to generate demand on its own provides more reason for countries to try to reach some sort of accommodation with Trump,” said Brad Setser , a senior fellow at the Council on Foreign Relations.
Trump started imposing tariffs in 2018, primarily on China but also on Europe and other allies. Those tariffs fractured global trade, weighing on large exporting economies in Asia and Europe, while not obviously hurting the U.S., which is less reliant on foreign demand than its trading partners. Trump campaigned on a promise to impose at least a 60% tariff on China, and an across the board tariff of 10% to 20% on everywhere else.
America’s superior economic performance has been driven in part by energy independence and massive government spending, said Neil Shearing , chief economist at Capital Economics in London. Since the U.S. now exports more energy than it imports—including millions of barrels of oil each month to China—the nation as a whole benefits when energy prices rise, unlike for net importers such as China and Europe.
The upshot: America’s traditional role as the centre of gravity in the global economy has become even more pronounced in the years after Trump’s first-term tariffs, the pandemic, and Russia’s full-scale invasion of Ukraine.
U.S. influence over Europe’s economy is a case in point. The U.S. has cemented its position as Europe’s largest export market as trans-Atlantic trade surged in recent years and China’s imports from Europe stalled. The U.S. has replaced Russia as Europe’s major source of imported energy. Europe runs big trade surpluses with the U.S. but big trade deficits with China.
The result is access to the U.S. market is far more important for Europe than access to European markets for the U.S. That asymmetry will give Trump leverage in trade negotiations with Europe, according to economists.
Germany exports around 7% of its entire manufacturing value-added to the U.S., but Germany imports only around 0.8% of value-added in U.S. manufacturing, according to a September paper by researchers at Germany’s Ifo Institute for Economic Research.
“German business is vulnerable to Trump,” said Marcel Fratzscher , president of the Berlin-based economic research institute DIW Berlin.
Parts of Asia have benefited from the changes in supply chains sparked by Trump’s initial trade war with China. Many manufacturers, including Chinese ones, moved factories to places such as Vietnam and Cambodia. For the past two quarters, Southeast Asia’s exports to the U.S. have exceeded those to China.
But that now leaves them more exposed to across the board tariffs, a policy that Trump advisers say will be necessary to force manufacturing back to the U.S.
To be sure, Trump’s policies could create countervailing forces. Tariffs would decrease imports and potentially weigh on productivity, but tax cuts would drive up household and business spending, including, inevitably, on imports. Other countries could retaliate by placing tariffs on U.S. goods.
Meanwhile, a tight U.S. labor market has pushed up wages, which is good for those workers. But it could pressure employers to raise prices, in turn making them vulnerable to foreign competition.
Many economists are girding for a different type of trade war from Trump 1.0, when trade fell between the U.S. and China but was diverted elsewhere.
“As long as protectionism refers only to one country, China, the world can live with this,” said Joerg Kraemer , chief economist at Commerzbank. “The thing becomes difficult or dangerous if you implement tariffs on all countries. This would be a new era in global trade.”