International risk returns

Key points:

International risk has increased and will continue to increase. This is a structural shift caused by changing economic and political power internationally, technological advancement and increased inequality. The result is greater populism, nationalism and protectionism.

Despite these shifts, international trade and investment will continue to offer unmatched opportunities for increased sales, profits and diversification. But businesses will need to better understand the risks and mitigate the risks they face in international markets.

Help is out there. Government agencies, bilateral chambers, industry associations and specialist companies like Mercury can help you better understand and manage these risks.

For most of us, our professional lives have largely been free from international risks other economic cycles. There were a few things that gave us glimpses of a riskier world—most notably terrorist attacks, and security tensions in the Middle East and on the Korean peninsula. But for most people these were not enough to challenge the view that we live in an essentially stable world on an inevitable trajectory of progress and peace.

Back to the future

But since the mid-2010s, the world has started to change. After an anomalous three decades of relative international stability, we are once again entering a period of great power rivalry. This time precipitated by the rise of China and the relative decline of the United States.

This is a new, more complex form of rivalry than in the 20th Century. Animosity is increasing despite shared commercial interests and the imperatives of global cooperation.

As global challenges become more complex, we are seeing international institutions and norms coming under increasing pressure—not only by the rising power China, but also by the United States, the power that did more to build the international system than any other.

As for Australia, we have started to see that the ‘power of proximity’ brings risks as well as opportunities. With some exceptions (such as the the Pacific during the Second World War), we have historically been assigned cameo roles in geopolitics. But now, whether we like it or not, we are now an important actor.

Australia’s position, like our other Asian neighbours, is growing more and more complex. We are confronted with a major trading partner that has regained its long-lost strength and is testing how to use it, and a major security partner whose increasingly dysfunctional domestic politics is leading it to act in ways unimaginable just a few short years ago.

The US and China are both weaponising trade, circumventing the rules to achieve political outcomes. There have been repeated body blows to the World Trade Organisation, the body that maintains the integrity of the global trading system. With role models like these, it is unsurprising to see countries increase their use of illegitimate trade discrimination to achieve political ends. The governments of Brazil, Turkey, the Philippines and some European countries are feeling increasingly unrestrained by international rules and norms.

Changes in relative economic strength, technological advancement, and winners and losers from globalisations are leading to an increase in populism, nationalism and protectionism across the globe. Few countries seem immune to this. Take, for example Britain, where one of the two major parties went to the last election promising to nationalise utilities.

While international risk is not new—international instability is the historic norm, the last few decades are outliers—it is happening in a world that is hyperconnected and more interdependent than ever, with the added complication of the relatively untested risks that technology brings.

What should I do?

While businesses are often good at understanding economic and transactional risks, most do not know how to assess the broader international challenges facing them. While sectors like mining have long needed to deal with complex international risks, others like education and agriculture unexpectedly find themselves on the front lines of geopolitical battles.

This increase in international risk is structural, not cyclical. Both businesses and governments must learn to adapt to this new reality.

Retreating from international markets is not a sensible option, for two main reasons. Firstly, the global nature of these risks mean that domestic markets will still be exposed, and those only operating domestically will have their risk concentrated in one market. Secondly, international markets will continue to provide lucrative opportunities to increase sales and profits.

Innovative, high growth businesses must continue to be ambitious internationally, but will need to better understand the risks they face. By understanding the risks, they can better judge the risk premiums to apply to their operations.

For some businesses, it may mean no change to their operations. For others, it will mean they should seek to diversify, either supply chains or markets.

But for all businesses, it will not be enough to only do due diligence when entering a market. They will need to stay connected to the market, understanding the intentions and policies of not only its government, but also governments along the value chain.

Businesses should better understand their rights and protections as provided by international agreements, and under what circumstances these might be voided. They should also understand their obligations, from making sure documentation is exactly correct, to complying with anti-corruption requirements.

Where can I go for help?

The good news is that, while the world is becoming more complex, there is plenty of help out there.

Government agencies—DFAT, Austrade, and state and territory trade promotion agencies—often have excellent people in market who can offer good advice.

Bilateral business chambers are an excellent source of intelligence, both from the organisations themselves or other members.

Organisations like the Export Council of Australia can help you ensure you get your documentation exactly right.

And, of course, specialist companies like Mercury can help you assess the risks you face and take a strategic perspective of how to deal with them.

Published by Heath Baker

Principal of Mercury International Consulting

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