As we look to upcoming elections in 2017, populism is expected to play a central role in several countries, including France, Germany, and the Netherlands – countries also impacted by the ongoing migrant crisis in Europe and terrorist attacks in 2015 and 2016.
Although economic factors have been the main drivers behind the rise of populist political parties, growing concerns about immigration and security have also boosted pro-protectionist agendas. Given the interconnected, international nature of many multinational companies, however, protectionist measures that restrain trade between countries will have an impact on businesses everywhere.
According to data from Global Trade Alert, recorded trade measures that are “almost certainly discriminatory towards foreign commercial interests” rose to 412 across all countries in 2015, a 72.4% increase from 2014 and more than the previous four years combined. Meanwhile, “protectionist” trade policies increased by 50% in 2015. Not surprisingly, according to IMF data in October 2016, global trade growth was projected to have slowed to 3.1%, before a forecast of slight recovery to 3.4% in 2017.
If US trade policies turn significantly protectionist or the UK’s Brexit negotiations negatively affect trade across Europe, we could see a domino effect of trade deals tumbling globally.
If populist forces come to power in most major economies, consolidate their positions, and refuse to compromise, potential impacts could include:
- Reversal of existing trade deals.
- Dramatic tightening of travel and immigration rules.
- Splitting of global institutions along regional lines.
While a slowdown of global trade and economic growth will undoubtedly impact companies’ income, businesses should also prepare for a shift away from globalization.
Recommendations for Multinational Organizations
We recommend businesses prepare for the possible impact of:
• Increased costs across their supply chains and the need to reconsider suppliers due to rising tariffs and other trade barriers.
• More stringent legislation in the countries in which they operate.
• Greater exposure of overseas direct investments to political risks as well as rising business interruption and trade credit risks.
• More restrictions on movement between countries, affecting workforces.
Given the complex implications of “peak globalization,” companies can prepare by formally documenting the countries with which they interact – whether from the perspective of investments, workforce, or supply chains – and assessing the associated economic and operational risks, using indices such as Marsh’s Political Risk Map 2017.
Greater consideration should also be given to the insurance coverage in place that helps transfer risks associated with more protectionist trade regulations and a more volatile geopolitical landscape for overseas operations.
Populist forces have recently defied expectations. Businesses should look beyond consensus forecasts and prepare for a broader range of potential outcomes and operational risk scenarios. They will also need to reframe how they view risk, keeping an eye on global developments that have implications down the line, and prepare to adapt their business models to what could be a vastly different “post-globalization” operating environment.