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With the coronavirus disease 2019 (COVID-19) pandemic disrupting
all facets of everyday life, we have begun to consider the long
term impacts the crisis could have on global state relations. While
it is possible that the world will go back to how it was in
December 2019, it is also possible that more substantive
geopolitical shifts will disrupt the status quo.
In our view, it is important to take stock of our assumptions
about the world now and how they might change so that companies and
investors can be better prepared for the longer-term disruption.
With that in mind, we have produced the 'Geopolitics in a
post-pandemic world - Scenarios for 2025' report to begin thinking
about what form that disruption could take.
Constructing scenarios
We adopt a '
scenarios' approach when examining potential disruption.
Scenarios, by definition, involve a series of events that could
happen, rather than those that will happen. We find the most useful
scenarios to be the ones that are credible and realistic but not
necessarily the most probable. In fact, scenarios that test
mutually exclusive outcomes give us the best insight into what
impacts we may have to plan for that otherwise may have been
overlooked or downplayed. To construct our scenarios, we first
consider the 'building blocks' that set out possible actions taken
by key geopolitical actors. Combining the various building blocks
in different configurations produces different global scenarios,
each of which test different dimensions of geopolitics.
For this report, we focused on our two most extreme scenarios
(Global cooperation vs Fragmentation) to look at the range of
potential outcomes and help stimulate discussion on how different
sectors and businesses will be impacted.
Scenario 1- A rebalanced global order
Our first scenario assumes that Mainland China and the US race
to fully reopen their markets and economies once a vaccine for
COVID-19 enters mass production. We also assume that EU cohesion is
strengthened post-pandemic, despite the block continuing to face
some policy challenges.
As a result, most countries and regions embrace policies of
cooperation and multilateralism to manage the fallout of the
COVID-19 pandemic and to mitigate similar shocks going forward. The
rivalry between the US and China persists, but issues deemed of
global criticality are designated as cooperation areas through
revamped multilateral organisations. Both China and the US ramp up
their foreign engagement, the former by increasing its funding of
and participation in multilateral organisations, and the latter
re-joining institutions it has scaled back support for. The EU,
which successfully completes the Brexit transition process,
introduces some reforms that help ease the block's current fault
lines and increases its financial support to its Eastern member
states.
Scenario 2 - A fragmented world
In our second scenario, we assume that the pandemic has weakened
global institutions or made them irrelevant. The EU splinters,
mainland China concentrates on reinvigorating its economy, and US
foreign policy is focused almost entirely on reducing its trade
deficit through new bilateral trade agreements.
In this world, the US, China, and the EU are pre-occupied with
internal pressure, dissent, and instability and decide to eschew
global solutions in the face of unprecedented challenges. As a
result, each of these actors sees a sharp turn to isolationist,
protectionist economic policy that in turn weakens many global
institutions and decreases trust between states. Governments around
the world follow this lead by implementing policies to re-shore
supply chains and control the supply of essential goods, largely
through new regulations and tariffs. This new global dynamic makes
EU cohesion untenable, leading to a breakup of the union into
smaller blocks and alliances.
Thinking about scenario impact
In addition to providing us with a view towards possible future
geopolitical events, by constructing scenarios we are also able to
assess how the risk landscape may change across different regions
of the world, and thereby begin to develop plans to mitigate them.
For example, Scenario 1 would lead to a highly competitive
international landscape, with regions such as Latin America and
Sub-Saharan Africa potentially seeing increased competition for
investment and influence from the US and China. In Scenario 2, the
fragmentation of the global order is likely to increase risks
related to international trade policy, with protectionist policies
raising risks such as contract enforcement, contract alteration and
tax inconsistency across Europe and the Asia Pacific region.
Helping clients get ahead of the future
The two scenarios outlined above, as well as their potential
impacts, are fleshed out in detail in our 'Geopolitics in a post-pandemic
world - Scenarios for 2025' report. While the
report only focuses on these two scenario possibilities, the full
scenario catalogue contains many more scenarios of varying
probability and impact.
There are many ways of selecting and developing scenarios to
help think through and inform planning for an uncertain future. If
you have a scenario challenge, we would be excited to discuss it
with you and develop an approach that provides you with the most
practically useful outcome. Contact us to learn more or request the full report.
Posted 09 June 2020 by Chris Suckling, Ph.D., Principal Analyst, Economics & Country Risk, IHS Markit and
Karim El Assir, Associate Director, Consulting, IHS Markit and
