Navigating a fractured world

Economic interdependence—once seen as the world’s great unifier—now finds itself weaponised in the geoeconomic tug-of-war of the 21st century. In this fractured world, governments are turning to protectionist measures with renewed vigour, aiming to safeguard (or, sometimes, revive) domestic industries and ensure that vital supply chains remain unhindered by perceived rivals. Policies restricting access to technologies and resources deemed critical, such as semiconductors, pharmaceuticals and rare earth minerals, are becoming commonplace, reflecting a broader trend of preserving economic sovereignty. The principles of free international trade have been abandoned; we are in a new era of globalisation.

Businesses, whose supply chains and intellectual property are caught in the crossfire of geopolitics, are seeking strategic recalibrations. Despite the odds, they are not abandoning globalisation altogether. Many are relocating existing supply chains, others are duplicating them, in order to capitalise on opportunities and minimise risks. This has created relative winners: non-aligned countries, such as the UAE, Vietnam, India and Brazil. They offer geopolitical havens for businesses seeking to avoid entanglement in great-power rivalries. As trade becomes a battleground for influence, this chapter explores how geopolitics is reshaping business priorities.

More friends, fewer foes

It is true in trade as it is in life, that in times of trouble, one turns to their friends. It is no surprise, then, that a prominent strategy businesses are adopting in response to geopolitical uncertainties is “friendshoring”, that is, to relocate supply chains to countries that are politically aligned, or those they have favourable trade agreements with. According to our survey, 34% of businesses are turning to friendshoring as a way to mitigate geopolitical risks (see Figure 3). This approach allows companies to reduce their exposure to sudden policy changes or trade barriers that may arise from deteriorating relations between major powers.

Friendshoring is often encouraged by governments, rather than businesses choosing it on economic grounds. This can sometimes cause trouble. For instance, the Biden administration has been promoting friendshoring as a means to “de-risk” from China, implementing tariffs and export controls to nudge firms towards “friendlier” markets. One example is the ban on American firms investing in Chinese technology, on national security grounds. Under a Trump administration, this encouragement is likely to take a stronger form, and which countries qualify as “friends” will be contested. Indeed, Mr Trump’s administration views significant trade surpluses with America as evidence of unfair practices, leading to a “zero-sum” approach to commerce where any country’s gain is seen as America’s loss.

Furthermore, friendshoring may only end up diverting supply chains through friendly markets, rather than truly divesting from perceived foes. Simon Lacey from the World Economic Forum provides a clear example of this: “Many of the processes moving to Vietnam or Mexico are essentially proxies for Chinese manufacturing in one way or another.” So, although American imports from China have, on paper, decreased, China’s exports of intermediate goods to countries like Vietnam, Mexico and other South-East Asian nations have surged. These countries then assemble final products that are exported to America, meaning that China’s role in Western supply chains continues to remain significant, even if less visible.

America will probably try to stop this rerouting. Before Mr Trump took office, the Biden administration raised duties on solar panels from South-East Asian nations, including Cambodia, Malaysia, Thailand and Vietnam, where Chinese firms have been setting up branches to sidestep other American levies.⁸ Mr Trump is likely to continue, and build upon, such moves. He has already threatened to scrutinise the rerouting from China as part of the review of the United States-Mexico-Canada Agreement (USMCA), which is due in 2026, pointing to surging trade deficits between the US and Mexico, and Chinese investment in Mexico.⁹ However, as Leila Afas, the director of global public policy at Toyota, notes, “if the US misdiagnoses the problem, they’re going to come up with the wrong remedy”. This poses risks to firms like Toyota without, in her view, addressing the underlying issues.

Double the chain, double the gain?

Besides those that are friendshoring, about 32% of the businesses we surveyed are creating parallel supply chains or engaging in dual sourcing (see Figure 3). This involves establishing two separate supply chains to serve different markets while hedging against region-specific risks. This is, in essence, an expensive form of diversification without the risk-opportunity balance: businesses stay in risky markets where their consumer bases remain lucrative, while also maintaining another set of operations that are less risky.

General Motors (GM), an automotive firm based in the US, maintains dual supply chains to cater to the American market. They are reshoring some operations, such as battery production for electric vehicles (EV), and regionalising operations to Mexico to serve US consumers, while also maintaining ventures in China to cater to markets around the world. “We manufacture in [China] and send products to Mexico, for example,” explains Sulaiman Pallak, the general manager of sales operations at GM. As part of this strategy, the Middle East arm of GM has increased the volumes they import from China. “We used to bring in 70% of our vehicles from North America and 30% from China; now we have increased that to 40% from China and 60% from the US”, he adds.

TSMC, the Taiwanese semiconductor giant, also illustrates this approach by balancing demands from both the United States and China—its two largest markets—amid rising geopolitical tensions. The company is investing in manufacturing facilities in the US, to align with American interests, while maintaining production in Taiwan and other locations to serve global markets. This dual strategy helps TSMC navigate trade restrictions and political pressures from both sides.

The allure of non-alignment

Amid the turbulence, some businesses are seeking refuge in non-aligned countries such as Vietnam, the UAE, India and Brazil. In response to geopolitical tensions, about 27% of firms are expanding into more stable markets that are not necessarily political allies (see Figure 3 above). These non-aligned countries offer opportunities for expansion and diversification without the baggage of great-power rivalry.

Our survey reveals that 71% of executives agree that non-aligned countries offer stable and diverse trade, economic and investment opportunities (see Figure 4). Moreover, 69% believe that non-aligned countries play an intermediary role, filling supply gaps created by trade conflicts between major geopolitical blocs.

However, operating in non-aligned countries is not without challenges. About 63% of surveyed executives agree that non-aligned countries face difficulties in regulatory co-operation and harmonisation, which can limit the potential scale of trade (see Figure 4). Additionally, 62% believe that these countries will have difficulty maintaining their “non-aligned” status as geopolitical tensions intensify, potentially exposing businesses to new risks.

South-East Asia, for instance, has been seen by many big firms as an attractive region due to its strategic location and growing markets. Vietnam has become home to many new tech-focused factories over the past five years, established by the likes of Foxconn and Pegatron, Apple’s biggest suppliers, as well as Dell and Hewlett-Packard.^10,11 However, as the region becomes a battleground for influence between America and China, maintaining non-alignment is bound to become increasingly harder. The case is similar for countries in the Middle East. The chief executive of Alat, a manufacturing hub in Saudi Arabia, has claimed the company will divest from China if the US permits American firms to set up operations in the kingdom.¹² In any case, businesses must navigate complex regulatory environments and be prepared for potential shifts in political alignments.