It's that other time of year again. The time when the world’s business and political elites gather at an Alpine resort in Davos, Switzerland, to compare notes on the challenges they face. The top risks under discussion this year, released in advance by the World Economic Forum, are cybersecurity and "a deterioration in the geopolitical situation." The first of these two risks, cybersecurity, represents merely the latest in a long line of threats that have emerged from technological development as states and private actors jockey for an edge over one another. But the second risk, geopolitical deterioration, has not been much of a focal point for several decades. And because geopolitics is the platform on which many other things rest, its deterioration is a threat that affects not only Davos attendees, but also the entire global population.
The World's Waltz
Business and geopolitics have been waltzing together for many centuries, taking it in turns to lead the dance. The modern corporation, for example, can trace its roots back to agreements struck between businessmen in the Eastern Mediterranean around the time of the Crusades. These early contracts were struck between a sedentary investor — who provided the capital — and a brave traveler — who accompanied the tradable goods on a dangerous voyage. But these incredibly basic corporations could function only within the bounds of their geopolitical environments. Friendly relations between Venice and the Muslim world, for example, allowed Venetian travelers to become the world's preeminent businessmen by selling eastern goods in Europe for high profits.
At other times — most notably when geopolitics have been fragmented — business has led the way. The Hanseatic League, a group of cities ringing the Baltic and North seas that was almost entirely motivated by profit, arose during a time when Germany was a loose patchwork of cities and small states. To protect its investments, the league created a navy, which forced sovereign governments to take the group of merchants seriously. Later on, businesses led nations into empire. The Dutch and British East India companies, created to be arms of their national governments, harnessed the motivations of private businesses while also furthering national interests — all without committing excessive resources.
In the era since the end of World War II, favorable geopolitics have caused business to emerge supreme. After 1945, the world became divided by two great adversaries: the United States and the Soviet Union. Though the confrontation created great risks for business, the two titans ultimately proved willing to exchange jabs rather than go for the knockout blow. Business on the capitalist side of the Iron Curtain thrived, incorporating a quest for efficiency that led to technological advancements and wealth creation. The fall of the Soviet Union then saw the capitalist model spread, as former communist states and developing countries alike lowered trade barriers.
Together, these trends created the world of multinational corporations that we know today. As the importance of national borders diminished, corporations took advantage of the friendlier business environment. The endless quest for efficiency has led companies to spread their operations around the world, causing businesses to become the decision-makers that are courted by national governments. In a world where corporations can choose to allocate resources to wherever they deem to be the most favorable environment, political leaders looking to maximize jobs and wealth creation are forced to compete for corporate favor. This is essentially the story of Davos, which has come to represent the court of the business king where leaders must travel to be heard by the corporate elite.
The Changing Rhythm
But the times are changing, and yesterday's geopolitical certainties are falling away. Rather than highlighting asymmetric threats such as terrorism or security, the latest U.S. National Security Strategy released in December focused largely on China and Russia. And in January, U.S. President Donald Trump is expected to unveil the first hard measures designed to counter the perceived threat from Chinese trade. The measures are a symptom of the wider deterioration of the geopolitical environment, and could lead to an escalation between the two countries.
Increased confrontation between states can often be bad for international business. Countries that are concentrating on each other are not competing for corporate attention. Worse, nations have the power to shape a corporations' surroundings. Unlike in Hanseatic times, national governments today largely hold the monopoly on violence, meaning they set the rules. A confrontation could lead to reestablished trade barriers between countries and make it more difficult for corporations to do business. Currently, the world is interconnected so that a new Cold War would force countries to unwind their existing supply chains, costing companies a great deal of money in the process. And a conventional military conflict would have an even more disruptive effect by endangering physical capital and personnel, while also causing the wealth of customers and governments to be spent on the war effort rather than corporate products.
Multinational companies are not only globalized for efficiency, but for necessity as well.
War between major powers is highly unlikely, at least partially because of the disruptive effect it would have on the businesses countries value highly. In a hypothetical war, companies with large international footprints would be expected to pick sides, a choice that would be more difficult for some companies to make than for others. Many state-run companies — such as Saudi Aramco or China National Petroleum Corporation — would have obvious loyalties. Because resources are strategically important during wartime, one can imagine that publicly traded energy companies such as ExxonMobil, Royal Dutch/Shell and BP would likely be repurposed for explicitly national ends. But this would come with challenges. Multinational companies are not only globalized for efficiency, but for necessity as well. ExxonMobil, Shell and BP produce oil and natural gas wherever they are profitable, including in countries that the West could conceivably fight a war with. In addition, technology companies such as Apple Inc. are increasingly reliant on foreign production lines and even foreign markets. None of these supply chains can be revamped overnight. Nevertheless, the precedent of World War II showed that corporations can and will be brought under more direct state control during wartime.
A major world war is not about to break out, but a deterioration of the geopolitical situation represents a negative development for the business leaders in Davos — or at least those not at defense companies. Created by very specific geopolitical circumstances, the status quo of the past 70 years has created an increasingly perfect climate for international business. Thus the business elite gathered in the Swiss mountains this week will be playing close attention to anything with the potential to disrupt the current world order. Listeners will be seeking to glean whatever insights they can about the future course of geopolitics, in the knowledge that things have plenty of room to deteriorate.