Is There Any Relief From Geo-Headaches?

Businesses do not like uncertainty. Unfortunately, there is a lot of it right now, particularly on the political front. Canada faces an aggressive and unpredictable president south of the border who habitually posts on social media about the U.S annexation of Canada and recently slapped a 25 per cent tariff on Canadian exports. At home, our federal government is rudderless, headed by an unpopular lame-duck prime minister, and resolution of federal leadership lies months away.

How should Canadian businesses navigate this worrisome, Donald Trump-driven, politically uncertain world?

Taking in the bigger view can help shed light on the path forward. First, take globalization. Defined as the deliberate lowering of barriers to economic activity that crosses national borders, globalization has led to greater consumer wealth and cheaper consumer goods, and encouraged capital and people to flow towards opportunity. It has also raised hundreds of millions of people out of poverty. 

While there is much in the zeitgeist about a shift towards deglobalization, the reality is the world economy was never as globalized as many had assumed. It is true that international trade and investment grew as a percentage of global gross domestic product (GDP), particularly as supply chains became more disaggregated. But even at the height of globalization, fewer than 20 per cent of U.S. firms relied on international value chains at all. Today, trade and investment as a percentage of GDP remain as high as ever. While supply chains are diversifying, much international business is being done. Globalization will not stop, but it will certainly look different.

The new-old Cold War

Geopolitics has never really gone away. For decades, Vladimir Putin has stoked Russia’s sense of grievance, fuelling his rise to power. China, for its part, has capitalized on open Western-led trade and investment systems to bolster its state subsidized, export-led economy, all the while keeping its own borders closed. Both countries endeavoured to interfere in Western elections for well over a decade. The U.S. now habitually refers to the “new Cold War” it now must wage against such adversaries, but it is hardly new.

The tension between economic integration and geopolitical rivalry is more normal than not. Countries have always competed for power and influence, and that competition is waged on various battlegrounds, including the economic one. This does not mean trade and investment cannot continue to grow. But it does mean industry will have to operate under increasingly watchful, geopolitically wary, interventionist governments. As a result, businesses must think geopolitically as well.  

Government leaders now eye economic activity less as a way to maximize consumer welfare and more as a tool to gain advantage over rivals. For them, it is about winning and losing, gaining power and influence at the expense of an opponent through the building, and projecting, of strength. Canada should not only understand this but also play the geopolitical game itself.

Practically, what does that look like? First, governments are in the business of taking credit and deflecting blame. The incoming Trump administration believes it can do both with trade protectionism, a popular tool that gives the appearance of “doing something” against “unfair” foreign competition. But trade protectionism ignores the overwhelming evidence of free trade benefiting consumers. Protectionism increases costs up and down the line, and consumers notice it. That hurts politically.

Trump uses tariffs like a sledgehammer. They can be used as a scalpel. Selective protectionism can generate strategic gains, inflict limited and tolerable pain on consumers, and can differentiate between allies and adversaries. Placing tariffs on Canadian mineral and energy exports hurts, rather than helps, U.S. geopolitical objectives. On the other hand, tariffs on highly subsidized Chinese electric vehicles could generate the opposite effect.

Another battleground is technology, an arena where governments are fearful of “losing out” to foreign rivals. Governments will spend money to gain domestic advantage in industries such as artificial intelligence, green energy and biotechnology. Businesses should anticipate heightened government oversight and scrutiny of investments in this area to safeguard the competitive advantages they have established.

Play the cards you’re dealt

A third battleground will be ongoing investment in the traditional instruments of national power. Trump clearly will place pressure on Canada to contribute more to national and continental defence. But doing so is long overdue: It is something Canada needs to do for its own interest. Defence spending, and Canada’s military industrial base, requires a significant boost. The fact that doing so may please Trump is a secondary benefit.

Canada also has cards to play, primarily via our inherent strengths in natural resources. Mining and oil and gas are critical resources the U.S. – and the rest of the world – needs and we can supply. These industries may enjoy a rebound as regulatory shackles come off.

But taking advantage of these geopolitical realities and opportunities will require adjustments by the Canadian financial community, including a possible reframing of what “sustainable” investing really means. Energy, mining, defence industries and high technology are critical industries vital to Canada’s national interest. Shunning them hurts returns and may weaken the country.  

By bolstering their political and geopolitical awareness, Canadian business leaders can craft more successful business strategies while also enhancing the country’s interest. Not a bad combination.