Everybody wants to talk about it – Making sense of Geopolitics

“Everywhere I go, people want to talk geopolitics. That’s not been the case for most of my professional career. We’re now going through a period of time where the impact of geopolitical events is going to have a broader impact on economic growth and capital flows around the world.” These were the words from Jared Cohen, CEO of Goldman Sachs at the inaugural Global Affairs Summit in January 2024.  He further added, “Our job is to understand those impacts in a way that’s going to be helpful to our clients. That’s our job and our business.” Well, they put their money where the mouth is and in October 2023 launched the Goldman Sachs Global Institute, a new platform that offers clients insights and perspectives at the intersection of geopolitics, technology, and global markets. It is not only Goldman Sachs, but a few weeks ago in June 2024, Boston Consulting Group launched their advisory on Geopolitics and their stated aim to help CEO’s build Geopolitical muscle.

In a recent paper by World Economic Forum, “According to corporate filings to the US Securities and Exchange Commission (SEC), for the first time in 2022, more internationally active firms mentioned geopolitical factors as driving business decisions or influencing risk assessments than terms relating to environmental, social and governance (ESG) matters, sustainability or climate change.”

Welcome to a new era of Geopolitics and Geoeconomic competition! There is no denying or escaping from the fact. The signals are all around us: wars in Ukraine and Gaza, reconfiguring supply chains, US-China economic competition and decoupling, Russia’s newfound aggression and its quest for a rightful place, important swing states flexing their muscles, rising aspirations of BRICS+ and the accelerating race for critical resources in the far corners of the world. From Latin America to Middle East to South China sea and the Pacific, there seems to be a global crisis of crises and international cooperation and institutions seem to be paralyzed by clash of geopolitical interests and rivalry. Techno optimism of the past two decades has given way to rivalry in the techno and cyber domains with different paths being chartered by various stakeholders. The decline of America’s unipolar moment is clearly visible from a fractured and poisonous domestic political scene, rising debt burden, a polarised society and an incoherent foreign policy. These rapidly evolving dynamics are redefining the four decades of post-cold war global economic and political order as we enter a period of geopolitical tension and flux, which in turn, is symptomatic of a deeper historic shift underway.

After the fall of Soviet Union, in a world that was politically and economically dominated by the United States, the relative calm of three decades led to accelerating globalization. Fractures began to appear in this system post 2008 after GFC, when countries like China started questioning the viability and validity of a financial and a global trading system driven by American interests. This trend has accelerated post Covid, and it is now obvious that over the past decade or so, we have entered a new geopolitical era, but of what kind?

What is Geopolitics?

Before we try to make sense of the changing and an uncertain world around us, let me try to give a coherent and easy to understand perspective of what geopolitics is. I am by no stretch of imagination an “expert or a thought leader” in this domain. But I have been a student of history and international affairs for over three decades and it was my passion for these subjects, that made me chuck up my career and go back to school in early forties. I have studied global affairs for four years in two of the best international affairs schools, learnt from the smartest and experienced out there, interacted with people from over forty countries and have travelled widely, which fortunately has given me a perspective and a framework to understand both geopolitics and geoeconomics.

One of the most confusing aspects when you start studying international affairs and geopolitics is the number of theories and frameworks out there that can be intimidating and to say the least confusing. While there are realists, liberals, internationalists, traditionalists, neoliberals and rationalists, there is also profusion of frameworks: Balance of Power, multilateralism, hegemonic stability and rivalry, Mackinder’s heartland and Mahan’s sea power theories and a few more that don’t make life easy.  So, what exactly is Geopolitics then?

The simplest and most coherent explanation according to me was provided by Colin Flint, a professor at University of Utah. He identified what are the essential building blocks, which clearly explain and put in context and perspective the world today.

Building-block 1: Geopolitics is about projection of power. Geopolitics is about the projection of power, and as a reaction, geopolitics is also about challenging projections of power. Geopolitics is the sum of the dynamics of some countries trying to project their influence beyond their borders and across the globe to serve their “interests” and the reactions of countries trying to prevent this power projection.

Building-block 2: Geopolitics and stronger and weaker countries. Some countries in this game are powerful, while others are weaker, who see themselves as being disadvantaged by the actions of the more powerful countries and may work with a more powerful country to help it project power. It is just as important to think about weaker countries and their relations with stronger countries as it is to think about relations between stronger countries. Geopolitics is not simply about one-against-one battles between great powers, or even alliances of great powers. Instead, geopolitics is a set of relations between countries.

Building-block 3: Economic relations between weak and strong countries are the driving force of geopolitics. We live in an unequal world, a world of disparities in wealth, resources and access. The relations between the stronger and weaker countries in the world is the main driving force of geopolitics and is motivated by economic relations and competition, which means that businesses and countries work together to change the world. Businesses and countries both “do” geopolitics. They are both players in the game, or actors on the stage. In fact, geopolitics is about how businesses create a web of economic relations and use countries to build or protect those relations.

Building-block 4: Businesses are important geopolitical actors, not just countries. Businesses and countries act together to make the geopolitical world. Since economic relations and access to resources are an important aspect, this directly results in trade and investment linkages between businesses in different countries. The goal of establishing military and political presence is about safeguarding these economic relations that exist as a geography of trade and investment networks. Economic strength helps pay for the projection of military power and this is seen as a good investment as military power is expected to protect existing economic relations and help make new ones.

Building-block 5: The geography of geopolitics involves networks and territory. Geopolitics is a combination of networks of economic relations and the political control of territory. Put another way, economic interests of resource extraction, and other elements of global supply chains, are forms of territorial geopolitics. Seapower is the essential component of force projection and control of overseas economic interests. Seapower is expressed as both controlling networks of trade across oceans and using that control to further interests onshore. Control of the seas, especially the facilitation of unhindered trade, is required when territorial control is far away from the home country.

Building-block 6: The geopolitical world is always changing. Geopolitics and associated dynamics are not constant in time and space but are a process. History has time again taught us that, the back and forth of economic competition, alliances and military strategy are fluid and the geopolitical world is ever-changing. It is just that some moments of historical change are more dramatic and consequential than others and it is useful to think of how things change rather than how things are permanent. While the essential geographical features of the world that dictate geopolitics do not change, the process of geopolitics is about how the importance of different geographic features changes over time. Geographic features are the landscape in which economic relations are made and power is projected. Whether geographic features are vectors or barriers, changes with the changes in geographies of industrial production and trade, technology, and the ups and downs of relations between countries.

Building-block 7: A definition of geopolitics. Geopolitics is the use of economic and political power to control networks, territory and physical features. In turn, geopolitics is the use of the control of networks, territory, and physical features to increase economic and political power. There are two parts to the definition, and they are connected at the hip. Economic gain and power projection are used to control parts of the world such as countries, oceans, and islands, and the way they are connected. Being in control of these things will make you richer or stronger. Not controlling them can make you poorer and weaker.

From my perspective, these seven building blocks seem the best possible way to understand many of the headlines today: rise of BRICS+, China’s BRI, Russia’s assertion of power in Africa, new industrial policies in US, China and EU, countries such as Saudi Arabia, Australia, Turkey and Brazil flexing their muscles, financial cold war and the global race to build blue water capabilities.

End of the golden era of globalization – Rise of geoeconomics

I started my career in the early 1990’s and called it quits immediately after Covid. This three-decade period also corresponds to the “Golden Age of Globalization”, and something posterity might hark back at with nostalgia.

For people of my generation, the post 1990 world order was defined by a few predictable underlying structures: the triumph of democracy and rule of law, the virtues of globalization and innovation, America’s unipolar moment and stabilizing role of American power, the great-power peace dividend, technology and innovation and the rising prominence of markets. This was a world where despite periodic strife and turmoil, predictability and continuity were the name of the game, which created a favourable atmosphere for US, EU and their allies. They provided tailwinds and fuel for the rise and rise of global finance and trade. This was an era that was propitious for firms and investors that rode globalization’s wave. Multinationals found no barriers for expansion, be it in China, Eastern Europe, South or South-East Asia by building new JIT supply chains and reap new efficiencies in an open, integrated world economy. They could trade and invest in a climate of security backed by international rule of law, finance and markets driven by the dollar hegemony and America’s naval power to keep the supply chains open. In turn, this golden age of globalization helped keep inflation low, by enabling business to exploit the labour arbitrage and drastically reduce the cost of goods for consumers. American tech firms fostered innovations such as internet, smartphones, satellite communications, advanced microprocessors, social media and artificial intelligence, that powered the digital age and there was belief in some quarters about the coming technological utopia.

The reason why today’s world seems so chaotic is that those pillars of the old-world order are crumbling, and the contours of a new era are taking shape, standing not on predictability and stability, but on uncertainty and disorder. As Hal Brands put it succinctly in a Bloomberg column, “The emerging order is one in which geopolitical blocs are back, and strategic rivals wage vicious ideological and technological fights. The international economy is a battleground, as interdependence and insecurity go hand in hand. Global governance and problem-solving increasingly look like artifacts of a happier age. International violence is intensifying, as the risk of major war, even global war ticks higher. US power still looms large, but America’s behavior grows more erratic as its politics become less stable.”

At its root, the post-Cold War order that rested on rules and interests of the US and its allies started to fracture once other countries started flexing their muscles and the relative decline of American power. It began with the explosive and exponential rise of China and the revival of Russia under Putin. In a flourishing global economy. America and its allies, mainly EU took things from granted, neglected their military capabilities and had grown too comfortable inside the bubble of their creation. The time was ripe for China and Russia and other countries that disliked a system and order driven by liberal values and US leadership to get aggressive and challenge the status-quo.  Russia made its moves in Georgia and Ukraine and further subtle manoeuvres economically and politically in Europe. China started flexing muscles about its ambitions and historic rights in the South China seas and Iran in a post-Saddam Middle east played its cards to sow chaos and grow its regional influence. This onslaught added further fuel to America’s ambivalence and confusion about its future role in the world and the burden imposed on it by the failed wars in Iraq and Afghanistan. The global financial crisis of 2008-09 put further strain on the underlying global financial order resting on dollar’s dominance and countries led by China began challenging it and trying to create an alternative.

What we are witnessing are economic drivers of long-term geopolitical change. As the balance of economic power globally has changed over the last few decades, so have the ambitions and aspirations of rising economic powers. Jeffery Sachs highlighted and summed it up nicely in 2023: America was far and away the world’s leading power at the end of World War II, contributing 27.3 percent of global output in 1950, though constituting only 6 percent of the world population. The Soviet Union was the next largest economy, at roughly one-third of the United States, while China was third, at roughly one-sixth. The American advantage was not only in total GDP but in science, technology, higher education, depth of capital markets, sophistication of business organization, and quality and quantity of physical infrastructure. American multinational companies circled the globe to create global supply chains. All this in a way aided the growth of other economies that established economic relations with the US.

It started with the East Asian economies taking-off, beginning with Japan’s rapid postwar rebuilding during 1945-1960. This was followed by the four Asian Tigers: Korea, Taiwan, Hong Kong, and Singapore, which began their rapid growth in the 1960s, and finally followed by China starting in the late 1970s with Deng Xiaoping’s reforms and opening of the country to the world. The 16 major East Asian economies produced 15.9 percent of world output in 1950, 21.7 percent in 1980, and 27.8 percent in 1990. But what everyone failed to predict, was the ability of China to grow rapidly for decades to come. Between 1991 and 2021, China’s GDP grew 14.1 times, while the American GDP grew 2.1 times. By 2021, China’s GDP in constant 2017 international prices, was 18 percent larger than US GDP. China’s GDP per capita rose from 3.8 percent of the US in 1991 to 27.8 percent in 2021. China’s rapid growth was underpinned by rapid advances in technological knowhow, capacity to innovate, quality education at all levels, and the upgrading and modernization of infrastructure.

In the past 30 years, three basic economic changes have transformed geopolitics.

·       The first is that the US share of global output declined from 21.0 percent in 1991 to 15.7 percent in 2021, while China’s rose from 4.3 percent in 1991 to 18.6 percent in 2021.

·       The second is that China has overtaken the United States in total GDP and has become the leading trade partner for much of the world.

·       The third is that the BRICS, constituting Brazil, Russia, India, China, and South Africa, have also overtaken the G7 countries in total output. In 2021, the BRICS had a combined GDP of $42.1 trillion, compared with $41.0 trillion in the G7. In terms of combined population, the BRICS, with a 2021 population of 3.2 billion, is 4.2 times the combined population of the G7 countries, at 770 million.

In short, we do not live in a world economically dominated by the US, UK, Germany and Japan anymore. China is of comparable overall economic size to the United States, and the large middle-income countries are a counterweight to the G7 nations. This has clearly reflected in the fact that the last three and the upcoming 2025 G20 Presidencies in a row have and will be held by middle-income developing countries: Indonesia (2022), India (2023), Brazil (2024), and South Africa (2025).

What this means is, we are seeing the rise in prominence of Geoeconomics. In an aptly titled book, “War by Other Means”, Robert Blackwill and Jennifer Harris have defined Geoeconomics as, “The use of economic instruments to promote and defend national interests, and to produce beneficial geopolitical results; and the effects of other nation’s economic actions on a country’s geopolitical goals.” In the book, they also explore today’s leading geoeconomic instruments: trade policy, investment policy, economic and financial sanctions, financial and monetary policy, energy and commodities, aid and cyber policies. While some function as they have in the past, others are new or operate in a different environment. Russia, China, and others now routinely look to geoeconomic means, often as a first resort, and often to undermine American power and influence. We have seen this happen in the past with China resorting to trade restrictions as a retaliation against Japanese policies or how Russia would withhold gas supplies Europe.

What next?

To better understand what might come next, relook at the building blocks for Geopolitics that I have outlined above and the definition of Geoeconomics. Things start to make perfect sense and actions by different countries seem more logical. No one wants to lose out and everyone wants to be part of the economic and military network that is most likely to project the most power going forward. Geoeconomics has also given rise to a new era of industrial policy in countries, be it US, China, Japan, Saudi Arabia or Brazil. The defining feature would be a combination of Geopolitics + Economics + Strategy. I will cover more on this in my follow-up article.

In 1968, Henry Kissinger, master of the realist game observed that “The current international environment is in turmoil, because its essential elements are all in flux simultaneously.” He was talking about the winds of change that were sweeping across the globe: decolonization, domestic protests, a changing balance of power, Soviet Union’s aggressive moves in eastern Europe, Wars in Middle East etc, that were shaking up the arrangements that came to define the period post WWII. The next two decades were tumultuous globally, both politically and economically and have left a legacy that is with us even today. While the context and specific factors might be different, Kissinger’s assessment holds true after more than five decades and should be a starting point for everyone to understand what might be coming at us.