The steady decoupling of the world’s two biggest economies has turned up the heat in the Indo-Pacific, and as great power competition intensifies, tensions are beginning to boil. Decades of economic development and US-led global cooperation have held conflicts to a low simmer, but the new world order is amplifying ideological schisms and resurfacing animosities rooted in history, politics, and culture. Increasing competition for the control of lucrative trade routes and natural resources is aggravating existing conflicts and creating new ones, while regional demographics, climate change, and scarce resources are becoming catalysts for conflict. Although the Taiwan issue has captured everyone’s attention of late, it is not the only flashpoint, nor do they all intersect with China. Rather, conflict zones and pressure points extend from East Asia to Southeast Asia to South Asia and include the leading economies of Japan, South Korea, Australia, Indonesia, Malaysia, the Philippines, and India. Regional fissures will intensify as the globe continues to shift to a multipolar system whereby the US and the West aren’t the sole definers and enforcers of the rules of the game. Companies and investors need to better grasp these issues and must consider the full spectrum of risks in their strategic planning – making concerted efforts to avoid regional or national biases that could stymie risk mitigation, and ensure they are properly positioned to identify and transfer risk where possible.
Key Risks for Business Planning Considerations
Indo-Pacific tensions are intensifying political risk exposure for companies and investors. From disputed territories in South Asia to insurgencies in Southeast Asia, governments will decide how these issues evolve and end. Populist governments may seek to use political and military power to resolve disputes, putting companies’ personnel, assets, and revenues at risk, and dampening the investment climate. Additionally, governments may ask companies to pick sides or demonstrate political loyalties. This could violate corporate policies and damage reputations at home. Worse yet, some governments can weaponize social media and turn simple corporate branding and communications efforts into political attacks. Understanding leaders, their policies, and their impacts are essential for firms to successfully anticipate and navigate political risks.
Regulatory and Compliance Risk
Rising political risk is also increasing regulatory and compliance risks. Geopolitical competition is exacerbating economic protectionism and competition. Governments throughout the region are enacting stronger data requirements, health and safety laws, and labor regulations to raise standards and better compete in the global marketplace. Companies will need to pay close attention to these changes and adjust their compliance programs accordingly.
Supply Chain Risk
As regional tensions mount and competition increases, supply chain risk concerns are ever more important. Overwhelmed ports, driver shortages, and container scarcities are only part of the problem. A maritime conflict zone in the Pacific or Indian Oceans, insurgencies near Southeast Asian mines, or divisive inter-state political disputes could lead to costly reroutes, higher shipping and insurance costs, or even no insurance, and lost access to suppliers. Corporations should continue analyzing their supply chain operations in the Indo-Pacific and determine alternative plans to ensure business continuity.
Increased financial risks tend to follow rising political, regulatory, and security risks – and this holds true in the Indo-Pacific region. The unprecedented sanctions on Russia and Belarus following Russia’s invasion of Ukraine are a foretaste of Western actions in response to a potential Indo-Pacific conflict. Regional sovereigns have agency and can impose their own sanctions on firms enforcing foreign sanctions. Not only would this sanction mix damage a company’s access to financing, but it would also effectively bar them from doing business. Having a plan to mitigate these risks will help businesses remain agile in a rapidly changing geopolitical environment.
Higher reputational risk naturally accompanies increasing political risk. Balancing a company’s views on an issue with its domicile country and market positions is difficult. Any perceived slights can lead to boycotts, negative media campaigns, and reprisals. Recent US and European laws that now prohibit the purchase and importation of certain goods made in Xinjiang will undoubtedly incur repercussions from Beijing. Failure to comply holds not only legal penalties but also potential consumer backlash. Firms are expected to conduct due diligence throughout the region, including in Southeast Asia to avoid complicity in supporting forced and child labor. Corporations need to understand the lay of the land to develop a comprehensive reputational risk mitigation strategy and avoid brand damage at home and abroad.
Regional flashpoints can quickly turn into war zones, greatly increasing corporate security risks. Indonesian and Filipino insurgencies could grow in violence and threaten factories, terrorist attacks in India could target technology investments, and wars to resolve territorial disputes throughout the region could cause untold damage and destruction to capital. The risk of a US-China confrontation in the South China Sea or even a small dustup over Taiwan looms over any firms doing business in Asia. These risks also have implications for supply chain risk that risk managers should factor into a regional supply chain strategy. Companies will need well-developed plans covering health and safety, operational resiliency, and even market exit to effectively respond to these events.
While a growing threat on its own, heightened regional tensions mean taking cyber risk more seriously. Governments and criminal organizations will seek to leverage their cyber capabilities to damage companies for political or financial gain. Tensions spiraling into conflict open the door to cyber escalation. Cyberattacks will increase in total and in intensity. Cyber events could be even more damaging since they can occur anywhere and target anything a company keeps on a hard drive or in the cloud. Ransoms or theft may not even be the goal. In some cases, crippling a business’ operations might be the endgame. Firms need to consider the full range of cybersecurity measures and risks to protect their assets.
Economic risks are ever present but tend to rise as regional tensions grow. Already, regional tensions are dragging on GDP growth. As the new world order continues to unfold and new technologies emerge, economic security will increasingly become a political issue for governments. Government policies from India to Japan – China included – restrict market access out of domestic concerns and a desire to maintain international competitiveness. Souring relations heading toward conflict would further restrict market access, curtail trade, and dry up investments, dampening economic growth. Climate stress, conflict, resource scarcity, and precarious trade relationships – which contribute to rising regional tensions – will also contribute to increased economic risks. Companies should understand these scenarios and create a plan to reduce their impact on their bottom lines.
Indo-Pacific risks aren’t going away. Businesses and investors need to consider rising risks as the Indo-Pacific region becomes more volatile.