The war in Ukraine taking center stage when the United Nations General Assembly meets in New York. From the packed agenda, escalating tensions with China and Russia's war in Ukraine launched early last.
Year, but some key players are expected to skip that gathering. Specifically, four out of the five permanent members on the Security Council China, the UK, France.
And Russia.
The high level talks about economics, energy, trade, and war at the UN this week highlight the geopolitical schisms that are reshaping the balance of power in the world and increasingly forcing nations to choose sides. But not just nations, corporations too are looking at the shifting political map when they make decisions that will impact their business for decades, like where to build a new factory. A just release Bloomberg analysis puts numbers to these decisions for the first time.
It shows how political divides like those exposed by Russia's war in Ukraine and increasing tensions between the US and China, are also disrupting decades of commercial relationships, and it reveals how the world is splitting into economic blocks that resemble political fault lines.
Lot has happened in the last five years in the global economy started. I think with the trade wars between the US and China, what we've seen is that when you look at tide numbers, you can already see some decupling happening between the countries.
That's Bloomberg economists Mevak Cousin. She and senior economics writer Sean Donnin are here to talk about how companies are seeking to insulate themselves from political turmoil.
We know that companies hate uncertainty, so we have a kind of level of uncertainty that is being created by governments that is just making it hard to do business in the world.
I'm west Kosova today on the Big take when politics and business collide.
Sean, welcome back. Thanks so much for having me back here.
So you know, we've been hearing for years about how companies put factories where they can manufacture their goods cheaply, or put them closer to their customers so they don't have to have long supply chains. But what's so fascinating about the story that you and Mava, along with our colleagues Enda Kerran and Jenna Hawk wrote is that there are so many more hidden factors into where companies choose to do their business these days.
And they're new factors, right. So for decades, the decisions that CEOs and boards made in terms of where they were alca their capital, the big business bets that they were making, were based on returns and profits and where's the big market, Where can I sell underarm deodorant, Where can I sell a car? Where can I make the
biggest buck? And what we're seeing in the last few years, and this is something that's really confounding economists because it's not the way it's supposed to happen in a normal economy. This is not how they teach economics in college. Is that geopolitics is starting to drive decisions and that is a whole new ballgame, and we're just starting to be able to kind of see the data. And that's what we've tried to do with the story and Mava.
This question of how politics is driving some of the decisions that big companies make is very hard to measure, which is why what you've done in the story is so new.
Yeah, that's very high.
It's difficult to measure. We are used to measure things like the size of the economy, the distance between countries, the tariffs that exist even non tariff barriers when there are some regulations that make it difficult to import and exports. But the geopolitics, and in particular the concerns about geopolitical tension and the fact that maybe in the future there could be restrictions, there could be export controls and bands,
this is much harder to measure. So we can start to see in the data that this is having an impact. We can use some poxies. We've used UN votes in the UN resolution on whether to condemn Russia's invasion of Ukraine. We've used those voting patterns as a proxy to understand the geopolitical similarities between countries. But you're right, it's actually something that's much more intangible than standard economic tools.
Sean, What gave you the idea to look at this, What was the thing that made you think, huh, it looks like geopolitics getting into the middle of these decision.
We've been trying to think about all of the different things that are happening out there in the global economy and how it's being shaped, and we're trying to get our head around what's really happening to globalization in the world, and what was clear and what we're starting to hear from more and more economists, is that geopolitics was a thing. Now, that's kind of obvious. We've heard here in Washington people every day are talking about China and the competition with
China in Europe likewise, they are exercised by this. Certainly in China. China feels under assault and is trying to build new alliances. We know that geopolitics is shaping the world, but it's harder to get a hold on how you actually measure capital decisions capital allocation decisions, which has been important to us at Bloomberg Right because that's kind of what we write about. And that's when we started noticing that a lot of economists were starting to latch on
to un voting patterns and other measures of geopolitics. People look at the number of mentions on Earth calls of the word geopolitics. So far this year, there's been some twelve thousand mentions by executives of standard Ports five hundred companies. These are the world's largest companies, and that's three times
what it was just two years ago. Economists have looked at other trading relationships, arm sales, or other kind of measures of geopolitical proximity, whether you're members of the G seven for example, or the G twenty or different blocks, and there is this whole effort by economists to try and understand this new force, and this seemed like the cleanest way for us to do it.
Maybe, can you tell us exactly what the numbers show, what you were looking for and what you've found.
We looked in particular at what we call green field for indirect investment. That's investment in new projects in factory is that will sometimes take years to build. So that's really the sort of decision today about where you want to do business in the future.
And so this is companies deciding where they want to build a new plant. So Toyota, should they build it in China, the US or Mexico.
That's right, That's exactly what we've been looking at in this World Investment Report. What we did is that we focused on those greenfield investment reports and we looked at where the new flows of investments were going, and we focused in particular on whether countries had been voting to condemn Russia's invasion of Ukraine in February twenty twenty three in the United Nations or if that voted against containing
the invasion or abstained. And what we noticed is that the share of those new projects that was going to countries that did not condemn the invasion of Ukraine by Russia, this share of new investment going to those countries has fallen very substantially. It was about thirty percent of all investments in the decade to twenty nineteen. By twenty twenty two it was only fifteen percent. And within those countries
there are two big losers. One is Russia in twenty twenty two that received no investment at no new investment at all. That means no investment from the US or Europe. But that also means no investment from China, for example, which is quite striking I find. And the other big loser China. So in the decade twenty nineteen, China was receiving an average about ten percent of all the flows of new investment in new projects. In twenty twenty two
they received less than two percent. So we really see this sort of decisions, companies deciding that they don't want to invest at a moment in those countries anymore.
Sean, let's pull that apart just a little bit. Why did you focus in particular on this vote about Russia's invasion of Ukraine. Why was that such an important dividing line when looking at investment decisions about where to put factories.
We know that Vladimir put in decision to invade Ukraine was the geopolitical moment of the last couple of years, and so where countries position themselves on that, whether they choose to condemn the vote or just simply abstained, told you a lot about their thinking and how they were kind of positioning themselves and their alliances, their geopolitical alliances. So there's that To be clear, we're not saying in this that the only reason people are moving their factories
is because of the war in Ukraine. There are other reasons why people are choosing to invest in the United States or in Western Europe, including a whole surge in industrial policy and subsidies that we've seen here in the United States in particular. We also know that China in twenty twenty one, in twenty twenty two was largely shut down because of a zero COVID policy that was putting
off a lot of foreign investors. But there is a clear divide at the same time that is happening in the world, and we see it in summits of leaders. We see in different policy areas in Washington efforts to try and stop technological exports to China, for example, the export of semiconductors and semiconductor making equipment to China. So we know this broader geopolitical tensions are happening. We're just using this vote to kind of sort through this data.
And maybe what does the data tell us about how much the war in Ukraine is driving investment decisions versus the war in Ukraine exposing divisions that were there even before.
It's a very good question, and a lot has happened in the last five years in the global economy started. I think with the trade wars between the US and China, what we've seen is that when you look at tide numbers, you can already see some decupling happening between the countries. When you look at tide numbers, you have a very
clear cut. In twenty eighteen, with the start of the trade wars between the US and China, US imports from China have fallen thirty five percent across all the tarift products.
So that's a big gap.
At the same time, China's imports from the US have also fallen. They've fallen for trift products, but they also have declined. And that's what Sean was saying. All those semiconductors related technology. Some of it is likely directly link to export restrictions imposed by the US on RUEWEI on SMC from October twenty twenty, to the sort of broad based export restrictions on semiconductor technologies. But some of it is probably geopolitical decopling's China trying to move away in
this very strategic technology. Actually, if you were to look at Russia as well, you can see that Russia was already starting to decoupel Western economies since twenty fourteen, since the invasion of Crimea and the start of sanctions. So clearly, for me, the un vertes and the invasion of Ukraine and votes around the invasion of Ukraine have actually crystallized some of the growing divisions and tensions that we're already growing under the surface in the global economy.
Seans, where we have this broad divide that you show in this story, and we know, of course there's China on one side, the US on the other, but there's every other country in between what is the divide which countries are on each side.
On one side you have you know, the big Western economies, the United States, Europe Asian allies like Japan and South Korea, and on the other side you have China and a lot of developing countries. And to be clear, there are a lot of countries that are trying to have a bet both ways, right, and this is actually an interesting set of economies that we're going to be looking further at.
Countries like India, Vietnam that abstained when it came to this big United Nations vote that we've been looking at that has kind of crystallized this geopolitical divide, and at the same time, and they're trying to have strategic relationships with the United States as well. President Biden was recently in Vietnam and India and in both of those visits was trying very hard to strengthen the relationship there and likewise, the leaders of India and Vietnam were very happy to
see the American president there. At the same time, they're trying to kind of maintain a relationship with China and so on. So you know, these are not clean blocks, right. We should also be clear that these are not equal blocks. About two thirds of the global economy is on the kind of US and G seven side. About a third of the world economy is on the Russia China side,
if you will. One of the ways you can really track what is happening and this divide in the global economy is how folks have voted at the United Nations on whether to condemn russia invasion of Ukraine or not.
After the break, Which countries have the most to win and lose in this shifting global structure. Maybe Sean said earlier that on earnings calls, when executives of big companies talk about their performance, they've been talking about global tensions quite a lot. What are some of the companies that were caught up in all of this that are making these decisions in part based on global politics.
What I found fascinating in the latest World Investment report is really the weight of semiconductors in those decisions. It's fascinating to see that greenfield projects, the new projects in fabs in semiconductor factories have jumped by about two hundred percent multiplied by three since twenty nineteen or twenty twenty. And in fact, you can see that companies like TSMC based in Taiwan, one of the geopolitical hotspots who used
to have factories mostly in Taiwan and Menan. China is building factories in the US, in Japan, and his index to build in Germany.
And it's not just semiconductors, right. We've been talking a lot since the pandemic about the importance of semiconductors to building everything from cars to cell phones to washing machines. If you listen to the earnings calls and you look at the transcripts, what you see is Wall Street giants like Black Rock and Larry Fink their chairman, talking about geopolitics and how it's going to hit returns.
These forces include a fragmented geopolitical landscape causing a rewiring supply chains, a transition to a lower carbon economy, and the aging population in the developed world, all of which are likely to be inflationary over time.
You see big consumer giants like Coca Cola and Tesla and Elon Musk talking about geopolitics. You also see big industrial companies like three M talking about geopolitics and worrying about it. It's hard to find a big company right now that isn't thinking about geopolitics in a way that they just weren't a few years ago.
And what do they say on those calls, What are their specific concerns when they talk about geopolitics.
The first concern is, this is a big risk, right. We are worried that a big geopolitical event and that these geopolitical tensions could affect our ability to do business in the world. The second thing they say is, we are working to reorganize our supply chains because of the geopolitical risk, and we don't want our supply chains to be caught up in a big geopolitical event. And the third thing they say is we're trying very hard to
find a way around geopolitics. And so Elon Musk in July, when he was talking to Tesla investors, had this fascinating line where he said, look, this is a really strange period in terms of geopolitical tensions in the world.
The best we can do is have factories and many past the world such that if is get cut in one part of the world, we know we can still keep things going in the rest of the world.
And we're seeing him do that. Right. Elon Musk has factories in Texas. He has factories in China outside Shanghai. He's building a big new factory just outside Berlin. And he's got a big factory in Mexico as well that's under development. And he, like a lot of big companies and like a lot of CEOs, is making sure that he is both respecting these new geopolitical interests but also finding a way to kind of survive this geopolitical time as well.
Maybe earlier you talked about how Russia and China are some of the bigger losers in this new divide. Who are the winners who are inheriting new companies, new factories where before they wouldn't have gotten that business.
I think so far what we've seen is that some of the big winners are actually in the G seven United States. He's a country that has seyn the credits increase in its new projects, Germany, Italy. So clearly at the moment, I guess it's a bit of a flight to safety, going to the sort of very safe place.
The blocks are starting to get identified, but I think it's still a bit in flex and so I guess that's maybe why at the moment companies are choosing the sort of safe bets and going where they really know on which side it's going to fall. That's a big winners. In our data, we can see other winners. We know that, for example, some countries have taken up some of the slack left by China in US imports. We know it's actually quite a lot of Asian countries. It's China, it's Vietnam,
it's also India. So you see two countries that actually didn't vote to condemn Russia's invasion have taken up a lot of the sex in the US.
And there's another important point to make here, which is on the kind of loser. And this is what a lot of economists and smart people really worry about, and that is the story of globalization over the last half century has been one of yes, production shifting from places like the United States to Mexico and China, but it's also been shifting and manufacturing has been growing rapidly in other poor countries, developing countries, and that has meant for
the world a huge reduction in poverty. There are far fewer people living in extreme poverty in the world today than there were fifty years ago. That said, if you look forward now, if geopolitics has this big influence, and we are doing this thing that some people call friend shoring, right, We're putting factories in friendly countries. A lot of those friendly countries are other rich countries. That means that that
investment is not going to poor countries. That means that those poor countries are likely to stay poorer for longer. It's likely to increase in equality in the world world, it's going to increase poverty in the world, and that is going to lead to all sorts of other problems.
And so if you are sitting at the International Monetary Fund or the World Bank and you are looking out at the global economy beyond these rich economies, you are worrying about the impact of this fragmentation on the world and sean.
About three decades ago, we saw another bipolar system come crashing down with the collapse of the Soviet Union. How does what's happening now compare to that.
It's really tempting to say this is the new Cold War, right the US and China, There's going to be an iron curtain descending on the world. And that is not what we are saying in this piece. We're not talking about a new Eastern Bloc and Western Bloc because the world is just so much more complicated than it was then. The fact is that the US and China still have
an incredibly complicated and pretty rich economic relationship. Gina Romando, the Secretary of Commerce, was just in China literally trying to sell Boeing aircraft to the Chinese. US still wants to sell to China, and vice versa now. Ten years from now, twenty years from now, fifty years from now, that iron curtain may be a lot harder than what we envision now. But if there is an iron curtain coming down on the world right now, it's really porous.
It's really easy to get around and walk through even I think.
One thing I find quite interesting is the return of export controls and export bands wielding the economic weapon for geopolitical purposes. It's something that more or less had disappeared since the United States actually decided they could start selling pieces to the USSR at the time, so that was for me. It's one of the proper code war type tool. So it's quite interesting and a little bit worrying to see it coming back in this sort of tried policies back.
What will this emerging system mean for the things we buy and how much they cost. Is there any upside to the world being divided into different economic blocks?
You know, I've been talking with economists at the IMF about this. You've been doing a whole series of deep dives into different parts of the global economy and looking at the impact of a fragmenting world. And they will tell you we've looked at it many different ways, and we don't see a scenario where the global economy as a whole gains. We see this is something that destroys
kind of economic output in the world. In the worst case, if you had a kind of hard iron curtain, if you had a real Cold war, it would be the equivalent of wiping out the French and German economies from the global economy. Right now, it's about seven percent of the global comody.
That's huge from a pure economic perspective. It's going to be costy. How costly, it's quite difficult to know. But we had done some estimates using a large scale model, and we had estimated that if we had the twenty five percent starif between the two blocks of countries, we would probably see trade flows fall by about twenty percent relative to what they are today, and twenty percent. That would take us back to the early two thousand, so
just before China joined the World Trade Organization. Based on our estimate of past relationship between trade integration and growth, we think it could reduce global GDP by about three point five percent. That it would be relatively broad based, because in some places producers would lose, in some places consumers would lose, but generally everyone would be a bit worse UF.
So you can see how a politician would make a decision based on a certain set of circumstances. But for a company that is really trying to make decisions based on how it's going to affect their business, is there any concern that because it's so hard to measure it, they're going to get it wrong.
Absolutely. So. I mean, one of the people I called when we were working on this story is a woman called Penny Goldberg, who is a former chief economist at the World Bank. She's now at Yale. She's one of the world's leading trade economists and experts on globalization, and she made a really good point. She said, geopolitics is man made uncertainty, and we know that companies hate uncertainty. So we have a kind of level of uncertainty that is being created by governments that is just making it
harder to do business in the world today. We have a very recent example that kind of illustrates it all. Look at how quickly sanctions went into place on Russia after the invasion of Ukraine. We saw McDonald's pull out in the matter of reasons, man.
The Possby chain will sell it's Russian business and take a write off of up to one point four billion dollars. Donald said that in the way the war in Ukraine continued, ownership of the business in Russia is not consistent with the company's values.
We saw other companies pull out their employees in a matter of days after the invasion. We have seen the Russian economy shut off by Western banks. The reality is geopolitics can change things very quickly, and big companies, whether it's Coca Cola, McDonald's, Walmart, Tesla, can feel the impact very quickly.
Mayva for listeners, say living in the US on one side of this block, or listener in Beijing on the other side of the block, what would you tell them about how it's going to affect them. Just people going about their lives, trying to make ends meet buying products. What does it mean for average.
People having been the US? Generally, it means that there are greater risks that consumers may face some short or some inflation as their products, products that used to being imported from China get relocated or resourced from a different country. And we know that sometimes it can be difficult, So I think that's probably the sort of thing that may happen. I would don't tell them to run to the shop
and hold I think they will be fine. But generally I think that the sort of greater risk for the sort of households or risk in the US maybe a bit more inflation volatility in China, I imagine, or his probably lies more of the producers. It means that depending on how it goes. So far China has managed we know they have lost market shares in the US. So
far they've managed to recover those market shares. I think it means that maybe China's market share in other parts of the US analyze word could become a bit more constrained, and that could probably mean some jobs. So that's probably more a job risk, has it than a consumption risk in China?
And you know, in the background of your question is a world where we see the two economic giants on two very different economic paths right now. So, China's economy is slowing and it's facing some huge structural problems like actually a declining population, an aging population, in a way that the United States is not. In the same way. It has recovered more slowly from the pandemic than the
United States. There are a lot of people in Washington and other Western capitals now who see China not as a kind of endlessly rising power, but as one that is starting to either peak or kind of the client. So that is a very different path. The United States has recovered incredibly quickly from the pandemic in a lot of ways. There's still a lot of problems on the ground in still very real for a lot of families
and so on. But we have a job market unemployment rate that is at historic lows, and the Biden administration would argue that there's all of this investment in the future that means that the US economy is going to be growing vigorously for a long time, and that is going to be felt by families in the longer term. Right, it may not be you and me who feel it at you know, in the grocery line or when we go out to buy our new iPhones or cars, it's going to be maybe our kids who feel it in
a different way. And once upon a time, the story was that by the time my kids were entering the workforce, China would be the world's largest economy and they would be competing in a very different way with China. It's not so clear that that's going to be the case anymore, and vice versa for young Chinese people.
Sean Mav thanks so much for talking with me today.
Thank you so much. Thanks finding us.
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