Geopolitics: State and Non-State Actors

National Governments and Political Cooperation

• Geopolitics studies how geography influences politics and international relations.
• These relations affect investments by influencing economic growth, market volatility, and transaction costs.
• Geopolitical analysts study actors and their interactions, including, individuals, organizations, and governments involved in political and economic activities.

State and Non-State Actors

• State Actors consist of governments, political organizations, or country leaders with national authority.
• Some examples include heads of state and parliaments.
• Non-state actors participate in global affairs without directly controlling a nation's resources, such as NGOs, multinational corporations, and charities.

Features of Political Cooperation

• State actor relations are either cooperative or competitive.
• Cooperation is when countries work together toward a shared goal.
  • Possible goals are strategic, economic, and cultural.
• Political cooperation is the degree to which countries agree on rules and standardization.
• Cooperative countries engage in rules standardization, harmonize tariffs, allow free information flow, and enter international agreements.
• Non-cooperative countries have inconsistent rules, restrict movement of goods/people/capital, retaliate, and limit technology exchange.

National Security or Military Interest

• Cooperation is driven by a country's national interest, including military, economic, and cultural goals.
• National security (national defense) involves protecting a country from external attacks, terrorism, and natural disasters.
• Cooperation is vital for landlocked countries to access necessary resources.
• Singapore and Panama use geographic location as leverage for trade.

Economic Interest

• Economic interest involves accessing resources and growing national wealth to contribute to social stability.
• Cooperation in this area focuses on securing trade resources and standardizing conditions for companies/industries.

Geophysical Resource Endowment

• Includes geography, climate, and access to food/water for sustainable growth.
• Resource distribution is highly unequal among countries.
• Resource-rich countries may gain political leverage but also become vulnerable to internal instability if resource benefits are unevenly distributed.

Standardization

• Standardization creates protocols for production, sale, transport, or the use of a product or service.
• It occurs when relevant parties follow these protocols for economic growth and higher living standards.
• It takes the form of regulatory cooperation, process standardization and operational synchronization.

Cultural Considerations and Soft Power

• Countries cooperate due to cultural reasons, such as shared history or immigration patterns.
• Soft power influences another country's decisions without coercion via cultural programs and exchange.
  • An example is Erasmus+ integrating young people and promoting EU policies.

The Role of Institutions

• An institution is an established organization or practice with formal (backed by law) and informal (customary) structures.
• Examples include non-profits, charities, media, political parties.
• Strong institutions help develop cooperative relationships and make them more durable.

Hierarchy of Interests and Costs of Cooperation

• National interest involves a country's goals arranged in a hierarchy.
• Governments cooperate when it benefits them, prioritizing needs when conflicts arise.
• These priorities shift with political leadership or global changes.

Power of the Decision Maker

• The hierarchy of national interests becomes more subjective as societal needs are met.
• A country's political cycle impacts its priority designation.
• Short political cycles make prioritizing long-term risks like climate change or poverty difficult.

Political Non-Cooperation

• Political cooperation and non-cooperation exist along a spectrum.
• Countries cooperate on international standardized rules over time.
• Extreme non-cooperation prioritizes the country's political self-determination.
  • These are rare.
• A cooperative country is one that is engaged and reciprocates.

Forces of Globalization

• Globalization is the process of interaction and integration among people, companies, and governments.
• Marked by the spread of goods, information, jobs, and culture.
• Headwinds to globalization include financial crises, nationalism, and capacity constraints.

Globalization

• Globalization results from economic and financial cooperation via trade, capital flows, currency exchange, and cultural exchange.
• Primarily carried out by non-state actors, such as corporations and individuals.
• Nationalism (antiglobalization) promotes one country's economic interests to the detriment of others.

Motivations for Globalization

• Globalization and cooperation are correlated but independent as the private sector can drive globalization.
• Three potential gains are increasing profits, accessing resources/markets, and intrinsic gain.
• Increasing profits involves sales growth and cost reduction.
• Access to resources might mean that talent or materials are not affordable locally.
• Portfolio and foreign direct investments may occur.
• Intrinsic gain is the side effect of generating more than just profit.

Costs of Globalization and Threats of Rollback

• Globalization's improvement on the aggregate does not equal improvement for everyone.
  • An example is factories creating jobs abroad but reducing them locally.
• Companies may operate at lower environmental/ social/ governance standards to reduce production.
  • An example is the European company that produces in another market where labor is cheaper, but less environmentally friendly.
• Globalization may cause job losses and political consequences.
• Interdependence can make companies reliant on other countries' resources.

Threats of Rollback of Globalization

• Supply chain disruptions through political non-cooperation may prevent firms from producing goods.
  • For example, copper production in Chile can disrupt industries relying on it.
• Deglobalization has grabbed headlines since 2018, but a complete reversal is unlikely.
• Companies are likely to reshore essentials, reglobalize production, or double down on key markets.

International Trade Organizations

• Two emerged from the 1944 Bretton Woods Conference: the International Monetary Fund (IMF) and the World Bank.
• The IMF stabilized the global financial system.
• The World Bank facilitated postwar development.
• The General Agreement on Tariffs and Trade (GATT) was born in October 1947.
• The WTO was officially established in 1995.

Role of the International Monetary Fund

• Current account deficits reflect a shortage of net savings and can be addressed in various policy actions.
• The IMF assists members with external deficits.
• Ensuring stability through international trade is its main mandate.

World Bank Group and Developing Countries

• The main objective is to help developing countries fight poverty and enhance environmentally sound economic growth via good governance and systems.
• There are two affiliated entities: the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA).
  • The provide loans/grants and provide the means to lend to developing countries.

World Trade Organization and Global Trade

• The WTO provides the legal and institutional foundation of the multilateral trading system.
• Important functions include implementation, administration, operation of agreements, negotiations platform, and settling disputes.

Assessing Geopolitical Actors and Risk

• Investment analysts can assess geopolitical actors and risks with investment using the axes of cooperation vs. non-cooperation, and globalization vs. nationalism.

Archetypes of Country Behavior

• The 4 archetypes are Autarky, Hegemony, Multilateralism, and Bilateralism.
• Autarky seeks self-sufficiency, with state enterprises controlling strategic industries.
• Hegemony involves regional leaders controlling resources.
• Multilateralism involves trade relationships and rules harmonization.
• Bilateralism has members that cooperate in many different ways, one-at-a time

Autarky

• Countries seek self-sufficiency with little external trade led by state-owned enterprises for political strength.
• In some cases offers swift development, in much of the 20th century.
• Often leads to economic and political losses.

Hegemony

• Regional or global leaders use political/economic influence to control resources through enterprises focusing on key exports.
• Benefits and costs influence global affairs and global systems.

Multilateralism

• Mutually beneficial trade relationships and extensive rules harmonization fully integrate private firms into global supply chains.

Bilateralism

• The conduct of political, economic, financial, or cultural cooperation between two countries.
• Bilateralism may have relations but is one-at-a-time agreements.
• Regionalism cooperates in groups, while bilateralism and regionalism exclude other groups.

The Tools of Geopolitics

• Political actors use these, and they are therefore the source of geopolitical risk and affect investors.
• Three types are national security, economic and financial.
• Each of these either reflects/improves cooperation, or escalates conflict.
• Tools that facilitate cooperation increase flows of goods/services etc...
• Tools that escalate reduce these flows.

Tools of National Security

• Influence is used to coerce a state actor through direct/ indirect impact on its resources, people or borders.
• Active tools are those being used, threatened are likely to.
• Extreme is armed conflict.
• Espionage is indirect.
• Not all tools are non-cooperative.
  • security agreements discuss/deescalate conflict

Economic Tools

• Actions reinforce stance through economic means.

Cooperative

• The main actions for this are Multilateral trade agreements, harmonization of tariff rules, and the common market/ currency.

Non-Cooperative

• The main forms of action are Nationalization, voluntary export restraints, domestic content requirements.

Financial Tools

Cooperative

• Frees exchange of currencies.

Non-Cooperative

• Limits access to currency markets.

Other

• Cooperative tools reduce political risk if they encourage cooperation.
• International systems may also create vulnerabilities from political tools.

Multifaceted Approaches

• Cabotage applies restrictions on those with trade agreements across subsectors.
• International organizations may use many.
• ASEAN seeks to facilitate integration.
• EU focuses on both national security and finance..

Geopolitical Risk and Comparative Advantage

• Political risk and geopolitical tools are used as a tactic to "tilt" things in favor of the implementor.
• Regions with less risk may attract capitol.
• Consistent conflict may require investors to increase compensation.

Notes from practice questions

• A reaction to refugee crises in Germany is a comparative advantage.
  • They hold political leadership.
• The resulting increase in labor causes growth.
• Firms reduce investment with risk.
• Event risk will have the smallest degree of uncertainty.

Geopolitical Risk and the Investment Process

• The involvement of the investor of their decision making will vary widely.
• Some investors may also incorporate risk into their analysis.
• Risk may also be a central component.

Types of Geopolitical Risk

• The three basic types are event, exogenous and thematic risk.
• Event risk evolves around elections that affect a country's cooperative stance.
• Risk is an unanticipated one that impacts the globalization of a company, or it's countries ability to cooperate.
• Thematic evolve and occur over time.

Assessing Geopolitical Threats

• Investors measure is a threat is relevant to them or not.
  • Is there likelihood, Is there velocity, what is the nature of the damage?

Likelihood

• Very difficult to do precisely, more of an art than science.
• The framework can be used to asses it more, but balance must be kept to weigh up to what is right.

Velocity

• There are shorts and mid terms.
• Short term cause volatility.
  • Black swan risks cause large impacts that are difficult to predict
• Medium changes will come from company operations. Long- term risks are important.

Impact of Geopolitical Risk

• The size of impact compounds external factors.
• The types of impacts are discrete, or abroad.
• Risks with little impact may not require attention.

Scenario Analysis

• Investors that deploy different types of ways to approach this often consider multiple different types of risk.
• Scenarios are either qualitative or quantitative.
  • Qualitatively considers a base case for an event, which can increase investor consideration.
  • One risk may be measured against another.
• One danger is groupthink.
  • Useful management teams must build creative strategies through steps.

Tracking Risks According to Signposts

• Signposts signal whether certain events may be becoming more or less likely.
• If the risk increases velocity must be implemented.
• One rule of thumb is that we should focus only on the real economy.
• Signposts will change.

Manifestations of Geopolitical Risk

The velocity of what happens happens may come from a change in asset prices.

Acting on Geopolitical Risk

• Investors should consider risk in their asset allocation strategies.
• Those who have longer histories maybe be those who are most reliable.
• The same can be said for capital profiles.

Notes from practice questions

• A U.S. company expanding parts is most likely to use re shoring.
• The close ties effectively mean it can be more easily protected.
• The applicable conclusion is that high risks results in damage to economy .
• Firms will not repeat investments in risky scenarios that may not repeat.
• The least uncertain is event risk

Explore the roles of state and non-state actors in geopolitics. Understand their interactions and distinctions. Learn about the significance of political cooperation and geopolitical risk assessment.