Introduction to Geopolitics PDF

**National governments and political cooperation** - **Geopolitics --** the study of how geography affects politics and international relations - These relations matter for investments because they contribute to important drivers of investment performance (economic growth, business...

**National governments and political cooperation** - **Geopolitics --** the study of how geography affects politics and international relations - These relations matter for investments because they contribute to important drivers of investment performance (economic growth, business performance, market volatility, or transaction costs) - Geopolitical analysts study **actors** (the individuals, organizations, companies, and national governments that carry out political, economic, and financial activities) and how they interact with one another **State and non-state actors** - **State actors --** typically national governments, political organizations, or country leaders that exert authority over a country's national security and resources. - **Examples:** the South African President, Sultan of Brunei, Malaysia's Parliament, British Prime Minister - **Non-state actors --** those that participate in global political, economic, or financial affairs but do not directly control national security or country resources - **Examples:** non-governmental organizations (NGOs), multinational companies, charities, influential individuals like business leaders or cultural icons **Features of political cooperation** - At the highest level, relations between state actors can be cooperative or competitive - **Cooperation --** the process by which countries work together toward some shared goal or purpose. - **Possible goals:** strategic or military concerns, economic influence, cultural preferences - **Political cooperation --** the degree to which countries work toward agreements on rules and standardization for the activities and interactions between them - **Cooperative country --** a country that engages and reciprocates in rules standardization; harmonization of tariffs; international agreements on trade, immigration, or regulation; and allowing the free flow of information, including technology transfer - **Non-cooperative country --** a country with inconsistent and even arbitrary rules; restricted movement of goods, services, people, and capital across borders; retaliation; and limited technology exchange - Each country's reasons to cooperate are typically defined by its national interest -- its goals and ambitions, whether they be military, economic, or cultural **National security or military interest** - **National security (national defence) --** protecting a country from external threat (military attacks, terrorism, crime, cybersecurity, even natural disasters) - Landlocked countries rely extensively on their neighbours for access to vital resources -- makes cooperation more important for them - Countries highly connected to trade routes, such as Singapore, or countries acting as a conduit for trade, such as Panama, may use their geographic location as leverage **Economic interest** - Includes access to such resources as energy, food, or water - Growing national wealth and limiting income inequality can contribute to social stability - Countries that cooperate in support of their economic interest are likely focused on one of two factors: - securing essential resources through **trade** - levelling the global playing field for their companies or industries through **standardization** **Geophysical resource endowment** - Includes such factors as liveable geography and climate as well as access to food and water, which are necessary for sustainable growth - Highly unequal among countries - Some countries are relatively self-sufficient in their resource use - Others are highly reliant on others for key factors of production, such as fossil fuels - A country heavily endowed with a resource may find itself with more political leverage when dealing with another country in desperate need of that resource - A resource-rich country may become vulnerable if the use or sale of the resource benefits certain groups more than others, contributing to internal political instability **Standardization** - The process of creating protocols for the production, sale, transport, or use of a product or service - Occurs when relevant parties agree to follow these protocols together - Helps support expanded economic and financial activities, such as trade and capital flows that support higher economic growth and standards of living, across borders - **Forms:** regulatory cooperation, process standardization, operational synchronization  **Cultural considerations and soft power** - Countries may have cultural reasons for cooperating with others (long-standing political ties, immigration patterns, shared experiences, etc.) - **Soft power --** a means of influencing another country's decisions without force or coercion, can be built over time through actions, such as cultural programs, advertisement, travel grants, and university exchange - **Example:** Erasmus+ seeks to integrate young people from different member states and also promote policies like the EU's green and digital transitions **The role of institutions** - **Institution --** an established organization or practice in a society or culture - Can be a formal structure (university, organization, or process backed by law) or it can be informal (a custom or behavioural pattern important to society) - **Examples:** non-governmental organizations, charities, religious customs, family units, the media, political parties, and educational practice - Generally, strong institutions contribute to more stable internal and external political forces -- more opportunity to develop cooperative relationships - Stronger institutions also make cooperative relationships more durable (lower likelihood that a country defects from cooperation) **Hierarchy of interests and costs of cooperation** - The national interest of a country is its set of goals and ambitions - A hierarchy of factors, with those essential for survival at the top of the hierarchy and nice-but-not-essential elements lower in the hierarchy - Governments will choose to cooperate where it benefits the nation-state, but when two needs result in conflicting cooperation tactics, those higher on the hierarchy are prioritized - These priorities may shift as political leadership turns over or as global events change - **Example:** **Power of the decision maker** - As basic societal needs are met, the hierarchy of national interests can become more subjective - The length of a country's political cycle has an important impact on priority designation - With short political cycles (just a few years), long-term risks like climate change or addressing income inequality can be difficult to prioritize  **Political non-cooperation** - ** **Political cooperation and non-cooperation exist along a spectrum - Over time, most countries cooperate on standardized rules on an international scale - **Extreme non-cooperation:** countries' political self-determination is more important than the benefits of any cooperative actions - These extreme cases are rare **Notes from practice questions** - A cooperative country is one that is both engaged and reciprocates **Forces of globalization** - **Globalization --** the process of interaction and integration among people, companies, and governments worldwide - Marked by the spread of products, information, jobs, and culture across borders - **Headwinds to globalization:** Global Financial Crisis, rise in nationalism, capacity constraints (global trade cannot make up 100 percent of global economic activity, meaning its expansion may slow even without specific disruptions)  - Products are often assembled in one country with parts from all over the world, finished in a second country, and sold in a third - Provides opportunities for companies to find the best inputs (highest quality or cheapest) - Also includes the spread of information or culture (e.g., Internet usage, social media allows users in South Africa to collaborate on dances with a Japanese music group...) **Features of globalization** - Globalization is the result of economic and financial cooperation -- active trade of goods and services, capital flows, currency exchange, and cultural and information exchange - Carried out mostly by non-state actors, such as corporations, individuals, or organizations - **Nationalism (antiglobalization) --** the promotion of a country's own economic interests to the exclusion or detriment of the interests of other nations - These actors may focus on national production and sales, limited cross-border investment and capital flows, and restricted currency exchange A diagram of a currency exchange Description automatically generated - Globalization and cooperation tend to be correlated (globalization can be facilitated or accelerated by political cooperation), but globalization is also an independent process (private sector forces can drive it even without government support) **Motivations for globalization** - **Three potential gains:** - Increasing profits - Access to resources and markets - Intrinsic gain - **Increasing profits:** - **Increasing sales --** access to new customers, the process may require extensive investment (acquiring plants in the new market, hiring their local workers) - **Reducing costs --** access to lower tax-operating environments, cheaper labour, or seeking other supply chain efficiency gains (e.g., economies of scale via consolidation) - **Access to resources and markets:** - Resources like talent or raw materials may not be readily available or affordable in the home country - A non-state actor may also seek market access or investment opportunities abroad - **Portfolio investment flows -- sh**ort-term investments in foreign assets, such as stocks or bonds - **Foreign direct investments** -- long-term investments in the productive capacity of a foreign country - Infrastructure was developed to support cross-border investments: foreign exchange, accounting services, global investment management services, harmonization of foreign exchange markets and investment practice - **Intrinsic gain:** - A side effect or consequence of an activity that generates a benefit beyond profit itself - **Example:** personal growth or education that individuals may receive from expanding their horizons, experiencing new places, or learning new ideas, accelerated productivity from learning new methods - **Other benefits of globalization:** increased choice, higher quality goods, increased competition among firms, higher efficiency, increased labour mobility **Costs of globalization and threats of rollback** - **Unequal accrual of economic and financial gains:** - Improvement on the aggregate does not mean improvement for everyone - **Example:** if a company moves a factory to another country, it creates jobs in the new country but reduces them at home - **Lower environmental, social, and governance standards:** - Companies moving their operations to lower-cost countries often operate in the local standards of those countries, which may be lower - This leads them to reduce their standards of production - **Example:** a European-based company decides to produce in a different country with lighter environmental regulations and cheaper labour costs -- it may make more profit but reduce environmental quality - **Political consequences:** - While some individuals may enjoy global exposure, others may fear it - Globalization can also create job losses in some countries - These dynamics can manifest in countries' local politics, resulting in a force for reduced political and economic cooperation and a rollback in political cooperation - **Interdependence:** - Companies may become dependent on other countries' resources for their supply chains - If there is a disruption to the supply chain, including through a moment of political non-cooperation, then firms may not be able to produce the good themselves - **Example:** Copper, essential for renewable energy construction, is largely produced in Chile -- disruptions to production due to mining accidents or floods can disrupt entire industries relying on those resources **Threats of rollback of globalization** - The threat of deglobalization has grabbed headlines since 2018 when the Trump administration began a series of "America first" policies - Despite the deglobalization discussion, completely reversing globalization seems unlikely - Companies are likely to use a combination of the following tactics to **fortify their supply chains:** - **Reshoring the essentials:** certain essential supply chains will likely be rebuilt domestically, such as prescription medication or personal protective equipment - **Reglobalizing production:** the same concerns may instead prompt companies to duplicate or fortify their supply chains (by getting inputs from more countries) - **Doubling down on key markets:** some companies may be hesitant to exit some key markets (China, Mexico, etc.), especially if they also want to sell there -- might lead them to develop production "In country, for the country," in combination with external supply chains **International trade organizations** - Two multinational organizations emanated from a 1944 conference in Bretton Woods: - **International Monetary Fund --** founded with the goal to stabilize exchange rates and assist the reconstruction of the world's international payment system - **World Bank --** created to facilitate post-war reconstruction and development - A third institution, the International Trade Organization (ITO), was to be created to handle the trade side of international economic cooperation - October 1947: the General Agreement on Tariffs and Trade (GATT) was born - In 1950, the US government announced that it would not seek congressional ratification needed to establish ITO, effectively killing the institution - The GATT became the only multilateral instrument governing international trade from 1948 until the World Trade Organization (WTO) was officially established in 1995 **Role of the International Monetary Fund** - Current account deficits (imports \> exports) reflect a shortage of net savings in an economy and can be addressed by policies designed to rein in domestic demand - This could have adverse consequences for domestic employment - The IMF stands ready to lend foreign currencies to member countries to assist them during periods of significant external deficits - Contributions of gold and currencies by members - **Main mandate:** ensuring the stability of the international monetary system -- the system of exchange rates and international payments that enables countries to buy goods and services from each other - provides a forum for cooperation on international monetary problems - facilitates the growth of international trade and promotes employment, economic growth, and poverty reduction - supports exchange rate stability and an open system of international payments - lends foreign exchange to members when needed, on a temporary basis and under adequate safeguards, to help them address balance of payments problems - **Example:** Greek sovereign debt crisis - In early 2010, the Greek sovereign debt rating was downgraded to non-investment grade due to concerns about the sustainability of Greece's public sector debt load -- yields on Greek government bonds rose - Facing default, the Greek government requested that a joint European Union/IMF bailout package be activated - A total of EUR110 billion in loans was agreed depending on strict economic policy conditions that included cuts in wages and benefits, an increase in the retirement age for public-sector employees, limits on public pensions, increases in direct and indirect taxes, and a substantial reduction in state-owned companies **World Bank Group and developing countries** - **Main objective:** help developing countries fight poverty and enhance environmentally sound economic growth - **To grow, developing countries should:** - strengthen their governments and educate their government officials - implement legal and judicial systems that encourage business - protect individual and property rights and honour contracts - develop financial systems robust enough to support endeavours ranging from micro credit to financing larger corporate ventures - combat corruption - **Two closely affiliated entities:** the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA) - provide low or no-interest loans and grants to countries that have unfavourable or no access to international credit markets - IBRD lending to developing countries is primarily financed by selling AAA-rated bonds in the world's financial markets and its own capital consists of reserves built up over the years and money paid in from the Bank's 185 member country shareholders - IDA's funds are replenished every three years by 40 donor countries **World Trade Organization and global trade** - The WTO provides the legal and institutional foundation of the multinational trading system -  Founded on 1 January 1995, replacing the General Agreement on Tariffs and Trade (GATT) that had come into existence in 1947 - The GATT and the General Agreement on Trade in Services (GATS) are the major agreements within the WTO's body of treaties that encompasses a total of about 60 agreements, annexes, decisions, and understandings - **Most important functions:** - implementation, administration, and operation of individual agreements - acting as a platform for negotiations - settling disputes **Assessing geopolitical actors and risk** - Using the two axes we have discussed---political cooperation versus non-cooperation and globalization versus nationalism---investment analysts can assess geopolitical actors and the likelihood of threat to investment outcomes **Archetypes of country behaviour** - **Four archetypes:** - **Autarky --** countries seeking political self-sufficiency with little or no external trade or finance, state-owned enterprises control strategic domestic industries - **Hegemony --** countries that are regional or even global leaders and use their political or economic influence of others to control resources - **Multilateralism --** the conduct of countries who participate in mutually beneficial trade relationships and extensive rules harmonization - Private firms are fully integrated into global supply chains with multiple trade partners - **Examples:** Germany, Singapore - **Bilateralism --** the conduct of political, economic, financial, or cultural cooperation between two countries - Countries engaging in bilateralism may have relations with many different countries but in one-at-a-time agreements without multiple partners. - Typically, countries exist on a spectrum between bilateralism and multilateralism  - Each of the axes represent a spectrum -- rarely do countries represent full extremes of either of these factors - Countries can also move within and between the quadrants over time - This makes geopolitical risk analysis **fundamentally dynamic** **Autarky** - Countries seeking political self-sufficiency with little or no external trade or finance - State-owned enterprises control strategic domestic industries - This makes them stronger politically, including the ability to exercise complete control over the supply of technology, goods, and services, as well as media and political messaging - **Benefits:** in some cases, periods of autarky can provide a country with swifter economic and political development (China in much of the 20^th^ century) - **Costs:** in many other instances, it leads to gradual economic and political losses (North Korea, Venezuela) **Hegemony** - Regional or even global leaders who use their political or economic influence of others to control resources - State-owned enterprises tend to control key export markets - **Benefits:** - For the country, economic and political dominance may provide important influence on global affairs - For the global system, countries aligning with the hegemon's rules and standards may enjoy the rewards provided by the leader, including the stabilizing force of monitoring and enforcing the hegemon's standards - **Costs:** as hegemons gain or lose influence in the international system, they may become more competitive, increasing the likelihood of geopolitical risk - **Examples:** China forcing technology transfers to Chinese partners from companies, Russia using its natural gas as leverage **Multilateralism** - Countries that participate in mutually beneficial trade relationships and extensive rules harmonization - Private firms are fully integrated into global supply chains with multiple trade partners - **Examples:** Germany, Singapore (the most open economy in the world according to WEF -- predispositions due to a lack of natural resources, position on important global trade routes, etc.) **Bilateralism** - The conduct of political, economic, financial, or cultural cooperation between two countries - Countries engaging in bilateralism may have relations with many different countries, but they are one-at-a-time agreements without multiple partners - **Regionalism --** in between the two extremes of bilateralism and multilateralism, a group of countries cooperate with one another - Both bilateralism and regionalism can be conducted at the exclusion of other groups (e.g., regional blocs may agree to provide trade benefits to one another and increase barriers for those outside of that group) - **Example:** Japan in the past -- its government engaged in substantial political cooperation for the sake of building a strong export market, but it did not globalize its imports - As the importance of international capital markets has deepened, Japan has been a pioneer of globalizing its equity and bond markets for international players -- today it would be considered a multilateral player **The tools of geopolitics** - The tools that a geopolitical actor uses are ultimately the source of geopolitical risk as it affects investors - **Three types of tools:** - national security tools - economic tools - financial tools - Among each of these tools, there are choices that reflect or improve cooperation and those that reflect or escalate conflict  - **Tools facilitating cooperation:** those that increase flows between countries -- flow of goods, services, capital, or labor through treaties, trade agreements, capital provisions, and approved migration - **Tools escalating conflict:** those that reduce these flows between countries A diagram of a trade war Description automatically generated **National security tools** - Used to influence or coerce a state actor through direct or indirect impact on its resources, people, or borders - **Active national security tools --** those being used at the time of analysis - **Threatened national security tools --** those that are not currently used but their use is likely enough to warrant concern - **Most extreme example:** armed conflict - Disruption or destruction of physical infrastructure, which can inflict long-term damage on a country's capital stock and ability to rebuild that stock - Migration away from areas of armed conflict, which can reshape international flows of goods, services, capital, and labour + affect neighbouring countries accepting refugees - **Espionage --** the practice of using spies to obtain political or military information - An **indirect** national security tool - Not all national security tools are used in a non-cooperative way - **Example:** collective security agreements like the North Atlantic Treaty Organization (NATO), an alliance between the European Union, United States, United Kingdom, and Canada, are used to discuss and deescalate potential conflict among members and between members and outside states **Economic tools** - Actions used to reinforce cooperative or non-cooperative stances through economic means - **Cooperative:** - **Multilateral trade agreements,** such as the Southern Common Market (MERCOSUR), which facilitates trade among member countries in South America - **Global harmonization of tariff rules,** as facilitated by the World Trade Organization (WTO) - **Common markets,** like the European Union - **Common currency,** like the euro - **Non-cooperative:** - **Nationalization --** the process of transferring an activity or industry from private to state control - **Voluntary export restraints --** when countries refuse to trade as much of their goods and services as would meet demand - **Domestic content requirements --** asserting that a certain proportion or type of domestic input be included in an exported good **Financial tools** - The actions used to reinforce cooperative or non-cooperative stances through financial mechanisms - **Cooperative:** - Free exchange of currencies across borders - Allowing foreign investment - Non-cooperative: - Limiting access to local currency markets - Restricting foreign investment - Sanctions - Cooperative financial tools may reduce geopolitical risk if they encourage cooperation in security, economic, or financial arenas - However, the same tools may also create vulnerabilities in the international system - **Example:** the dominance of the US dollar -- makes other countries vulnerable to changes in US monetary policy (tighter US monetary policy can contribute to liquidity shortages in countries that do not or cannot maintain US dollar reserves, as the dollar appreciates in response) **Multifaceted approaches** - **Cabotage --** the right to transport passengers or goods within a country by a foreign firm - Many countries (including those with multilateral trade agreements) impose restrictions on cabotage across transportation subsectors, meaning that shippers, airlines, and truck drivers are not allowed to transport goods and services within another country's border - International organizations may also make use of multiple tools of geopolitics - **Example:** ASEAN seeks to facilitate economic, political, security, military, educational, and cultural integration, the EU focuses on both financial and national security components **Geopolitical risk and comparative advantage** - Geopolitical risk and the tools of geopolitics can tilt comparative advantage of a country in one direction or another - For example, countries or regions with limited geopolitical risk exposure may attract more labour and capital compared to those with higher risk exposure - A consistent threat of conflict may drive more regular volatility in asset prices, prompting investors to require higher compensation for risk taken (i.e., an increase in the required rate of return or the discount rate used in valuation) **Notes from practice questions** - Germany's reaction to the Syrian refugee crisis is an example of comparative advantage stemming from geopolitical risk (answer: True) - With its strong economic position in the EU and longstanding stability of political leadership, Germany was able to undertake the resettlement of one million Syrian refugees to it while assuming the short-term relocation costs and disruption of its domestic politics - The resulting increase in labour and capital stock could potentially increase Germany's economic growth rate **Geopolitical risk and the investment process** - The extent to which investors incorporate geopolitical risk into their decision making will vary widely with their investment objectives and risk tolerance - Some investors may be considered *takers* of geopolitical risk -- incorporate geopolitical risk into their analysis only to the extent that it affects the long-term attractiveness of asset classes or strategies - For other investors, geopolitical risk may be a central component of their investment process **Types of geopolitical risk** - **Three basic types:** event risk, exogenous risk, thematic risk - **Event risk --** risk that evolves around set dates, such as elections, new legislation, or other date-driven milestones, such as holidays or political anniversaries, known in advance - These events often result in changes to investor expectations related to a country's cooperative stance - **Example:** Brexit referendum - **Exogenous risk --** a sudden or unanticipated risk that impacts either a country's cooperative stance, the ability of non-state actors to globalize, or both - **Examples:** sudden uprisings, invasions, the aftermath of natural disasters - Take the example of the Fukushima disaster -- it contributed to a shifting stance on political cooperation on environmental issues (Germany and Belgium decided to phase out nuclear power, etc.) - **Thematic risks --** known risks that evolve and expand over a period of time - **Examples:** climate change, pattern migration, the rise of populist forces, the ongoing threat of terrorism, cyber threats **Assessing geopolitical threats** - To assess whether a particular geopolitical risk is relevant for their portfolio management decisions, investors consider it in terms of the following three areas: - Likelihood it will occur - Velocity (speed) of its impact - Size and nature of that impact **Likelihood** - The probability that a geopolitical risk will occur - Very difficult to do precisely, more of an art than science - The framework from before can be used to assess the basic likelihood of risk occurring - Highly collaborative and globalized countries are, on balance, less likely to experience geopolitical risk because the political, economic, and financial costs of partners inflicting those risks are higher - But the interconnectedness might make them more vulnerable to certain risks - **Other factors that influence likelihood:** internal political stability, economic need, the motivations of governmental actors, etc. **Velocity** - The pace at which geopolitical risk impacts an investor portfolio - There are short-term or "high-velocity" impacts, medium-term, and long-term or "low-velocity" impacts - **Short term:** volatility in the markets affecting entire industries or even the entire market - **Black swan risk --** an event that is rare and difficult to predict but has an important impact - Long-term changes are unlikely to be necessary in response to these events - **Medium term:** may begin to impair companies' processes, costs, and investment opportunities, resulting in lower valuations - These risks tend to be distributed toward specific sectors - **Long term:** important environmental, social, governance, and other impacts - Can affect an investor's asset allocation---including choice of asset classes and investment styles---for a long-term horizon - The immediate impact on portfolios is likely to be more limited  - Some risks have more than one speed of impact on investments **Impact of geopolitical risk** - A risk's impact on investor portfolios can manifest in many different ways - The size of a risk's impact may be compounded by external factors (e.g., if the economy is in a downturn) - **Discrete impacts --** affect only one company or sector at a time - **Broad impacts --** felt more holistically by a sector, a country, or the global economy - **Assessing these three factors together:** - A highly likely risk with very little impact to the portfolio may not merit extensive analysis and investor attention - A highly impactful risk with a low likelihood of occurring may merit building a scenario for response but not regular monitoring and assessment **Scenario analysis** - Many investors deploy an approach that includes scenario analysis and signposting rather than a single point forecast - **Scenario analysis --** the process of evaluating portfolio outcomes across potential circumstances or states of the world - Scenarios can take the form of qualitative analysis, quantitative measurement, or both - **Qualitative scenario building:** - Develop a base case for the event - From there, investors can consider upside and downside scenarios -- considering alternate futures for key risks - **Quantitative scenarios:** - One form is a stylized scenario in which portfolio sensitivity is measured against one key factor relevant to the portfolio, such as interest rates, asset prices, or exchange rates - Another involves using circumstances from extreme events to help build quantitative tests for portfolio resilience - **One danger: groupthink --** the practice of thinking or making decisions as a group in a way that discourages creativity or individual responsibility - For scenario analysis to be useful in portfolio management, teams must work hard to build creative processes, identify scenarios, track these scenarios, and assess the need for action on a regular cadence -- avoid groupthink when building scenarios **Tracking risks according to signposts** - **Signpost --** an indicator, market level, data piece, or event that signals a risk is becoming more or less likely - As a risk rises in likelihood, velocity, or impact according to signposts, an action plan may be necessary - A basic rule of thumb for distinguishing signal from noise is the distinction between politics and policy -- only the latter affect the real economy and should be focused on - Often, particularly for emerging markets, these signposts will change before official data are released **Manifestations of geopolitical risk** - Higher-velocity risks are most likely to manifest in market volatility via prompt changes in asset prices - Lower-velocity geopolitical risks are likely to have a prolonged impact on investor inputs **Acting on geopolitical risk** - If the risk does occur, what, if anything, can be done about it? - Taking a top-down approach, asset allocators may consider geopolitical risk in their asset allocation strategy - For example, countries with a long history of using a multilateral approach may be considered more reliable investments and see increased investor flows - Allocate more capital to the countries with lower expected risk profiles - At the portfolio management level, investors can consider geopolitical risk as a factor in multifactor models - The importance of geopolitical risk to the investment process depends on investor objectives, risk tolerance, and time horizon - For an investor with low risk tolerance, reducing exposure to geopolitical risk may be appropriate - For an investor with a long time horizon, a geopolitical event like an exogenous shock could be a buying opportunity - For an investor nearing retirement, however, that same exogenous shock can have a major negative impact on their terminal portfolio value **Notes from practice questions** - A US company expanding critical spare part inventories for local customers made at its existing Canadian facility after a supply chain disruption is *most likely* using the coping tactic of reshoring the essentials - Critical spare parts are an essential supply chain, just like personal protective equipment - The close integration of the US and Canadian economies through the revised USMCA agreement effectively makes expanded production at an existing Canadian factory an example of reducing manufacturing risk by relocating to home countries via reshoring - It cannot be reglobalizing production, since instead of duplicating or fortifying its supply chain, the company is simply continuing to use its existing capacity more intensively - An applicable conclusion drawn from the Geopolitical Risk Index (GPR) is that high geopolitical risk results in tangible macroeconomic effects (reduced US investment, employment, and price level of the stock market) - Firms reduce investment in the wake of idiosyncratic events, which would be unlikely to repeat (not recurring risk events) - The basic geopolitical risk type *most likely* in comparison to have the smallest degree of uncertainty is event risk