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The changing landscape of political risk

We find ourselves in an era of upheaval where administrations around the world are pitching themselves against each other, jockeying for position in the beginnings of the third industrial revolution. Over the past few years relations between traditional rival, and ally countries alike, have been shaken up and become far more strained. Doing business outside your own domestic market has become more complicated and with increased risk.  

Chinese telecoms equipment company ZTE almost went out of business early on in President Trump’s administration, as it faced severe retaliation to flouting sanctions for exporting to Iran and North Korea. President Trump then had to relent after President Xi Jinping personally intervened. Last year, President Trump’s administration took the extraordinary step of touring the world telling everyone to cut Huawei out of any involvement in their 5G network – or they would face heavy consequences. Some may have thought that President Trump was perhaps irritated by Boris Johnson’s initial stance of using Huawei on the periphery of the U.K.’s own 5G network rollout, but the latter relented shortly afterwards.  

One by one, countries around the world, certainly the developed ones, have been duly cutting Huawei out of the 5G picture. Most recently, President Trump homed in on the security risk posed by ByteDance’s TikTok and called for an outright ban across the country, putting the whole future of the viral video app in jeopardy. China retaliated by imposing a ban on exports of all Artificial Intelligence technology (in TikTok’s case, this was its all-important video recommendations algorithm). Elsewhere, Europe is now busy putting together a hit list of 20 Big Tech companies who it considers should face tighter restrictions to limit their power. Turkey’s President Erdogan also recently imposed a major crackdown on the way social media companies operate in his country. Although no weapons have been drawn, there is most certainly a technology war going on!

The upshot of all this is that there seems to be much more uncertainty associated with doing business overseas. U.S.’s Big Tech probably never thought that it would face so much resistance in Europe and Chinese tech companies probably never thought that they would face such vehement resistance in U.S. and Europe. In the past, political risk was something that would be more associated with doing business in countries with unstable governments in troubled parts of the world. If you add into the mix the supply chain issues highlighted by the coronavirus outbreak, there is even more pressure on companies to reconsider their international operations.  

At the time of writing this article, TikTok’s future hangs in the balance as ByteDance awaits a judgment on whether its deal with Oracle and Walmart can go ahead (as well as more detail about how it is structured and what happens with the algorithm) and U.S. companies now face major bureaucratic hurdles to supply China’s Semiconductor Manufacturing International Corporation (or “SMIC” for short – it is China’s biggest chip maker) as it is deemed that doing so poses an “unacceptable risk” because authorities believe that the end products could be diverted to “military end use”. Meanwhile, Huawei continues to face rejection around the world.  

Thus far, China has been arguably quite low-key about retaliation. It may be coincidence that chief exec Tim Cook’s livestream coverage of the launch of its iPhone12 5G line-up was cancelled by China’s five biggest video platforms (including Tencent Video and iQIYI) just moments before launch, but it is highly possible that Apple could become a political football between the two superpowers. So far things seem to have been very one-sided, but China also has the wherewithal to impose more stringent sanctions of its own. If this is the case, it is possible that foreign companies who have spent years investing time and money into what they see as a market with huge potential may have the rug taken from under them either directly by China or indirectly by U.S. via bans on the use of Chinese components and/or manufacturing facilities. You do also wonder whether the widespread rejection of Huawei overseas highlights that conducting business outside your own backyard is getting increasingly difficult.

Companies will have to be far more wary of their overseas expansion plans and supply chains as conditions of doing business could change quickly and with no warning. This means that there will be an increasing need for them to review the risks they face and whether insurance has a role to play in managing these risks. Furthermore, it may lead to more bespoke and innovative insurance products being developed and perhaps parametric insurance may play a role. Time will tell.

For more information about this topic, or to learn how Baker Tilly’s Value Architects™ can help, contact our team.

Kevin Harding
Partner, MAE, FCA, ACIArb
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