Why Every Company Needs A Diplomatic Strategy

As globalization gives way to trade barriers and conflict, businesses need to step carefully to minimize their risk

Sir Robin Niblett

We gathered a group of senior leaders across the private and public sectors at the Royal Society of Arts on March 21, 2023, for a critically important discussion of how companies should try to position themselves in our increasingly fragmented global order. Sir Robin Niblett, a distinguished fellow at Chatham House who recently stepped down after 15 years as Director and Chief Executive of the think tank, explained how the Ukraine war has accentuated global divisions by pushing Russia and China closer together (he spoke as Xi Jinping and Vladimir Putin were concluding two days of talks in Moscow) to counter a reinvigorated alliance between the United States and its allies in Europe and Asia. This is a far cry from the integrated, open world most companies designed their businesses around, and requires every company to develop its own diplomatic strategy to navigate today’s riskier landscape. Here are our key takeaways:

  • We are moving from a world of win-win scenarios to one where the game is more zero-sum. Most big companies built far-flung global networks in recent decades in the belief that economic integration would continue to deepen and competition could be mutually beneficial. Consider the countless US, European, and Asian multinationals that shared intellectual property with Chinese partners to gain access to the mainland’s vast market. Growing trade tensions between the US and China cast doubt on that vision in recent years before Russia’s invasion of Ukraine effectively undermined it. The war has brought the US and its European and Asian allies much closer together in defense of shared political and security interests while China has tightened its alignment with Russia to gain support for its intensifying economic and geopolitical competition with America. This threatens to become a world of winners and losers, not one of competition and co-existence. Companies will find it harder to avoid picking sides.
  • Globalization isn’t dead but it is increasingly layered. US-China trade hit a record last year, but American companies aren’t racing to build new plants in China and Chinese firms face growing barriers in the US. That reflects a world in which the US and its closest allies – the G7, plus the European Union and countries like Australia and South Korea – share the highest degree of economic and political cooperation. Their governments are trying to reduce reliance on Chinese technology and Russian energy. Then there is the vast middle ground of perhaps 150 countries, ranging from emerging market giants like Brazil and India to Gulf petrostates to much of Latin America, Africa, and Southeast Asia. They share no common set of values or form of government, but they are largely non-aligned and can play the G7-plus off against China and Russia. India, for instance, is a member of the China-led Shanghai Cooperation Organisation and the Quadrilateral Security Dialogue with Australia, Japan, and the US. Companies can operate in this middle ground but need to step carefully.
  • A divided world is shifting trade and investment flows. Sir Robin describes economic activity as increasingly falling into three lanes: green, where commerce is mostly uninhibited; yellow, where some curbs may apply, and red, where restrictions or bans tightly constrain who can do what and where. The map was largely green for western multinationals at the peak of globalization, but Donald Trump’s tariffs and trade sanctions started a shift to the yellow-red end of the spectrum, and Joe Biden has furthered that shift by severely restricting the sale of semiconductors and related technology to China. The US and its allies also are looking to develop artificial intelligence and renewable energy technologies and protected supply chains for critical minerals, all without Chinese input. Plenty of green space remains in areas like agriculture, luxury goods, furniture, toys, and other low-end manufacturing, but finance and entertainment are increasingly flashing yellow if not red – just ask TikTok.
  • Companies need a diplomatic strategy to navigate this complex and risky world. That starts with intelligence. Executives need to have their corporate ears to the ground to anticipate where new barriers, formal and informal, might arise. Brands may portray themselves as global but they can quickly get tarred with a national brush, even by events outside their control. Companies should empower their own people to take a broader look at risk than just the bottom line, and work with trade associations and lobbyists to get a good sense of how the weather may be changing and to amplify their voice with policymakers. Crucially, firms need to focus their intelligence efforts at home as well as abroad. Government intervention in economies is growing as leaders want to show skeptical electorates that they are promoting jobs at home, such as with the buy America provisions of the US Inflation Reduction Act. No CEO wants to get called out for being unpatriotic at a Congressional hearing.
  • The UK’s place in this divided world may be stronger than many think. Brexit will carry a long-term economic cost and continues to divide the governing Conservative Party, but instability affects virtually every country these days. One only has to look across the Channel to the bitter debate over raising the retirement age in France. The fact that Britain got rid of two unpopular prime ministers in a matter of months can be seen as a demonstration of democracy in action. Prime Minister Rishi Sunak has moved quickly to reach agreement with the European Union on the Northern Ireland Protocol, which could open the way to smoothing out some of the bigger irritants to UK-EU trade and cooperation. In the meantime, the UK has become the first non-Pacific country to join the Trans-Pacific Partnership economic grouping, led by Japan. Having lost its privileged position inside the EU, the UK government is driven to open new relationships across the large, non-aligned layer of the world economy.