Political Risk Grabs the Spotlight

A pushback against globalization has raised the prospect of barriers to international trade.

Businesses always have a lot to worry about, and these days one of the items that’s getting increasing attention is political risk.

Corporations and their risk managers are facing an unprecedented set of surprises that reflect a backlash against globalization in developed countries, including the U.K.’s vote to exit the EU and the U.S.’s election of Donald Trump, who has argued for exiting various trade agreements.

Political risk and uncertainties jumped to the ninth highest-ranked risk among businesses surveyed for Aon’s 2017 Global Risk Management Survey, up from 15th place in its 2015 survey.

Roger Schwartz, a senior vice president and political risk practice leader at Aon Risk Solutions, noted that political risks are a constant for companies that do business internationally. The difference now is “the possibility of some sort of instability” in developed countries, he said.

But in spite of the political rhetoric, “in terms of overall international trade and operating in developing countries, there hasn’t been a massive sea change one way or another in terms of being able to conduct business,” Schwartz said.

Recent events have cast doubt on a push toward globalization that has been in place for decades, a push that has included the lowering of trade barriers and the signing of trade agreements, said Stephen Kay, a senior vice president and U.S. practice leader for structured credit and political risk insurance at brokerage Marsh.

“Now there’s this alarm that the cheerleader of globalization, which is the U.S., is talking about tearing up trade agreements, closing its borders to immigration, doing things that are antithetical to this globalization drive,” Kay said. “Companies are very smart to sit up and take notice.”

Within days after his inauguration, President Donald Trump withdrew the United States from the Trans-Pacific Partnership, a broad 12-nation agreement. After threatening to pull out of the North American Free Trade Agreement, the president recently announced that his administration will renegotiate the agreement. And the GOP’s tax proposal includes a border tax that would be levied on U.S. importers.

If the U.S. and other developed nations do back away from trade agreements, companies that do business overseas could face increases in tariffs and other costs of trade, and the possibility that their investments in overseas countries will not be treated fairly in those countries, Kay said. If the U.S. closes its borders, “so will other countries where U.S. plants are operating now,” he said.

The risk of confiscation or other forms of government intervention “is not necessarily something of the past,” he said. “It’s something that could easily reappear now.”

But Kay put the concerns about events in developed nations into context by noting that Marsh’s 2017 map of global risks still shows the U.S., Canada, the Scandinavian countries, and Western Europe at the lowest level of country risk, in contrast with the high levels of risk perceived for countries in some other regions, such as sub-Saharan Africa.

While Brexit has dominated the news, “before and after Brexit, the U.K.’s still going to be a very wealthy, democratic country with a democratic rule of law,” he said. “What’s changing are the rules of the road for some businesses.”


Insurance as an Option

Some of the risks raised by the pushback against globalization might be remedied with insurance products, Kay said. For U.S. companies that operate plants overseas, political risk insurance might be helpful, and companies that earn a large portion of their income overseas might want to look at trade credit insurance, he said. “Trade credit insurance covers both credit risks of overseas buyers failing to pay and also political risks of the trade deal [that] didn’t get done because of the imposition of trade barriers, like cancellation of an import license,” he said.

But other risks are less easy to cover with insurance, he said, citing supply chain risk as an example. “Let’s say a U.S. company relies on an overseas supplier, a third party they don’t own, and that third-party supply might be interrupted because of geopolitical risks or events that occur in this new environment.”

While there’s a product designed for such situations called trade disruption insurance, Kay said that Marsh doesn’t recommend it, regarding the market as too shallow.

“Our suggestion to companies is that they should try to control or manage that risk by other means, like finding alternative suppliers—or making contingency plans if their third-party supply is interrupted,” he said. “We suggest companies do studies to identify their risks, the linkages and contingency plans that would set in if certain trigger events should happen.”

Similarly, Kay said, the threat of rising tariffs isn’t something that can be insured against, and thus “has to be more hands-on managed by the firm.

“Companies should be evaluating their vulnerabilities to these types of risks, things like embargoes and sanctions and increased trade tariffs and trade barriers,” he said.

Aon Risk Solutions’ Schwartz also cited a need for companies to evaluate their risks and come up with workarounds for those risks that can’t be insured. “There are ways to mitigate these sorts of exposures without rushing to an insurer, from working out a separate supply chain arrangement to installing operations in a particular country,” he said.

“Risk managers and people on the contracting side and treasury have to sit there and do a cost-benefit analysis and risk assessment,” he added. “Insurance companies and brokers like ourselves are here to help them determine what the exposures are and whether or not services we can provide can help them mitigate it—and, even more importantly, help identify it.”

Access to Markets

Stephen Chipman, CEO of Radius, a Boston-based consulting company, said that while multinationals need to be aware of the pushback against globalization, to date it hasn’t affected their operations.

“It’s one thing to have political pushback; it’s another thing to no longer have access to markets,” he said. “As of today, people still have access to markets.

Chipman argued that the anti-globalization sentiment is running up against the forces that have driven globalization to date and continue to do so, such as “technology, communications and transportation improvements, and the movement of people.” He also cited the opening of new markets in recent decades including China, India, and Brazil.

“Those are huge economic forces, and those are not reducing,” he said. “Certainly from our perspective, in terms of the clients we work with, they at this point are not being significantly influenced by the politics—they’re continuing to pursue their international strategies aggressively.”

Chipman noted that his clients are technology and life sciences companies. The backlash against globalization might be having more effect on the largest global brands, which are “held up by the anti-globalization movement as being the major focus of their ire,” he said.

Those large multinationals are “looking at how do we position our brand within the community, how do we demonstrate that we are sensitive to these issues that are affecting people in their communities,” he said.

 

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