Dealing with economic dependencies in a deglobalizing world – Business Perspective by Lenita Toivakka at FIIA Forum 2023

Ukraine is still fighting for European values and freedom. The war can be seen in our everyday lives as an energy crisis and increasing cost of living. In Ukraine, the reality of the war will be far-reaching – the devastation, trauma and ruins to which no comfort as to how and when the war will end. We cannot grow tired, Ukraine still needs our support. The Russian war has fundamentally changed the European security environment in a short time. Companies, many of them, have withdrawn from Russia, Finnish ones in an exemplary way.

The outlook for companies is now particularly foggy and the uncertainty of world trade is troubling. The business environment has become difficult to predict in a very short period of time. First schock was the pandemic, then the war of aggression started by Russia in Ukraine. The tensions between China and the United States appears to grow week by week. China’s approach towards the Russian war raises concerns and adds to the overall uncertainty.

The Russian war has further strengthened the global divide into blocks between US and China while accelerating the race for technological dominance. Economy, security, technology and trade are strongly intertwined. States are taking a bigger role in world trade in defining strategic trade partnerships and critical dependencies. Sanctions and embargoes guide companies’ foreign trade directions, and an increasing number of industries are defined as strategic from the point of view of state security.

China’s importance in global value chains is significant. In recent decades, companies have increased their presence in China, the growing market and cheap costs have been attractive. It has been thought that the risks can be managed, even though the country is authoritarian. China today, has become more difficult environment to do business. Now, both governments and companies are reevaluating their dependence on China and their China risk. Finland’s trade dependence on China is at EU average according to the recent report coordinated by the Ministry for Foreign Affairs. According to the same report we depend on China for several critical raw materials and components. Now it is time to reexamine these dependencies.

Understanding geopolitics is essential for every company

Businesses are increasingly aware of the geopolitical risks, including those related to China. This is now extremely important. Understanding geopolitics is now essential for every company, every business leader and board member. Companies should be vigilant about China. Preparation, assessment of China-related business risks and especially their diversification is now important.

In many companies, risks related to supply chains are assessed, their crisis resilience is examined, and in many companies, steps have also been taken to spread the risks related to production chains. According to a recent study by ETLA, an economic research institute in Finland, the disruption in the function of global value chains has been worse in recent years than at any time during their existence. Global economic networks are breaking up into smaller entities, regionalizing and value chains are changing.

The Finland Chamber of Commerce’s export leader surveys (vientijohtajakyselyt) from last year November and the beginning of 2023 clearly display the changes that have started in companies, which are caused by the growing tensions in world trade:

In this context I would like to raise three topics:

  1. Companies are preparing for the future with very foggy prospects. The geopolitical situation has driven companies to prepare for uncertainty and to look for new markets. According to a recent study by the Finland Chamber of Commerce, 95 percent of export companies are prepared for various risks. The high level of pre-preparedness is surprising and shows how important it is to evaluate and, if necessary, change operating methods in the new geopolitical environment. Companies have prepared for geopolitical risks by assessing and diversifying their value and supply chains, by increasing the assessment of political risks in markets that are important to them, and by growing their inventories and starting to export to completely new markets. (36%).

Each company must do this from the perspective of their business and value chains. They need to consider the safety level of risk and the impacts of diversifying their operations.

  1. The risk assessment of the sustainability of supply chains is currently in progress in many companies. New partners from new countries are being sought after. However, making changes to production chains is slow and costly, since finding reliable partners is not easy. This is further complicated by the increase in global companies looking to secure the continuity of their value chains in parallel. The work is slow, because it is necessary for companies to evaluate the renewed production chains and suppliers also from the perspective of corporate responsibility. Businesses of all sizes need to think more about who they can trade with, who they can buy from and how sustainably their products are produced.
  2. Companies want to reduce their dependence on China and spread the risk more widely. Not having all eggs in one basket is a wise piece of advice for companies. According to our latest Export Manager study, 43% of the companies with dependence on China have reduced or are about to reduce their dependence on China. According to this survey companies are looking to diversify to India, Vietnam, Indonesia and some countries in Eastern Europe were mentioned.

China is an important trade partner for Finland. It is also important for the EU and the United States. China is dependent on the know-how and technology of the West, both in the EU and the United States. Trade flows between these regions are strong and interdependence is high.

In the West, policy makers like to talk about decoupling with China. Companies see that it is neither possible nor sensible in all respects. There are still very many opportunities in China. That’s why we prefer to talk about derisking. Controlling climate change is the biggest challenge of our time. Slowing down both climate change and biodiversity loss requires global cooperation. The work for the climate and nature will not be successful without cooperation with China. Currently, the realisation and speed of the green transition depends on the raw materials available from China. Changes to these supply chains are possible in the long term, but it takes time.

Free trade agreements, friends and partners are crucial now

Tensions, trade disputes, even trade wars are strongly present in the everyday life of companies. Protectionism is gaining a stronger foothold all over the world. For companies, this means less open and fair competition, more barriers to trade and rising costs.

Open, multilateral, rule-based world trade does not work, globalization is slowing down and trade flows are regionalizing. There are far too few defenders of free trade. In Europe, too.

In this context, I would like to raise the importance of free trade agreements, which have not been noticed enough in this time of world trade uncertainty. Right now, friends and partners are precious. They are valuable for companies, but also for governments. For states, they represent partners with whom similar values are shared. For companies, they mean markets with fewer trade barriers and lower tariffs.

The EU must actively promote the creation of new agreements and complete unfinished ones. If necessary, one must be ready to give up the level of ambition a little. Free trade agreements are of great importance for securing the sustainability of value and production chains, and even for ensuring the availability of critical raw materials. According to one estimate, about 25% of the critical raw materials needed by the EU can be secured with the help of the EU’s current free trade agreements. This figure should be higher!

Finnish companies are looking for new markets

The export prospects for Finnish companies are now relatively positive. According to our export manager survey at the beginning of February, 64 percent of companies say their export will increase this year. The export prospects are positive, especially due to the green transition and the energy transition. Finnish companies are now particularly interested in the United States, but it can also be seen that companies have become bolder, and they are even hungrier to seek growth outside of familiar export countries. New markets are actively sought after. The world is full of opportunities for the know-how of Finnish companies. Despite the difficult and uncertain world situation, companies are confident in the growth of export, as long as competitiveness factors are in order In Finland and in EU.

The International Chamber of Commerce ICC offers companies concrete help, tools for smooth and reliable trade processes and contracts. Its original operating concept from 100 years ago still guides the work today: We enable business worldwide to secure peace, prosperity and opportunities for all. The founders of this, today’s global organization, named themselves The Merchants of Peace in 1919. This idea seems to be confirmed today, 103 years later.

Written by: Lenita Toivakka, Country Leader of ICC Finland