Political Risks Facing Global Businesses – Global businesses in 2025 are navigating an increasingly complex and volatile political landscape, with geopolitical tensions, economic nationalism and internal societal divisions posing significant challenges to operations, supply chains, and investment strategies. A recent survey indicates that political risks are now among the top five concerns for 74% of globalised companies, with 11% identifying it as their number one risk.

Key Political Risks for 2025:

  1. Geopolitical Rivalries and Trade Protectionism:
  • US-China Decoupling and Global Trade Wars: The strategic decoupling between the US and China continues to deepen, leading to increased tariffs, trade barriers and export controls. This impacts key sectors like consumer electronics, construction machinery and electrical equipment, forcing businesses to rethink sourcing and production. The incoming US administration’s aggressive trade actions, including potential tariffs on Mexico, Canada, and and BRIC nations, are a significant concern for nearly 60% of surveyed companies, who anticipate negative financial impacts. This dynamic is contributing to a “global trade war” where countries are actively preparing for economic conflict.
  • Supply Chain Fragmentation: Rising tensions encourage a shift away from “just-in-time” inventory management towards increased stockpiling and diversification of supply chains. This aims to reduce dependence on any single country but can also increase overall demand and costs. Companies are being forced to rethink supply chain resilience, regionalisation strategies and investment priorities.
  • Technological Competition: The race for technological dominance, particularly in AI and semiconductors, is intensifying, leading to policies and regulations designed to control digital spaces and critical technologies. Companies reliant on advanced technology may find themselves caught in the crossfire of national security interests, leading to fragmented regulations and technological blocs around the US and China.
  1. Wars and Conflicts:
  • Ongoing Conflicts: Existing conflicts, such as the Russia-Ukraine war and tensions in the Middle East (including the Israel-Hamas conflict and Iran-US tensions), continue to disrupt global trade flows, particularly through critical shipping choke points like the Red Sea. This leads to elevated freight insurance rates, longer journeys and inflationary pressures. The number of active military conflicts globally is at its highest since WWII.
  • Potential for New Conflicts: The escalation of tensions within and between countries and groups raises the risk of new conflicts, both in the physical and cyber realms, further increasing uncertainty for businesses. This includes the potential for conflicts around Taiwan, which could severely impact semiconductor supply chains.
  1. Populist Policy Influences and Economic Nationalism:
  • Protectionism and Immigration Restrictions: A surge in nationalism and populist movements is driving protectionist policies, limiting immigration and putting pressure on green initiatives. This can lead to increased trade barriers, challenges in accessing talent and inconsistencies in climate regulations across borders. This “me-first” mentality is leading to a move away from international cooperation.
  • Taxation Conundrums: New governments, grappling with debt burdens, may explore strategies to increase taxes on corporates, assets and high-income households, creating taxation complexities for businesses. Fiscal policy will be shaped by the challenges of managing elevated public debt and high interest rates amid competing economic and political demands.
  • Resource Nationalism: In emerging countries, there’s a growing trend of resource nationalism, where governments seek greater state involvement in the resources sector or demand higher value-added processes occur domestically.
  1. Societal Divisions and Workforce Challenges:
  • Societal Polarisation: Misinformation and disinformation, coupled with rising inequality, are amplifying societal polarisation, making societies more fragmented. This can lead to social unrest and political instability, impacting business operations and consumer behaviour.
  • Workforce Pressures: Aging populations, mass retirement, falling birth rates in developed markets, changing worker preferences, culture wars, AI integration and reskilling needs are bringing major workforce challenges. Talent shortages and skills mismatches are pressuring CEOs to rethink workforce strategies.
  1. Digital Sovereignty and Cyber Threats:
  • Government Control over Digital Spaces: Governments are increasingly implementing policies and regulations to control their digital spaces, driven by the strategic importance of digital technology. This includes industrial policies around AI algorithms, semiconductors and network infrastructure, which can present both investment opportunities and regulatory compliance challenges.
  • Cybercrime and Cyber Warfare: Global instability fosters an environment where cybercrime is increasingly prevalent. State-aligned attackers are disrupting government systems and infiltrating the digital arteries of commerce. Supply chains, in particular, are under siege from cyber-enabled disruptions, threatening operational continuity and customer trust.
  1. Climate and Geo-energy Dynamics:

Inconsistent Climate Regulations: Climate policies are being shaped by economic, geopolitical and price competitiveness imperatives, potentially leading to inconsistent climate regulations across countries. Businesses must assess how these inconsistencies affect cross-border operations and long-term sustainability strategies.

Shifting Energy Transitions: Government policies are continuously altering geo-energy dynamics, creating uncertainty for the speed of the global energy transition. Companies need to understand how multiple, simultaneous energy transitions could impact their strategy and compliance, considering renewable energy availability in investment decisions. Climate change itself is also identified as a top societal issue and threat, leading to physical damage and business interruption from extreme weather events and potentially contributing to resource wars and climate migration.

Regions Most Affected by Political Instability:

While political risk can manifest anywhere, certain regions are consistently highlighted as areas of heightened instability, and the Coface political risk index remains high at 40.2%, above the pre-Covid-19 average. 112 out of 162 assessed countries face a higher level of political and social risk than before 2020.

  • Middle East and North Africa (MENA): Ongoing conflicts in Syria, Yemen, and Libya, coupled with the unresolved Israeli Palestinian conflict, continue to be significant drivers of instability, with the Israel-Hamas war leading to significant waves of mobilisation in many countries.
  • Eastern Europe: The Russia-Ukraine war has created a new geopolitical fault line, threatening European security.
  • Sub-Saharan Africa: Weak governance, ethnic conflicts and economic challenges contribute to instability, particularly in countries like Ethiopia and Sudan. The African Sahel is also seeing rising terrorism risks exacerbated by climate change.
  • Latin America and the Caribbean: Inequality, corruption and weak institutions remain pervasive issues, with Venezuela as a stark example of economic mismanagement leading to instability.
  • Southeast Asia: Authoritarianism and ethnic tensions pose challenges, with Myanmar experiencing significant instability following the military coup. Several Southeast Asian economies are benefiting from the ‘China plus one’ strategy as companies diversify investments away from China.
  • South Asia: Political tensions, particularly between India and Pakistan, fueled by ethnic and religious divisions, contribute to regional instability.

Impact on International Trade and Investment:

Geopolitical tensions fundamentally alter trade patterns, supply chains and economic relationships:

Trade Volume Decline and Re-alignment: Trade values have decreased, especially between countries that are geopolitically distant. Trade partnerships are re-aligning based on spheres of influence, with Western countries potentially crumbling, and China and Russia forming new blocs. Supply Chain Disruptions: Restrictions, conflicts and cyberattacks cause disruptions to supply chains, leading to increased costs and potential shortages of key resources. Nearly 80% of organisations’ supply chains were disrupted in the last 12 months due to geopolitical shifts, resource nationalism and evolving trade alliances.

  • Investment Uncertainty: Higher geopolitical risk is associated with lower firm and country-level investment, increased uncertainty, higher risk premia and volatile capital flows. Boards and investment committees are actively raising questions around geopolitical risks on acquisitions, investments, joint ventures and supply chain security.
  • Inflationary Pressures: Trade restrictions, commodity price spikes (especially from tensions in the Middle East impacting oil production and trade routes) and supply chain disruptions contribute to higher inflation and lower economic growth.
  • Currency Realignment: The traditional dominance of the US dollar is facing challenges, with projections for a sustained decline, as geopolitical tensions accelerate the development of alternative currency arrangements.

Strategies for Mitigating Political Risks:

Integrate Political Risk into Enterprise Risk Management (ERM): Systematically identify, evaluate, and monitor political risks, incorporating both qualitative analysis and quantitative indicators. This includes ongoing evaluation of political stability, social unrest, trade policies, international relations, military tensions and the regulatory landscape.

Diversify Operations and Supply Chains: Reduce dependence on any one country or region by diversifying sourcing, production locations, and market presence. Strategies like “friend-shoring” (relocating production to allied nations) and “nearshoring/reshoring” (moving production closer to end markets) are gaining traction to enhance supply chain stability and reduce transportation risks.

Build Strong Stakeholder Relationships: Cultivate robust relationships with government officials, local communities, industry associations and other key stakeholders. Proactive engagement can facilitate quicker responses to emerging issues and even help prevent unwelcome policies.

Develop Early Warning Systems and Leverage Technology: Implement mechanisms to continuously monitor the political landscape, including legislation, news, social media, and expert analyses. Utilizing digital tools and AI can enhance performance tracking and alert systems, helping businesses stay ahead of geopolitical shifts.

Cultivate Organisational Resilience and Scenario Planning: Foster a culture of adaptability and flexibility within the organisation to respond swiftly to unforeseen political shocks. Develop comprehensive crisis management and contingency plans based on various geopolitical scenarios (e.g., regime changes, sanctions, natural disasters, regional conflicts) to test resilience and readiness.

Utilise Political Risk Insurance (PRI): Consider purchasing political risk insurance to protect against financial losses arising from government actions such as expropriation, currency inconvertibility, or breach of contract, etc. The PRI market remains a “hard market” with rates stabilising, though China-related renewals are seeing significant increases.

Conduct Thorough Due Diligence: Before entering new markets, conduct comprehensive due diligence to assess the political risk environment, including legal, regulatory, and cultural nuances. This includes understanding the legal requirements related to supply chain management, trade sanctions, and restrictions.

Prioritise Cybersecurity and Data Governance: In an era where supply chains are geopolitical flashpoints and prime targets for cyberattacks, strong cybersecurity and data governance are paramount. Organisations must prioritise cyber resilience as a strategic imperative, designing resilience from the start with principles like zero trust and leveraging AI to counter threats.

By understanding the evolving political risk landscape and implementing these proactive strategies, global businesses can better safeguard their interests, maintain operational continuity and identify opportunities in a volatile world.

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