GeoLegal Weekly #57: The Sovereignty-Growth Trade-off

The era of globalization is receding but most of us still run global businesses with global exposures. Core tenets of the globalization era are now being thrust in reverse.

First off, sincere thanks to Bridget McCormack, former Chief Justice of Michigan’s Supreme Court and CEO of the American Arbitration Association, for her review of Unruly: Fighting Back when Politics, AI and Law Upend the Rules of Business (review here). The book looks at everything going on today from a number of different vantages—politics, tech and law—and Bridget’s review does a wonderful deep-dive on the legal implications of an unruly world, alongside the promise and threats of tech-driven legal services. Special thanks to Richard Tromans of Artificial Lawyer for carrying the review; his missives are unmissible if you’re in the legal space.

Trump Will Let This Aggression Stand

In Donald Trump’s address to Congress last night, he called for a stop to the war in Ukraine in order to end killing on both the Russian and Ukrainian sides. He ignored the fact that the war could end tomorrow if Russia withdrew its troops from Ukraine’s borders. It was a far cry from President George H.W. Bush’s address to Congress following Iraq’s 1990 invasion of Kuwait: “We will continue to review all options with our allies, but let it be clear: We will not let this aggression stand.” The elder Bush never said Iraq’s and Kuwait’s killings needed to stop before negotiations could begin and ultimately the US formed a global coalition and went to war with Iraq to evict it from Kuwait.

With his talks with Putin and Zelenskyy, the war in Ukraine is a signpost for a new era in global politics in which borders and sovereignty do not mean what they once did. Trump’s speech and actions point toward the notion that territorial integrity need not be defended anymore.

But while Trump seemed highly comfortable with negotiating away Ukrainian territory—and repeated desires to annex the Panama Canal and Greenland (though he left out his previous suggestion that Canada should become the 51st state)—his speech also asserted a much bolder and uncompromising view of US sovereignty. He celebrated withdrawing from international agreements; never referred to any country as an ally or proposed working with partners to address global problems (unless you count talking about working with Russia to end the war in Ukraine…), and declaring it would impose tariffs on any country that itself had tariffs on US goods. This was a sovereignty-focused, border-agnostic view of the world.

Borders in Reverse

I think of the heyday of globalization as the era from the fall of the Berlin Wall in 1989 to the fall of Bear Stearns in 2008. As globalization wore on, borders were opening to ease the movement of goods, data, and people. Supply chains were integrated, people moved freely and prices of communications and transportation fell.

As the world seemed less risky, countries began to take sovereignty for granted. In fact, they ceded sovereignty to international organizations, harmonized regulatory environments, international arbitration processes and the like in order to be able to grow faster. They grew less worried about their neighbors and focused on getting rich, assuming collective security would save the day in a crisis. And it largely did: States who didn’t respect the sovereignty of others - think Iraq or the post-Yugoslavian ethnic land grabs - largely ended in economic, political and military disaster for the aggressors.

This is definitely not the vibe today where it seems likely that Russia will walk away with a large piece of Ukraine and normalized relations with a United States that may pursue its own aggression over Greenland or even Canada. And, yet, as sovereignty becomes less sacrosanct in the eyes of others, the concept of borders as a way to defend one’s sovereignty seems to matter more than ever.

What is often missed in the breathless geopolitical analysis is that this has some very clear economic ramifications.

Borders

Today, borders are closing, but paradoxically less sacrosanct. From tariffs to national regulatory frameworks to stricter immigration control, borders are becoming fortified walls from the perspective of the economy, data and people. New tariffs unveiled this week are turning borders into toll booths.

Got a global supply chain that runs through Canada, Mexico or China? Too bad, you should have built American. Want to immigrate into the US? Tough luck, unless you have $5mn.

Immigrants who walked across permeated boundaries are being deported. And data, which has long ignored borders, is being shoehorned into them through regulatory prerogatives in Europe.

The big challenge with building walls is that it reinforces national echo chambers. Russia believes that Ukraine should be part of it due to history, the same way Iraq justified aggression against Kuwait. A world of rising borders is a world of reinforced biases; a world of jingoistic national truths that limit the ability to engage with others. It is a world where a country will do anything to defend what’s going on in its own borders, including attempting to steamroll across others.

All of which makes attempting to win land by conquest more enticing. After all, if my supply chain shortens and my neighbors increasingly look and think like me, it’s a lot less risky to go after you to take something I want. Thus, others need to spend time, money and resources preparing for that eventuality instead of boosting growth.

Sovereignty

For nearly the last 400 years, nation-states have been a key driver of global international relations. Core to the post WW1 international landscape has been the belief that state sovereignty is as close to a universal value as can be held and the international community has stood ready to aggressively defend against incursions.

I was in Europe last week and there was palpable fear of what the Ukraine issue means. Europe is going to have to pay more money to beat back a worsening security situation with no confidence the US will come to its aid. A big chunk of Ukraine will be traded away to Russia for a cessation of hostilities, and both Russia and Europe are likely to use their time to prepare for a likely future conflict. Russia is already on a military footing; Europe has some excellent niche military capabilities but has thoroughly relied on the US within NATO to underwrite both the security and military capability of the Continent. Europe will need to sleep with one eye open while likely needing to shift some of its butter spending over to guns spending. That is unlikely to be popular and far-right political parties–typically more sympathetic to Russia–will no doubt use this to their advantage. It’s hard to square that with an economic growth story.

But this impending crisis in Europe is a symptom of the bigger issue in which the US is signalling that territorial integrity is no longer an international value to be defended. If Russia can invade Ukraine and walk away with normalized relations with the US (and perhaps a golden visa scheme) plus a bunch of new land and subjects, then other countries will see it is possible to invade another nation and be rewarded with the spoils of your invasion. This will prove tempting for China with respect to Taiwan. And maybe to America with respect to numerous sovereign nations whose territories and possessions it has threatened to annex in recent weeks. That should make any supply chain shiver.

So borders, for the purposes of demarcating sovereign territory, can no longer be relied upon. Yet at the same time they are being fortified. This growing shift in open borders and sovereignty over the past 15 years has been worth tracking; but when the president to the United States addresses Congress saying articulating clearly that Ukraine’s, Greenland’s, and Panama’s borders can be negotiated, while US borders will be strengthened to block good and migrants from crossing in service of a stronger American sovereignty, companies must quickly focus on the impact:

How can you fight back against the unruliness?

A few techniques will be helpful to fight back against a world where basic assumptions about geography no longer hold.

• Supply Chain Scenarios: To what extent does your business rely on an international system that is supportive of cross-border movement of goods, data, or people? As tariffs perhaps lead to full-scale trade wars, what will be the impact on your supply chains? Or how would export controls on resources from critical countries like Canada and China affect business operations? Hours after the March 4th imposition of 25% tariffs on all Canadian goods coming into the US except energy, the province of Ontario responded by imposing a 25% export tax on all electricity going to the US, which includes the states of New York, Michigan, and Minnesota. What if Alberta does the same on crude oil exports?

• Geopolitical Planning: Assess whether it is possible that a company asset could end up on the wrong side of a border. In 2013, Shell signed an agreement with the Ukrainian government for the rights to produce shale oil in eastern Ukraine. They pulled out in 2014 after Russia’s first (unofficial) invasion citing insecurity (the real reason was likely the geology wasn’t as good as hoped). This failure ten years ago to understand that borders were not as sacrosanct as the global order would suggest is a warning. Coming at the height of globalization, Shell’s misjudgement was perhaps understandable; today shareholders will likely be less forgiving of companies that ignore the risks that borders now present. Where are you making assumptions about geography that no longer apply?

• Bolster your Knowledge Network: Most businesses have been focused on offloading external advisors to control costs. But in a world that changes so rapidly, it’s more important that you have the right advisors lined up to help you for the next geopolitical spasm. That’s risk experts and crisis management consultants. And, of course lawyers. Lots of them, as the rules of the game are far from clear and the courts may be the only route around populist politics.

• A World of Controls: As a nation-first mentality develops within the US and elsewhere, companies will begin to operate in environments in which public policies are increasingly oriented toward bolstering control of a state rather than, for example, the economic wellbeing of a state. Deporting millions of immigrants in the US without legal documentation serves a certain definition of the sovereignty of a country–what’s the point of a border if you don’t control access across it? –but it certainly undermines the economy. Barring the export of advanced AI chips to China at the expense of US companies like NVidia likely fits in the same category. What other choices between business growth and sovereignty will be made in the coming years? And which of those trade-offs can affect you?

Drop a note if you want to chat or want to try our Hence Global software for managing all this risk.

-SW and DB