Multinational corporate treasury teams charged with enabling global trade, investment and risk management across the globe often find themselves in the crosshairs of geopolitical power plays. And the US and China are not the only geopolitical players on the world stage, warned Rabobank’s Menno Middeldorp, speaking at the Working Capital Forum Europe recently.

Regional powers position themselves within the global rivalry between China and the US to wield military, economic, demographic and diplomatic capabilities relative to the region. Middeldorp warned that Formal Bilateral Influence Capacity, FBIC, manifests in regional countries exerting economic, trade and financial influence and that political and diplomatic representation leads to shared memberships and military alliances that will impact global business.

Shifts in geopolitics is causing trade patterns to change, hitting China’s trade particularly. He said imports from China into the West have stalled, and China is attracting less foreign direct investment (FDI). In contrast, he noticed a spike in demand for capital from corporates seeking to invest in operations in western economies. For example, decoupling is leading to a shift in corporate exposures and FDI in other developing markets like Brazil, Mexico, East Asia and the Pacific, all benefiting from diversification.

He noted US banks still dominate this financing. “The US is still the richest player and the banker in the game of global finance,” he said.

Despite corporates diversifying their supply chains outside China, Middeldorp said every supply chain continues to include products from China. “You can’t spell ‘chain’ without c-h-i-n-a,” he said. For example, Greater China is responsible for 22% of the semiconductor chain. That compares to the US accounting for 12% of that chain and Taiwan 7%. Despite efforts to diversify supply chains, he said China is still behind many supply chains and urged companies to look at their procurement policies warning long supply chains result in more points of failure. “Geopolitics hides in supply chains,” he said.

Although supply chain pressures have eased and prices are declining, Middeldorp argued global trade volumes are stagnating because central banks have slowed economies to fight inflation. “Growth is collateral damage in the inflation fight,” he said.

Capital controls

Middeldorp warned that geopolitical risk is also visible in the spike in capital controls as countries seek to limit the flow of foreign capital in and out of their economies. The use of sanctions has also grown with the weaponisation of the financial power of the US in a dollar-based system. Noting the push back on the dollar system, he argued the dollar-based global banking and money transfer framework is used to enforce sanctions and linked the rise of Central Bank Digital Currencies (CBDCs) as a way around this dollar financial system.

It is contributing to demand from China and others to change the rules of global finance. Although he argues the dollar is likely to stay the dominant player, he noted the renminbi and other currencies can chip away at the edges, especially in bilateral exchanges. Digital currencies could be linked bilaterally offering cross-border transactions without dollar-based banking. Countries with cross-border CBDC projects include Singapore and Hong Kong, which has cross-border CBDC projects with Israel, the UAE and Thailand, for example.

Middeldorp concluded with a warning that corporate treasurers can’t hedge every risk. He said they should continue to diversify their supply chains; keep money in safe harbours and move early.