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Mission Grey Daily Brief - November 12, 2024

Summary of the Global Situation for Businesses and Investors

The global order is shifting as Donald Trump wins a landslide victory in the US and Germany's coalition government collapses. This marks a shift from neoliberalism to economic realism, with national security considerations taking precedence over market interests. Trump's protectionist policies and China's state-directed capitalism are intensifying geopolitical competition, pressuring businesses to make investment decisions through a geopolitical lens. The era of peak globalisation is behind us, and companies face a choice between rival IT infrastructures, markets, and currency systems. Trump's proposed tariffs and trade war threats are causing concern and uncertainty for many countries, especially those with close trade ties to the US and China.

Trump's Return to the White House and the End of the Neoliberal Era

Donald Trump's return to the White House coincides with the collapse of Germany's coalition government, signalling a shift in the global order. The German government coalition fell apart over disagreements regarding the debt brake, with former Finance Minister Christian Lindner advocating for neoliberal staples such as tax relief, deregulation, and fiscal discipline, while Chancellor Scholz pursues "economic realism", acknowledging that market-driven solutions may no longer work in a world disrupted by geo-economic competition.

Following Russia's invasion of Ukraine, Europe and Russia have economically decoupled, and while a complete decoupling of Western economies from China remains impossible due to extensive interdependence, the Biden administration has turned to export controls, investment restrictions, and a subsidy-driven industrial policy. China's state-directed capitalism is surging to the technological frontier through heavily subsidised industrial policies, threatening industries worldwide.

Trump's protectionist policies and China's state-directed capitalism are intensifying geopolitical competition, pressuring businesses to make investment decisions through a geopolitical lens. The era of peak globalisation is behind us, and companies face a choice between rival IT infrastructures, markets, and currency systems. Diversification, especially in high-tech sectors, is accelerating, potentially leading to competing economic blocs.

Trump's Tariff Plans and the Potential Impact on Global Trade

Trump's proposed tariffs and trade war threats are causing concern and uncertainty for many countries, especially those with close trade ties to the US and China. Trump has threatened to impose tariffs of between 10-20 per cent on all goods coming into the US, and up to 60 per cent on those coming from China, which could trigger global trade wars on a scale we've never seen before.

Indonesia's businesses are concerned that restrictive trade policies from the US will incentivize Chinese producers to divert large quantities of goods to Southeast Asian markets and create barriers for Indonesian exports to the US. Indonesia is China's largest trading partner and the US is the second-largest export market for Indonesian goods, so these policies could significantly impact Indonesia's economy.

Indonesia's government is taking steps to minimize the negative impact of the change of US administration, including pushing for trade deals, diversifying export markets, and improving competitiveness. More regional trade agreements are necessary to navigate the expected wave of protectionism, as such deals would cement a strong foundation for Indonesian businesses to brace for the shift of US policies.

Taiwan's Position in the US-China Trade War

Taiwanese companies with bases in mainland China are in a hurry to relocate back to Taiwan or elsewhere if Donald Trump imposes high tariffs on China. This highlights the delicate position Taiwan finds itself in as it navigates the US-China trade war.

Mexico's Response to Trump's Threats

Mexico is bracing for the challenges ahead as Donald Trump eyes a return to office, with Trump's constant threats on tariffs, massive deportations, and cross-border trade putting the country in a difficult position. Mexico has a new leader, Claudia Sheinbaum, who is more ideological and less pragmatic than the former Mexican president, Andrés Manuel Lopez Obrador.

Sheinbaum's administration could face particular pressure to address US concerns regarding immigration and drug trafficking, and her recent moves to centralize government power by diminishing independent regulatory bodies could violate US-Mexico-Canada Agreement (USMCA) terms, giving Trump grounds to push for trade renegotiations, especially regarding the auto industry and supply chain regulations.

Mexico hopes for peaceful trade dynamics, but experts argue that optimism should be tempered by a realistic understanding of Trump's national security-focused policies, which often prioritize economic protectionism.


Further Reading:

Eoin Burke-Kennedy: Ireland’s €54bn exposure to Trump’s tariff plan - The Irish Times

How A Second Trump Term Could Strain U.S.-Mexico Relations To The Breaking Point - Reform Austin

Indonesia’s businesses fear deluge of Chinese goods after Trump takes office - asianews.network

Taiwan — caught between Xi Jinping’s aggressiveness and Donald Trump’s unpredictability - Deccan Herald

Trump Wins Big, Germany’s Coalition Falls—A New Global Order? - Social Europe

Trump to target EU over UK in trade war as he wants to see ‘successful Brexit’, former staffer claims - The Independent

Trump told Putin not to escalate the war in Ukraine in their first postelection call, a report said - Business Insider

Themes around the World:

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Regional Geopolitical Tensions

Ongoing conflicts and rivalries in the Middle East, involving Iran, affect regional stability and trade routes. These tensions can disrupt logistics, increase insurance costs, and deter investment, impacting businesses reliant on Middle Eastern markets or transit corridors.

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Trade Relations and EU Integration

As a key EU member, France benefits from trade agreements and single market access, facilitating cross-border commerce. However, evolving EU trade policies and external geopolitical tensions require businesses to monitor regulatory changes closely.

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Currency and Financial Market Volatility

The Russian ruble experiences significant fluctuations amid economic sanctions and capital controls. Financial market instability affects investor confidence, complicates currency risk management, and influences repatriation of profits for multinational corporations operating in Russia.

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Labor Market Dynamics and Talent Availability

Israel's skilled workforce, particularly in technology sectors, supports innovation but labor shortages and rising wages pose challenges. Businesses must navigate talent acquisition and retention strategies to maintain competitiveness.

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Supply Chain Resilience Initiatives

Japan is actively diversifying its supply chains to reduce dependence on China, investing in Southeast Asia and domestic manufacturing. This shift aims to enhance resilience against geopolitical risks and global disruptions, impacting investment strategies and operational planning for multinational companies.

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Political Stability and Policy Shifts

Mexico's political landscape, marked by policy shifts and governance changes, affects regulatory environments and investor confidence. Monitoring political developments is vital for anticipating regulatory risks and opportunities.

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China's Economic Recovery Post-Pandemic

China's gradual economic reopening and stimulus measures are driving a rebound in domestic consumption and industrial output. However, uneven recovery and localized COVID-19 outbreaks pose challenges to stable growth, influencing foreign investors' confidence and operational planning.

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Infrastructure Damage and Reconstruction Needs

Widespread destruction of critical infrastructure necessitates extensive reconstruction efforts. While presenting long-term investment opportunities, the immediate impact includes disrupted logistics and increased costs for businesses operating in affected regions.

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Environmental Sustainability Initiatives

Saudi Arabia is increasingly focusing on sustainability, including renewable energy projects and carbon reduction commitments. These efforts align with global ESG trends, affecting investment decisions and requiring businesses to comply with evolving environmental standards.

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Regulatory Environment and Compliance

Changes in US regulatory frameworks, including data privacy, environmental standards, and trade compliance, create challenges and opportunities for multinational companies. Adapting to these regulations is critical for maintaining market access and managing operational risks.

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Technological Innovation and Digital Economy

France's investment in digital infrastructure and innovation hubs fosters growth in tech sectors, influencing global competitiveness. This trend drives shifts in supply chains towards high-tech components and services, attracting foreign direct investment and reshaping market entry strategies.

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Energy Supply and Diversification Efforts

Turkey's strategic focus on diversifying energy sources, including renewables and natural gas imports, influences industrial costs and energy security. Energy policy shifts can affect manufacturing competitiveness and investment decisions in energy-intensive sectors.

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Infrastructure Investment and Modernization

Significant federal funding is directed towards upgrading US infrastructure, including transportation, energy, and digital networks. These investments are expected to enhance logistics efficiency, reduce operational costs, and attract foreign direct investment.

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Energy Sector Expansion

Significant investments in oil, gas, and renewable energy sectors aim to reduce energy imports and support industrial growth. Energy sector reforms and discoveries boost export potential and improve energy security, benefiting energy-intensive industries and foreign investors.

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China's Belt and Road Initiative (BRI) Expansion

The BRI continues to expand China's influence through infrastructure investments across Asia, Africa, and Europe. This initiative opens new markets and trade routes but also raises concerns about debt sustainability and geopolitical leverage, affecting international investment and strategic partnerships.

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Technological Innovation and Digitalization

France's push towards digital transformation and innovation ecosystems fosters opportunities in tech sectors but also demands adaptation from traditional industries. Investment in AI, cybersecurity, and digital infrastructure influences competitive advantage and market entry strategies.

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Currency Volatility and Monetary Policy

Fluctuations in the Japanese yen and the Bank of Japan's monetary policies impact export competitiveness and investment returns. Businesses engaged in Japan must manage currency risks and adapt to evolving financial conditions to optimize operations.

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Geopolitical Realignments and Alliances

Ukraine's evolving geopolitical position, including closer ties with Western institutions, reshapes trade partnerships and investment flows. Businesses must adapt to shifting alliances that influence market access, regulatory standards, and security guarantees.

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Political Stability and Governance

Egypt's political environment remains a critical factor for investors. While the government maintains control and implements reforms, risks of political unrest and governance issues persist, potentially disrupting trade flows and investor confidence.

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Currency Fluctuations and Monetary Policy

The Canadian dollar's volatility against major currencies affects export competitiveness and profit margins. Monetary policy decisions by the Bank of Canada influence inflation and interest rates, shaping investment environments and capital flows.

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Environmental Regulations and Sustainability Policies

Stricter environmental standards are being implemented, impacting manufacturing processes and compliance costs. Businesses must adapt to these regulations to avoid penalties and align with global sustainability expectations, influencing investment decisions.

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Labor Market Dynamics

Demographic shifts and labor shortages in South Korea affect manufacturing and service sectors, influencing operational costs and productivity. Businesses must adapt strategies to address workforce challenges and maintain competitiveness.

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Semiconductor Industry Challenges

South Korea's semiconductor sector faces supply chain disruptions and export controls amid global chip shortages. This impacts international trade and investment, with companies needing to diversify suppliers and invest in domestic production capabilities to mitigate risks.

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Currency Volatility and Inflation

Iran faces significant currency depreciation and high inflation rates, undermining purchasing power and increasing costs for businesses. This economic instability complicates financial planning for both domestic and international companies operating in Iran.

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Ongoing Conflict and Security Risks

The persistent conflict in Eastern Ukraine and tensions with Russia continue to pose significant security risks, disrupting trade routes and deterring foreign investment. Businesses face operational challenges due to infrastructure damage and heightened geopolitical uncertainty, impacting supply chain reliability and increasing insurance and compliance costs.

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Supply Chain Resilience Initiatives

US companies and government agencies are investing heavily in supply chain diversification and resilience post-pandemic. Efforts include reshoring manufacturing and securing critical materials, which affect global suppliers and logistics networks, increasing costs but reducing dependency risks.

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Labor Market Dynamics

Canada's skilled workforce and immigration policies affect labor availability and costs. Changes in labor regulations or demographic shifts can influence operational efficiency and investment decisions for businesses relying on human capital.

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Cross-Strait Political Tensions

Ongoing political tensions between Taiwan and China pose significant risks to international trade and investment. Escalating military activities and diplomatic pressures could disrupt supply chains, increase operational costs, and deter foreign direct investment, necessitating strategic risk mitigation for businesses engaged in the region.

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Geopolitical Sanctions Impact

Western sanctions on Russia, including financial restrictions and export controls, severely limit international trade and investment. These measures disrupt supply chains, restrict access to technology, and increase operational risks for foreign businesses, compelling companies to reassess their exposure and strategies in the Russian market.

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Infrastructure Development and Logistics

Investments in transportation and logistics infrastructure enhance Canada's connectivity and supply chain resilience. Improvements in ports, railways, and highways facilitate trade efficiency but require substantial capital, influencing investment priorities and operational planning.

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Regulatory Environment and Business Reforms

Ongoing reforms aimed at improving the regulatory framework, including corporate governance and labor laws, enhance the business climate. Streamlined regulations reduce barriers to entry and operational costs, encouraging foreign investment and multinational corporate presence.

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Trade Agreements and Regional Integration

Japan's active participation in trade agreements like the CPTPP and RCEP enhances market access but also requires compliance with evolving standards. These agreements shape trade flows and investment opportunities across Asia-Pacific.

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Labor Market Dynamics and Workforce Skills

Egypt's large, young labor force presents opportunities and challenges, including skill gaps and labor market regulations. Workforce availability and quality impact manufacturing, service sectors, and the scalability of business operations, affecting investment attractiveness.

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Economic Growth and Market Potential

India's robust economic growth, driven by a young population and expanding middle class, presents significant opportunities for international trade and investment. The country's GDP growth rate remains among the highest globally, attracting foreign direct investment (FDI) and fostering a dynamic consumer market, essential for multinational corporations seeking long-term expansion.

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Trade Relations and Free Trade Agreements

Israel's expanding network of trade agreements, including with the US, EU, and emerging markets, facilitates smoother market access and reduces tariffs. These agreements enhance Israel's attractiveness as a trade and investment destination, supporting diversified supply chains.

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Aging Population Impact

Japan's rapidly aging population is leading to labor shortages and increased social welfare costs. This demographic shift challenges domestic consumption and workforce availability, influencing investment decisions and operational strategies for businesses in Japan.