Vox Populi: How 2024’s Elections Have Precipitated A New Geopolitical Chapter

We have certainly seen a sharp shift towards populist politics in this year’s general elections across the G7 and beyond, but whether that shift leads to the prediction made by Alcuin remains to be seen. What we do know, though, is that the general elections this year are the latest point on a broader set of geopolitical changes that have been in train since the global financial crisis of 2007/08. International financial centres have little control over these changes, and have to continue to adapt and evolve if they are to thrive in what is emerging as a new world order.

Three Scenarios For The Future

In our 2022 report for BVI Finance, Beyond Globalisation, we set out three potential future global economic scenarios: weaker internationalism, the bloc economy, and new economic nationalism. Following the major elections in the United States, United Kingdom, Germany, and France, we’ve revisited our scenarios to see which is likely to predominate over the coming years, and what that could mean for International Finance Centres.

The first scenario, which we called ‘weaker internationalism’, saw no change in the direction or nature of globalisation – but these trends continued at a slower pace. It had the most positive outlook for the global economy out of our three scenarios, but it still represented a material reduction on historical growth rates. The second scenario, ‘the bloc economy’, envisioned continued economic, regulatory and, in some cases, political integration between countries within predominantly regional geopolitical blocs, but with these different groupings diverging from each other. It offered a less positive outlook for the global economy than the weaker internationalism scenario or recent history. The third scenario, 'new economic nationalism’, saw many of the larger individual nations increasingly go their own way and become more protectionist and anti-internationalist. Out of our three scenarios, it would cause the most damage to the future growth of the global economy.

Figure 1: Illustrative scenario forecasts of the volume of cross-border activity (2000 = 100)

Heading Inevitably Towards A New Economic Nationalism?

Over the course of 2024, voters in five of the G7 countries have resoundingly rejected the political status quo, leading to a rise of populist right-of-centre political parties. In France, the right-wing National Rally won the first round of voting in the recent French general election, but was eventually edged out after the more centrist parties worked together to prevent a majority. In the United Kingdom, Reform UK won five seats in the July general election, but came second in hundreds more, with the United Kingdom’s ‘first-past-the-post’ system preventing them from securing a Parliamentary presence that matched their electoral share. In Germany, the nationalist ‘Alternative für Deutschland’ (AfD) made significant in-roads in the European Parliament elections at the expense of the centrist parties. And in Austria, the ultra right-wing ‘Freiheitliche Partei Österreichs’ (FPÖ) secured almost 30 per cent of the seats to become the largest party in the Austrian Parliament.

In all cases, though, populist political parties in the G7 countries have generally neither won a major election nor been able to form a new government, with the exception of Italy. They largely remain on the fringes or, in the case of Italy, have ameliorated their policies once faced with the need to govern. And whilst centre-right political parties have shifted to the right in order to regain voters who have chosen populist parties at recent elections, the broad electoral consensus across the G7 appeared to remain in the centre of the political spectrum.

Before what happened in the United States elections at the start of November, that is, where voters chose President-elect Trump’s ‘America First’ vision that seeks to increase United States isolationism and protectionism in ways that have not been seen since the 1920s and 1930s.

Global crises often bring major geopolitical change in their wake, and what we have seen over the last year or so is perhaps the culmination of another global crisis-driven shift in the geopolitical landscape. The Covid-19 pandemic appears to have accelerated the move away from the concepts of globalisation and cooperation that commenced within the global financial crisis, with voters in many countries rejecting solutions to the economic and social challenges left after the pandemic, proposed by the established or incumbent political class.

Populist politicians give hope that there are simple solutions to often highly complex problems, and the complexity of those problems is largely driven by the inter-connectedness of the global economy and its supply chains. For example, America’s largest tech companies rely on state-of-the-art microchips to be manufactured in Taiwan because TSMC is almost the only company globally that has the ability to maintain and regularly renew the expertise and tools to print the increasing billions and billions of transistors required for the most modern chips.

Onshoring this capability into the United States would take years and billions of dollars, and would probably lead to an increase in the cost of each chip (and therefore the resulting product) as the economies of scale offered by TSMC would not exist. Increased costs of products would need to be passed to consumers and would probably push up inflation, leading to higher interest rates and, ultimately, higher unemployment amongst the very voters that brought Trump into the White House. For example, tariffs on the vast numbers of South Korean-made Samsung and SK Hynix chips that are used in many electronic devices designed in the United States, would only exacerbate this situation.

And microchips are just one example of how the complexity of global supply chains make our scenario of a new economic nationalism unrealistic in the short-term. Whilst recent elections have given rise to populist or libertarian political parties (or politicians) pushing increased protectionism and isolationism, globalisation has meant that doing this in a way where there is zero-harm to a domestic economy is almost impossible.

Moving Into The Bloc Economy Is More Likely

Our bloc economy scenario envisions continued economic, regulatory and, in some cases, political integration between countries within predominantly regional geopolitical blocs, but with these different groupings diverging from each other. Fissures grow between groups of nations, reflecting increasingly conflicting economic interests and diverging social values, political ideologies and cultural perspectives – and activity between these blocs is increasingly restricted. There is a rising incidence of traditional barriers to inter-regional trade, such as tariffs and quotas. But much of the additional friction at the regional borders is created by other means, such as: entry and residency visas; regulatory standards; technology standards; and professional recognition and the trade in services.

The global gatekeepers of the twentieth century – the United Nations, Bretton Woods institutions, and World Trade Organisation – are marginalised and ineffective within our bloc economy scenario, with bilateral negotiations between blocs or between individual large nations and blocs, taking their place. Conversely, trade tariffs, quotas and non-tariff protections continue to be eroded within blocs (possibly at a faster rate than before), as do barriers to intra-regional travel and migration. Some blocs may accelerate in the direction of political and military integration.

The bloc economy scenario, therefore, is far more likely, not least because we are already seeing its key elements coming to fruition. And given how far global supply and value chains are inter-related, it is the more logical scenario. After all, the next best thing to being completely self-reliant and rejecting globalisation outright is to work (perhaps slightly reluctantly) in blocs with partners who have the same values and aspirations. By doing so, politicians can feel as though they have regained some form of control over their economic destiny in a way that can be positioned as beneficial to voters. They can slap tariffs on products from outside of those partners (thereby meeting election pledges), whilst avoiding some of the economic damage from a trade war, not least in terms of protecting critical parts of relevant supply chains.

This all becomes much easier if you happen to effectively be a bloc on your own, as the United States arguably is. Whilst its reliance on its NAFTA/USMCA partners cannot be underestimated, the sheer size, diversity, and complexity of the United States economy ensures that it has a scope to operate as a single bloc if it so chooses. No other country comes close: China, for example, has too great a reliance on trade to be self-sufficient.

So What Does This All Mean For IFCs?

International finance centres provide a degree of stability during times of global geopolitical change. As we move increasingly towards the bloc economy, IFCs will have the important role of ensuring smooth and efficient arrangements for facilitating trade and investment between blocs, thereby maintaining demand for their services, even though it will become harder for them to face all markets simultaneously. But this is neither certain nor without risk. Alternatively, international finance centres must choose between blocs.

The accelerating divergence of standards, regulations, and possibly even accepted norms of doing business between the United States, China, and the European Union, is already posing the industry tough questions about how to serve these markets. Indeed, a widening divide on tax and transparency between Washington DC and Brussels, which will only increase under the new Trump administration, is driving a wedge between long-established markets. It is likely that United States tariffs on imports from all existing trading partners, albeit at varying levels, would push the wedge deeper as those trading partners respond in kind on United States exports. And should the current Organisation for Economic Co-operation and Development/G20-brokered agreement on a global minimum corporate tax be broken as the new United States administration seeks to deliver on a low tax, small government manifesto, then a new front in the inevitable trade war could be opened up.

The obvious danger in such a regionalised world is that the offshore centres (and potentially individual businesses) must, in effect, align to one bloc at the expense of access to others. But this is no different to the decisions individual nations are taking, particularly in the Global South. You just have to look at the success of China’s Belt and Road Initiative in increasing alignment of countries within Africa and South America to both China and the wider BRICS bloc, even before the recent opening of the Chinese-funded deep-water megaport at Chancay in Peru. This fragmentation of the broad bi-polar global alignment – in evidence since the end of the Second World War – of those aligning to the democratic and economic values of the United States and those not doing so, is likely to continue and require IFCs to pivot accordingly.

Figure 2: Belt and Road Initiative participating economies and their economic corridors, 2023, Pragmatix Advisory

However, from an IFC perspective, the lack of coordination between blocs provides greater opportunities for multinational (and multi-bloc) businesses to work within offshore centres to utilise their expertise, and potential future strength, in being able to make meaningful connections between blocs that can boost trade.

Additionally, there will be potential growth in digital currencies (both fiat and crypto) on which IFCs can capitalise, as regulations are relaxed in the United States and as the BRICS nations start to develop the opportunity to create a digital-version of a reserve currency that rivals the United States dollar (although we think that is still a long way off). International finance centres will have a crucial role to play in enabling this growth by sitting outside the blocs and using their cross-border expertise to potentially help facilitate cryptocurrencies to become globally acceptable mediums of exchange.

IFCs Will Need To Evolve If They Are To Thrive

It remains to be seen whether we are witnessing the start of a new geopolitical chapter based on a ‘bloc economy’ or simply a short-term wrinkle in a long-term trend of ‘weaker internationalism’. However, if a bloc economy emerges, as we suspect, the offshore industry potentially faces an uncomfortable choice between chasing growth in emerging markets such as Asia and Africa, and retaining revenues from the currently larger, more predictable, but slower established markets of North America and Europe. Onshoring services and activities into the United States as a result of the forecast low tax, low regulation, small government manifesto of the forthcoming Trump administration, particularly related to cryptocurrencies and decentralised finance innovations, could also lead to challenges as the advantages of offshore centres become eroded.

Offshore centres, though, have faced similarly disruptive challenges before and have survived. Their cross-border expertise will be critical to ensuring that the bloc economy functions, but if they are to thrive in this new world order, IFCs will need to ensure that they are not complacent. Those that thrive will need to continually review how they can evolve their services to meet demand from new and existing sources. Thriving will require services to evolve in light of demand, and opportunities will need to be taken rapidly and efficiently if business is to be won and retained, and growth secured.

Both IFC governments and the (increasingly global) industry need to take a long hard look at themselves and consider: are we nimble, innovative and, importantly, brave enough to make the tough decisions with appropriate speed to respond to this rapidly changing, uncertain, risky and opportunity-filled world?

Paul Marshall
Paul is Pragmatix Advisory’s director responsible for strategy and governance research. Having spent more than twenty years working in higher education, he has a depth of expertise in supporting C-suite leaders develop and implement robust strategies for complex organisations in regulated markets where government policy is decisive but often unpredictable. Paul is a Fellow of the Royal Society of Arts, a chartered governance professional and currently studying for an MSc in Global Finance at Bayes (previously Cass) Business School in London.

Mark Pragnell
Mark Pragnell, managing director of Pragmatix Advisory, has over 30 years’ experience as a macroeconomist, forecaster and policy consultant. He has worked with a number of IFC governments, promotional bodies and businesses, and has led seminal research to explain and quantify the value of IFCs.