In the post-cold war era, otherwise known as Pax Americana, geostrategic risks were considered a thing of the past. Francis Fukuyama’s best seller “The End of History” captured the times. U.S.-Russian relations seemed destined for a permanent rapprochement, while the formerly communist countries of Eastern Europe modernized their economies and joined western institutions such as the EU and NATO. Meanwhile, China’s opening to the world was continuing apace.
But this benign international environment ended with a thud over the last few years, as geostrategic issues again dominate the headlines. Russia’s relationship with the West soured quickly with the former’s invasion of Ukraine and annexation of Crimea. And China seems determined to reassert itself both regionally and globally, challenging U.S. hegemony in both spheres. Fraught relations with Russia and China are tectonic shocks to the international landscape, making benign neglect of geostrategic risks untenable.
Here are some basic country risk definitions for one’s edification.
Country risk: A collection of risks associated with investing in a foreign country.
Political risk: The risk that an investment’s returns could suffer as a result of political changes or instability in a country.
Sovereign risk: The risk that a foreign central bank will alter its foreign-exchange regulations thereby significantly reducing or completely nulling the value of foreign-exchange contracts.
Credit risk: The risk of a government becoming unwilling or unable to meet its loan obligations.
Economic risk: The risk that macroeconomic conditions will affect an investment.
Geostrategic risk: The risk that international events, such as wars or diplomatic initiatives, will damage business or financial interests.
Sometimes international trade policy is not just about international trade policy. Take the Trans-Pacific Partnership (TPP) being negotiated between the U.S. and 11 other nations, for example. While the deal may increase U.S. exports, the economic benefits to the U.S. will be fairly small. However, the deal’s true importance lies in its geostrategic effects.
China has been flexing its muscles in the region, both economically and militarily. For example, China has initiated unprecedented island reclamation projects, declaring sovereignty over those and other islands that have been contested by nations such as Japan, Vietnam and the Philippines. China has also extended its reach in international waters, declaring a wider swath of the sea belongs within its territorial boundaries. This too has alarmed its neighbors.
On the economic front, China successfully founded the Asian Infrastructure Investment Bank, much to the chagrin of the United States, which furiously lobbied its allies not to join. Unfortunately most joined anyway. The U.S. is concerned that this new bank will help China exert undue influence in the region due to its economic heft.
U.S. policymakers fear they are losing sway in the region. As a result, they hope a successful TPP will solidify American influence in the region by reasserting its economic leadership and extending its security umbrella to more nations. Sometimes a trade deal is more than a trade deal.