First, we shall explain what the Indo-Pacific Tilt is, how we know that it has occurred, and why it is so significant. We will go on to explain why you really should care; it has already affected you, and will continue to do so, bringing both risk and opportunity to your business and investments.
What Is It?
Some geopolitical shifts, the move from one epoch to another, are sudden, some are gradual. The shifts from Spanish to Dutch to British maritime dominance. The first global circumnavigation by US warships signaling the emergence of a new global power and a rebalancing of geopolitics. The assassination of Archduke Ferdinand in Sarajevo sparking World War I. The US’ disapproval and the subsequent withdrawal of British and French troops from their ill-fated attempt to seize back the Suez Canal signaling the curtain on their empires. The 30-year economic collapse of the USSR. Passenger aircraft slamming into the World Trade Towers on 9/11 signaling the end of the post-Cold War era. And now the shift from the Global War on Terror (GWOT) to today’s Indo-Pacific Tilt.
Whilst Obama was in the Whitehouse the West began to realise that decades of purchasing goods from China had enriched and empowered her to such an extent that she was poised to pose a real threat to American hegemony and a world order that most benefited the West. China saw (and sees) her rise as a natural, inevitable return to global pre-eminence. Collectively then, the West began to re-orient to counter the rise of China - this is the Indo-Pacific Tilt.
Although this shift began during President Obama's tenure, it took years to fully occur. After a long build-up, this re-focusing exercise finally, fully culminated in 2021, ushering in a new geopolitical era that is directly responsible for all of the instability and conflict that we currently see today. Yet, despite the tectonic nature and significance of this shift, it was almost imperceptible to much of the world as it occurred - the conflicts that we see today are simply the aftershocks.
The signs that this global geopolitical shift had finally culminated came in two forms in 2021; the chaotic withdrawal of NATO forces from Afghanistan (set in motion by Trump, executed by Biden) illustrating the de-prioritisation of the GWOT (read our 7 Sep 2021 article on this debacle here), and the crucial Australia-UK-US (AUKUS) agreement.
The AUKUS agreement was a shock to many in Europe, and a green light to Putin … or so he thought (read our 25 May 2022 article on Putin’s folly here). Originally the Australians had committed to buying nuclear submarines from the French, but the surprise announcement that instead they would buy from the Americans and that henceforth US, British, and Australian submarines would jointly patrol the Pacific signaled that the focus of the US and friends had profoundly shifted toward China. The newspapers were full of coverage about how enraged the French were that they would be losing out on all those lovely Australian dollars, but the crux of it for France and the rest of Europe was the sudden, cold realisation that it was once again alone and increasingly responsible for its own security.
And as that shift to a new epoch finally culminated it made solid what had been gradually congealing already; a hardening East-West divergence, a rejection of the legacies of the West-favouring Bretton Woods system by the likes of China and Russia, an effort to undermine the hegemony and influence of the USA wherever possible and by various other state and non-state actors. And so, the world began to split into three broad new factions:
The “West”; essentially the USA and friends. Amongst this cohort are the obvious allies in the forms of the UK, Australia, Japan and most of Europe, but also a variety of other nations who stand to gain, primarily economically, from their proximity to developed Western markets and a decided effort by the West to re-, near-, and friend-shore their supply chains (more later on the opportunities this offers).
Next, the collective geographic and ideological “East” i.e. anyone who does not agree that US hegemony should endure, or that the US can act with impunity wherever it chooses, or that the existing global economic ecosystem doesn’t require an overhaul. This cohort is coalescing as you read. China is busy developing relationships, primarily through onerous economic enticements (also, notably, via vaccine diplomacy during the pandemic), in parts of Asia Pacific, Africa, and Latin America. She is also busy developing trade agreements in anything other than the US dollar so as to water down the potency of possible future sanctions against her – she can see what is coming and has learned well from Russia’s fate. Her relations with the Solomon Islands have unnerved Australia, as have her overtures towards Timor L’este (East Timor) and her developing economic and political relationship with Indonesia. There is also a wary (on the part of China, in a kind of ‘the enemy of my enemy is my friend … but I don’t really trust or respect you’ way) inclusion of Russia in this cohort, whom is avidly reviving a 1980s style of influence, particularly in Africa’s Sahel region, to destabilise countries and seize natural resources. Countries like Iran and Venezuela fall loosely into this group; China is a bit wary of getting too deeply embroiled with them, as they can be loose cannons, but Russia is … less circumspect.
Finally, the middle; several nations, Saudi Arabia and the United Arab Emirates being prime examples, chose not to firmly side with either the East or the West, but instead to play them off against one another and grow their influence in their own right. They’ve got off to a good start too.
And with that culmination suddenly everything changed. For decades the red lines were clearly marked out; every nation had known where it stood, who was allied with who, how far they could push their agendas, what the likely consequences of miscalculation were. Now, as the Indo-Pacific Tilt finally and inevitably occurred, the red lines became invisible, at best blurred. Every nation now sought advantage in this new fog, and every so often someone stumbled across a newly set red line. Putin saw this fog, the US and her allies' gaze averted towards the Pacific, and saw opportunity to seize strategic depth in Ukraine ... quickly discovering a new red line. Iran saw opportunity to both erode US influence in the Middle East and up the ante against Israel, and middling but growing powers like KSA and UAE saw opportunity to shake off Western impositions, reassert their values, and extend their influence.
This is the ultimate cause of today's global volatility, not Trump, not Biden, not Jinping, not Putin, nor any one leader. Everyone is pushing, looking for advantage, finding and setting new red lines amongst this fog, toeing around red lines as they find them, and trying to identify consequences for crossing them.
We are in a new geopolitical era, make no mistake.
Why Do You Care?
Understanding the significance of the Indo-Pacific Tilt will allow you to understand, and even predict, its ramifications. Armed with the overarching context of this tectonic shift you can now see where the world is headed on a global scale, better judge conflicts and political developments against the backdrop of that shift and, with our help, you can divine the likely impacts at regional and national levels. Here are a few important aspects to ponder right now:
Exposure. If you’re a West-based company or investor that’s still avidly pursuing opportunities in China or countries increasingly allied with her, you might want to have a peek at the tea leaves. As this divergence hardens and as red lines are tripped over along the way, the potential for conflict (hot or cold) increases, and with that conflict you will find yourself straddling the divide, compromised.
Think of those corporations and investors that had significant assets in Russia at the time of their invasion of Ukraine. Look at how quickly they had to divest, how much capital they lost, the new sanctions landscape they had to navigate, and the reputational damage they suffered. Now imagine what you will be faced with if you’re a West-based company with significant assets in China as relations deteriorate towards conflict … over Taiwan, for example.
You have to pick a side and you have to do it now, not tomorrow, because your exposure on the other side of the divide has already become a risk. If you must, must maintain your exposure on the other side of the divide then you should be building provisions into contracts and joint ventures ASAP so that you can extricate yourself with the minimum of pain when the time comes.
Supply. Say you’re a manufacturer, or you rely on a manufacturer for the products your company uses, or you’re investing in either of these; have you considered the vulnerability of the supply chain to the risks ushered in by this new geopolitical era? If not, you really should start.
Here’s an illustration; there’s an oft-quoted example of a European car manufacturer whose seat belts go through over 20 countries as they are built and before they are finally installed in their vehicles. Not only is this car manufacturer currently exposed to a host of domestic risks in each of those nations, ranging from labour issues to inflation to electricity supply interruptions, but they are also exposed to two new risks.
Firstly, that one or several countries within their supply chain now sits, or will soon sit, on the other side of the East-West divide, and secondly that, as their seat belt components are shipped from one country to the next, they are held up or delayed by geopolitical issues at shipping pinch points.
On the latter, in a typical year roughly 12% of global container shipping transits the Suez Canal, yet after the Houthis of Yemen (armed and encouraged by Iran) began targeting shipping passing through the Bab-el-Mandeb strait at the opposite end of the Red Sea that traffic fell by 84% (according to UNCTAD). As insurers and ship owners began to ban their fleets from transiting the Red Sea on their way to or from the Suez, delivery timelines and associated shipping costs significantly increased, with container traffic now forced to add thousands of miles to their journey by circumnavigating the entire continent of Africa. Adding weeks onto the manufacturing of a key component like a seat belt means weeks of delays before cars can roll off the line and your stock can be sold off. Capital starts to bunch up in stock that’s sitting on factory parking lots, cashflow starts to suffer.
Now consider this; 44% of global container shipping traffic transits the Taiwan Strait. If/ when conflict breaks out over Taiwan imagine the impact on supply chains, stock levels, cashflow, inflation, insurance costs and so on. And there are numerous other such pinch points in the global supply chain, all of which have real potential to be compromised in some way by geopolitical developments; 3% of global oil supply transits the Bosporus, 3% of global trade transits the Panama Canal, roughly 33% of global LNG supply and 25% of global oil supply transits the Strait of Hormuz (over which Iran holds a literal Sword of Damocles).
In short, it is high time to look at geopolitical risk in supply chains, both in terms of the countries of manufacture and of the shipping routes either to market or to the next country in the manufacturing chain. Again, your exposure here is already a risk.
Opportunity. Now that you know that the world is splitting into these three factions, not only can you reduce your exposure on the other side of the geopolitical divide, and reduce your exposure to supply chain geopolitical risks, but you can also see the opportunity that this new era fosters.
We mentioned above that there are “a variety of other nations who stand to gain, primarily economically, from their proximity to developed Western markets and a decided effort by the West to re-, near-, and friend-shore their supply chains.”
Here lies opportunity. Developed Western nations are busy re-shoring those capabilities that they cannot afford to be compromised come what may. And they are also near-shoring or friend-shoring those capabilities that are important enough that they are keen to better insulate them from deteriorating relations fostered by the East-West divide, and from vulnerabilities associated with supply chain pinch points.
If the USA or Canada want to avoid manufacturing sitting on the other side of the divide (i.e. in China, or Russia, or nations allied with them), or vulnerability to supply chain pinch points that could be blocked or constrained by geopolitical tensions, then Mexico is a no-brainer. Already the vast majority of cars destined for North America are manufactured there, and an increasing range of industries, from pharmaceuticals to IT services, are building capacity there. Despite her security and political troubles, Mexico has a well-educated labour force and low cost of living – so cheap, high-quality labour, with a geopolitically uncomplicated route to major developed markets. What’s not to like?
For the developed markets of Europe, there’s plenty to choose from; Morocco, Turkey, Egypt, a vast arc of Eastern Europe, and potentially up and coming nations like Kazakhstan. Each have their own challenges, on which we can advise and report, but they offer shorter supply lines, are to varying degrees geopolitically less complex, host cheaper labour, and have increasingly educated workforces.
There is significant opportunity in numerous of these Frontier and Emerging Markets, if only you know where to look. And we can help …