The year 2022 was challenging for international business, reflecting escalating geopolitical tensions, high inflation, tighter monetary policy, looming recessions and an ongoing pandemic. We examine in this article three developments that will shape international commerce in the new year and the roles that policymakers, companies and investors will play.

More talk than action on trade regionalisation and ally-shoring

Bifurcation risks for global supply chains rocketed in 2022 as the Ukraine war became a new geopolitical fault line and US-China tensions remained high, particularly over Taiwan. Fresh supply constraints, reflecting China’s lingering zero-covid policy (only recently lifted) and the war’s disruption of commodities markets, further increased calls for bringing trade closer to home and prioritising relations with allies.   

Recent policy developments would suggest that growing interest in supply chain security, a top talking point among governments and businesses, has finally translated into action. Major economies are leaning into industrial policies to promote self-sufficiency; for example, the US, the EU and China are each developing large-scale subsidies to strengthen domestic semiconductor manufacturing. The US has accelerated dialogues with allies in Asia, Europe and North America to co-ordinate policies on trade and technology issues, notably vis-à-vis China. The EU is pursuing agreements with nearby North African, Eastern Mediterranean and Central Asian economies to help to balance the loss of Russian energy.

However, this push towards regionalisation and ally-shoring is running up against political and economic realities, which will continue to frustrate these efforts in 2023. Divergent trade priorities between allies, particularly over China, will remain a major stumbling block. This will inhibit progress on US-led initiatives in Asia, such as the Indo-Pacific Economic Framework and the CHIP 4 alliance while complicating widespread backing of US export controls targeting China’s semiconductor industry. Protectionism will be another obstacle. US-EU tensions will persist over the US’s Inflation Reduction Act (IRA), which favours North American manufacturing. Meanwhile, disputes over market access, including in energy and agriculture, will continue to weigh on US-Mexico-Canada relations.

As policy co-ordination stumbles, companies will face an increasingly ambiguous trade and investment landscape. The absence of clear rules and compelling incentives will limit supply-chain restructuring to the lowest-risk options, especially as global economic uncertainty remains high. This will keep game-changing transformations of trade networks off the agenda for 2023, if not longer.

OECD global tax deal will face more delays

Although nearly 140 countries signed the OECD global tax deal in 2021, the process of enacting the new rules remains hobbled by doubts. This will not change in 2023, even as a new 2024 implementation deadline (already delayed once) approaches. The path forward may become clearer once the OECD finalises a required international treaty to enact the agreement’s first pillar, which will dictate where companies are taxed; this is planned for before mid-2023, with signatories to adopt shortly thereafter. However, this timeline is likely to prove ambitious, as the terms of the treaty will be technical, controversial and difficult to design. Leadership changes at the OECD present another obstacle; the long-standing director of the organisation’s tax unit stepped down in October 2022, his successor will retire by March 2023 and a permanent replacement is still unannounced. 

Even if the first-pillar treaty is finalised on time, there is no guarantee that countries will endorse it. US Republican lawmakers continue to criticise the project, making ratification unlikely in the sharply divided US Congress. The EU has also struggled to reach consensus. Failure to get buy-in from these important tax jurisdictions, especially the US, would kill the agreement, given that most large multinational companies are based or operate there. It also would discourage participation by smaller countries and could prompt a continuation of digital services taxes (DSTs), which the EU agreed to end as part of the OECD deal, following lobbying from the US.

Progress on the agreement’s second pillar, which includes a 15% minimum corporate tax but does not require an international treaty, will hit similar snags. Even the IRA’s new 15% minimum tax is too narrow to comply, reflecting concessions to ensure passage in the US Congress. Although the EU recently reached its own agreement, following months of internal wrangling, US Republican lawmakers remain unconvinced and continue to protest against implementing the full measure.

All of this will mean that multinationals, particularly large technology firms, will face a growing number of compliance risks in 2023. As policymakers wrestle with the agreement’s details, a worst-case scenario of a fragmented global tax landscape, with unilateral DSTs and retaliatory US actions, will remain a real possibility.

The war in Ukraine will continue to reshape ESG investing

The year 2022 was a disruptive one for ESG investing. It started with considerable optimism, not least because of stronger climate pledges from major economies, including at the COP26 UN Climate Change summit in 2021, and record-high investments into sustainable funds during that year. However, by February 2022, when Russia invaded Ukraine, the ESG landscape changed dramatically. Asset managers had to adjust to new investment criteria, as international sanctions and a corporate exodus from Russia put previously “safe” investments off limits. The war-induced energy crisis increased interest in dirty fuels to make up for lost Russian energy supply, share prices in the oil and gas sector rose, and conventional funds began to outperform green ones. Recession fears, alongside high inflation, rising interest rates and an overexposure of ESG funds to troubled technology stocks, further encouraged a pivot away from these investments.

With the war set to continue throughout 2023 and beyond, the transformation of ESG will persist as well. Although the conflict’s immediate impact has been to discourage these types of investments, the longer-term effect will be to accelerate interest in them, and we believe that these changes will start to become visible in 2023. The war has underlined the value of preparing for high-impact events that otherwise seem improbable or distant. As policymakers begin to sync energy security concerns with industrial policies and energy transition goals, a rush of government spending (including via the IRA) will help to make green industries more sustainable, profitable and attractive to investors. Regulators will play an important role too. A crackdown on “greenwashing” may initially tarnish the appeal of ESG labels. However, international and country-level moves to create clearer sustainability reporting standards, including under upcoming US Securities and Exchange Commission guidelines, will boost the credibility of these assets over the long run. 

These factors will not be enough to generate another ESG investment boom in 2023, and tight monetary policy and a growing backlash against “woke capitalism” will not help. However, they will lay a foundation that will gradually raise the appeal of these funds, especially as the global economy recovers going into 2024, as we expect, and market sentiment improves.

The analysis and forecasts featured in this piece can be found in EIU’s Country Analysis service. This integrated solution provides unmatched global insights covering the political and economic outlook for nearly 200 countries, helping organisations identify prospective opportunities and potential risks.