Top risks forecasts:

The business climate has changed significantly over the past few years. First the pandemic challenged traditional assumptions about supply chains, and just as the disruption caused by the pandemic was coming to an end, Russia’s invasion of Ukraine made the geopolitical climate much more unstable. This has only worsened in the past two years as the conflict in the Middle East has developed. Businesses have a much more uncertain environment to negotiate and at the same time are having to deal with the enormous opportunities but also major risks which AI presents. In this context, KPMG has published a comprehensive report on the top risks facing today’s companies around the world, and strategies for dealing with them. 

Global trade and investment patterns are shifting. The future of supply chains and economic integration is becoming more dependent on national security priorities and increased policy interventions. In response to geopolitical uncertainty, many governments have reoriented their economic relationships along ideological and geopolitical fault lines. Recent analysis from the UN shows that global trade patterns have taken a geopolitical turn; many countries and territories are moving away from trading with “geopolitically distant” countries and turning more toward ideologically aligned trading partners, often reinforcing this trend by raising restrictive trade barriers.

Tariff rates, export controls and import bans have become commonplace in developed economies, having nearly tripled since 2019 to almost 3,000. Many of these new restrictions were imposed in 2023, and the trend is set to continue throughout 2024. Moreover, sanctions have also played their part in the disruption of international trade. Legislation to restrict trade with partners which do not share certain standards (”values legislation”) has also increased (e.g. the EU Corporate Sustainability Due Diligence Directive, and the Carbon Border Adjustment Mechanism).

However, although there has been a lot of discussion about an apparent shift away from globalization, the reality is more complex. According to the European Central Bank, trade flows are forecast to grow at 3.3 percent in 2024 year on year (up from 1.1 percent in 2023). In addition, according to a report by DHL, the average distance that merchandise travels from country of origin to destination has increased over the past two decades — reaching a historical peak of nearly 5,000 km on average in 2022 — running counter to the perceived regionalization of trade relationships. What is changing though, is the decentralization of trading partners and the tendency to reduce concentration risk for the sake of resilience. 

Supply chain disruption hit the headlines late last year, when from December 2023, Houthi strikes started targeting commercial vessels passing through the Red Sea. Commercial traffic through the Red Sea plummeted as a result, with containers having to travel around the Cape of Good Hope instead, a much longer journey that resulted in soaring freight rates. From the date of the first Houthi strikes until US retaliation, the global freight index nearly tripled — from US$1,157 to US$3,411. These events clearly illustrate how a regional conflict can have global implications, since many companies which had no operations in the Middle East were affected.

However, there are many more examples of strategic points through which large amounts of shipping pass, as illustrated in a map issued by the IMF and included in our report, which shows choke points and the percentage of global trade which passes through them. The interconnected nature of maritime trade means that any potential disruption could spread globally, with business leaders needing to assess the risks associated with limited alternative routes and increased shipping costs. 

Companies across all sectors are rapidly taking advantage of the benefits of AI and assessing how it can transform their operations in the future. However, AI also presents numerous challenges. One particular risk for businesses is that the regulatory environment for AI is moving more slowly than its development. Sweeping AI safety rules are being discussed in the US, UK, EU and UN at varying states of progress, but any governance strategy that hopes to have an impact will need to be global in scope (including private sector participation from tech companies). Thus far, these parties have been unable to rise above the strategic competition to cooperate on effective global regulation.

Consequently, businesses are likely to have to take the initiative themselves in developing an AI framework which takes account of AI’s risks, including cybersecurity threats.  Malicious actors, whether state sponsored groups or individuals, will see these regulatory gaps as an opportunity. So companies will need to be especially vigilant in identifying and neutralizing a wide range of attacks. Effective governance is unlikely to come from global AI policy frameworks, and companies risk operational and reputational damage if they do not prepare.

Geopolitical risks rarely exist in isolation; they often interact with one another, creating complex dependencies and amplifying potential consequences. Therefore, it is crucial for companies to consider the interconnectedness of risks within their operations, supply chains and broader ecosystem. They will need to think about supply chain exposure, develop an effective strategy for the integration of AI, and also consider the extent to which they should engage with topical issues, for example whether or not they should be drawn into taking a position on a particular subject or basing business decisions around it. 

KPMG in Romania has a strong team of risk management specialists, with detailed understanding of current geopolitical trends. We also have a highly developed IT Advisory Department, which can support with development of AI strategies, in particular through the KPMG Trusted AI framework. Moreover, we offer a special service, Dynamic Risk Assessment (DRA), which helps clients gain a better understanding of the risks they face, focused heavily on a synthesis of expert opinions. We will be pleased to help your organization to navigate the uncertainties of the current business climate by developing strategies to anticipate risk and mitigate its possible effects.