Category Archives: Political Risk

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3 Key Risk Management Responses to the Coronavirus

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The novel coronavirus 2019-nCoV continues to spread throughout China and other countries, seriously impacting business operations around the world. As governments and companies act to protect their citizens, operations and employees at home and abroad, these actions threaten to produce business interruptions, travel risks and other effects that could be detrimental to business continuity.

On January 30, the World Health Organization (WHO) declared the virus a global emergency, meaning that it is a threat beyond China, after more cases have appeared in other countries around the world.

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According to the New York Times, the WHO has only made such a declaration five times since 2005. The virus has killed more than 400 people (including 2 outside mainland China) and has infected more than 20,000 in more than 25 countries.

In addition to the cancellation of major public events in China (including celebrations of Chinese New Year), many international businesses have curtailed their operations there since the outbreak. According to Bloomberg, this includes Starbucks (which closed more than half of its shops), Toyota (which stopped production), McDonald’s and KFC (which both closed restaurants), and Disney (which closed its resort in Shanghai), among others.

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Some international companies have instructed their employees to work from home to limit exposure as the virus spreads, and Amazon, Microsoft and other tech companies also limited employee travel to and from China.

China has maintained mass quarantines of areas with high number of infections, including Wuhan, the origin of the outbreak, and some other countries are also taking extraordinary steps to limit the virus’s spread. Last week, Russia sealed its entire border with China and cancelled all trains between the countries except for a single train line between Moscow and Beijing. Japan is currently quarantining more than 3,000 people on a ship after a passenger tested positive after departing the ship, while the United Kingdom has advised its citizens to leave China. And the United States issued a proclamation suspending entry for non-citizens who spent 14 or more days in China before attempting to enter the United States.

The Center for Disease Control (CDC) stated that the risk for people in the United States is “considered low at this time,” with elevated risk for individuals who may have increased exposure—such as healthcare workers and others in close contact with patients with the virus. However, companies should still act to protect their operations and employees, especially if operations require international travel and if supply chains depend on Chinese business continuity. Here are three approaches to limit risk from the coronavirus:

1. Take Travel Precautions

The CDC has recommended avoiding all non-essential travel to China, and the U.S. State Department has asked people not to travel to China. If travel is essential, the CDC suggests avoiding contact with sick people, any animals, animal markets or products made from animals. If traveling employees are older, they should take extra precautions, since, “older adults and people with underlying health conditions may be at increased risk.”

2. Develop a Response Plan

Medical and travel security services firm International SOS also recommended that businesses have regularly-updated and evaluated business continuity plans in place to ensure smooth response to incidents like disease outbreaks. The Institute of Risk Management South Africa (IRMSA) recommended preparing a specifically-focused “Pandemic Preparedness Plan” or updating previously prepared plans to reflect current circumstances to ensure business continuity.

IRMSA also suggested creating a group within the company, chaired by a senior staff member, able to make quick executive decisions for the organization in response to any coronavirus-related impact to the business and prepare decision-making processes for future incidents.

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3. Consult Reputable Information Sources

Relying solely on reputable news sources, like government disease control agencies and reliable media, can help when evaluating and taking courses of action to reduce risk. Conspiracy theories about the coronavirus have spread rapidly, including misinformation about its source, how to protect against or treat infections, and the number of people affected. Misinformation has also resulted in discrimination against Chinese-linked businesses and people of Chinese heritage, as well as East Asian people in general. Disseminating clear, reputable information to all employees, especially those traveling, can reduce risk of infection and impact on business operations.

Trade Dispute Worries US Companies in China

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As the Trump administration wages an economic battle with China in the form of reciprocating tariffs and other economic measures, it may not be a great time to be an American company operating in China. The US-China Business Council (USCBC), an organization made up of 200 U.

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S. companies that do business with China, released its annual member survey, finding the trade dispute—and the ongoing political tensions underlying it—are a huge concern for these companies and may be adding to worries about doing business in China.

Since the Trump administration declared a tariff on billions of dollars of Chinese exports in June 2018, the United States and China have traded retaliatory economic measures.

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Negotiators from the countries are preparing to meet in October, hoping to break a deadlock, even as each side moves to put pressure on the other’s economy.

Last month, President Trump announced increased tariff rates on Chinese imports, and tweeted that American companies were “hereby ordered to immediately start looking for an alternative to China, including bringing your companies HOME and making your products in the USA.” Some U.S. business groups condemned the moves and the president’s rhetoric, including the National Retail Federation. “It’s impossible for businesses to plan for the future in this type of environment,” said David French, the federation’s senior vice president of government affairs. These moves are an outgrowth of continued tensions, both economic and political, between the two countries.

It is no wonder then, that between 2018 and 2019, the percentage of USCBC members who said that their company’s business had been affected by US-China “trade tensions” increased from 73% to 81%. Of the reasons companies reduced or stopped planning investment in China in the past year, 60% of respondents cited “increased costs of uncertainties from US-China tensions.”

Among the real-world results of the trade dispute, USCBC members reported that the biggest impact was “lost sales due to tariffs implemented by China” (49%) and “shifts in suppliers or sourcing due to uncertainty of continued supply” (43%). The majority of the other concerns have to do with uncertainty or stigma attached to U.S. companies in China. Additionally, 26% of respondents projected that their current year revenue from China would decrease, compared to 9% in 2018.

The USCBC reported that “respondent optimism about China market prospects five years from now is at a historic low,” with the country’s stringent regulatory environment posing the largest driver of long-term doubt for U.S. companies. Indeed, the survey showed that, for 2019, 14% had a pessimistic or somewhat pessimistic five-year outlook, while 21% were neutral, an increase of 5% for both since 2018. However, the trade disputes are a major driver of short-term pessimism.

Also, when asked about cyber-related issues with doing business in China, 64% of respondents reported that “U.S.-China political tensions” were their biggest worry. And with good cause: According to cybersecurity firm Crowdstrike’s 2019 Global Threat Report, in the past year, the firm “observed an increasing operational tempo from China-based adversaries, which is only likely to accelerate as Sino-U.S. relations continue to worsen.”

And the impact reaches far broader than just companies that do business in China, like the members of the USCBC. As reported in the Risk Management article “The Business Impact of Trump Tariffs,” because many companies have complex, interconnected international supply chains, the trade dispute has a much broader effect on a wider array of businesses and industries. For example, a tariff on Chinese solar panels does not just hurt Chinese solar panel companies, it hurts U.S. manufacturers that supply parts for those panels, and U.S. companies that rely on components from Chinese manufacturers are affected as well.

The Economic Costs of Government Internet Interruptions

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At the end of April, global internet access monitor group NetBlocks reported that Venezuela’s state-run internet provider ABA CANTV was restricting the country’s access to various social media platforms amid continuing demonstrations and political turmoil. In May, NetBlocks reports this has continued, in addition to similar internet limitations in Benin and Sri Lanka. While increased global internet connectivity has led to international economic growth, it has also often led to increased government control over methods of communication and commerce, and government shutdowns pose a serious risk to businesses and economic activity in these countries.

Businesses face a variety of challenges and risks when operating abroad, but internet shutdowns and limitations may present a unique impediment, especially for companies that operate largely online and rely on consistent internet access. With more countries shutting down or limiting access more frequently, companies that conduct business in countries with regular interruptions may need to plan accordingly, or reevaluate whether their operations can accommodate these disruptions. Companies that have internet-dependent supply chains may be particularly susceptible and should ensure they have comprehensive mitigation strategies in place to avoid business interruptions.

Many nations increasingly use internet and social media disruptions as a way to quell political dissent. Some countries have shut down social media after violent incidents, purportedly to curb people’s ability to incite further violence, such as in Sri Lanka after the Easter suicide bombing there. Ethiopia also limited internet access in 2017 after activists leaked copies of the national school exams online. Whatever a country’s motivation, the frequency of shutdowns worldwide is rising dramatically, according to Stastista, which notes a 6,000% increase between 2011 and 2018.

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The Indian government routinely implements shutdowns in various parts of the country, and has in turn suffered serious economic consequences. The Indian Council for Research on International Economic Relations recently reported that, between 2012 and 2017, internet shutdowns in India climbed from 3 to 70 per year, and the shutdowns’ total duration rose from 9 hours in 2012 to 8,141 hours in 2017. According to the report, titled The Anatomy of an Internet Blackout, these disruptions cost the Indian economy approximately $3.04 billion in total. This includes approximately $2.37 billion from mobile internet loss and $678.4 from fixed line internet shutdown.

The Brookings Institution released a study in October 2016 examining 81 short-term shutdowns in 19 countries and their impact on GDP. Between July 1, 2015, and June 30, 2016, the study found that the economic consequences of internet shutdowns cost at least $2.4 billion in GDP globally. The report notes that this is a conservative figure and does not account for tax losses or drops in investor, business, and consumer confidence.

Deloitte also examined the issue in 2016, estimating that the economic consequences of a temporary shutdown “grow larger as the level of connectivity and GDP increase.” For highly connected countries, a temporary shutdown could cut 1.9% of daily GDP—an estimated $141 million per day. Medium-connectivity countries lose an estimated 1% ($20 million) of daily GDP and low-connectivity countries could lose an estimated 0.4% ($3 million) of daily GDP.

A study released in October by Strathmore University’s Center forIntellectual Property and Information Technology Law (CIPIT) showed that shutdowns can also severely impact countries’ shadow economies, often uncounted in formal studies like those from Brookings and Deloitte. According to the report, titled Intentional Internet Disruptions in Africa, unreported economic activity in 49 African countries made up an average of 37.65% of all economic activity. Because this activity is not counted in previous formal studies (like the Brookings study), CIPIT estimates that including these shadow economies increases the total cost of shutdowns by 19% to 29%.

Another Statista study from August 2018 shows that certain countries are shutting down their internet more often than others, most notably India, Pakistan and Iraq. Risk managers should consider these figures and cost estimates when assessing their companies’ existing or potential operations in the countries noted below, or when looking at where to invest overseas.