Growing government influence shapes the global business climate

Governments are intervening to an ever-greater degree in market activities through a growing array of regulatory mechanisms, as well as through direct intervention. The justifications range from notions of national security to straightforward economic nationalism. While this trend seemed novel only a few years ago—and unthinkable a decade ago—it has become a fact of life for businesses, sovereigns and state-owned enterprises, who must understand how it impacts them.

Understanding the trend

Economic and political developments contributed greatly to the current regulatory climate. After the 2008 financial collapse, many countries sought to moderate the economic risks of financial contagion through more active regulation of financial markets. As the inequalities created during the era of globalization became more evident, some countries turned to regulation to shift their policy focus from wealth creation to economic equity. As political and security rivalries emerged among great powers over the past decade, economic and security interests coalesced with some countries using regulatory tools to assert greater control over their economies.

For many states, economic and security concerns have become more closely intertwined and the regulation of the global economy has become core to protecting national security. Domestic laws and regulations have become the preferred means for governments to ensure greater sovereign oversight of cross-border economic activity and to promote their own national economic interests (We discussed the forces shaping this trend more fully in our report, A world of clubs and fences: Changing regulation and the remaking of globalization).

Far-reaching impact

Several areas of government interventionism have seen particularly rapid development over the past five years and have potentially profound implications for how businesses navigate the global economy. These areas include trade, industrial policy, investment screening and sanctions.

A redefined global trading system?

Countries across the globe are employing trade policy measures, particularly tariffs and export controls to advance their economic and security interests. World Trade Organization (WTO) member states have increasingly cited national security as a justification for trade-restrictive measures that may not conform with WTO obligations. Countries including Canada, China, Japan, Russia and the US are interpreting national security ever more broadly to expand their policy freedom to regulate trade. The Trump administration justified its imposition of tariffs on the PRC and other countries beginning actively in March 2018 on national security grounds, invoking a previously rarely used exception in the WTO rules. While the US remains an outlier in the scope and frequency of its use of national security to justify trade restrictive measures, it is far from alone. Trend lines suggest that the previously open global trading system is quickly being redefined by export controls and tariff measures.

The return of industrial policies

While the post-WWII liberalization of the global economy sought to constrain the role of governments in supporting targeted industries, industrial policy is quickly making a comeback. In response to supply chain instabilities, climate change and national security threats, countries are using their economic, regulatory, and political powers to foster domestic industries in strategic sectors. Academic studies show a near doubling of global subsidies between 2017 and 2023.

In the US, the CHIPS and Science Act and the Inflation Reduction Act provide significant subsidies for critical sectors including electric vehicles, green energy, and microchips. In Europe, the European Chips Act, and the Important Projects of Common European Interest (IPCEI) framework offer financial support for technology, energy, and infrastructure sectors. The PRC’s Belt and Road Initiative and state-owned enterprises are seen by some as part of a similar national industrial policy.

Yet, the subsidies inherent in such economic policies often violate international legal commitments under the WTO framework, and respective national legislation. With an impaired WTO Appellate Body, many countries are responding with unilateral actions outside the WTO system. For example, both the US and Canada have imposed 100 percent duties on Chinese electric vehicles and the EU has imposed duties of between 7 percent and 35 percent, on certain Chinese electric vehicle manufacturers. Simultaneously, regulatory capacity to address subsidies has increased significantly in both the US and the EU.

The EU has put in place the Foreign Subsidies Regulation, a new mechanism that allows it to investigate subsidies that distort the EU internal market, and which fall outside the scope of traditional trade defense instruments.

Investment screening on the rise

As countries have expanded their definitions of national security to include economic competition, many have begun screening foreign direct investment (FDI) flows. Today, at least 49 countries have a regulatory regime to screen certain inbound FDI and have built the enforcement capacity to block transactions deemed to threaten national security. In the US, the 2018 FIRRMA legislation gave the Committee on Foreign Investment in the United States (CFIUS) expanded powers to review inbound FDI. Europe has followed suit with its framework for screening foreign direct investments. The PRC adopted a more restrictive Foreign Investment Law in 2019 and, in 2020, added new regulations to further enhance its regulatory authority and capability to filter inbound investment flows. Emerging economies are now developing similar regulations.

Sanctions proliferate

Economic sanctions have quickly become a preferred foreign policy tool of many governments to intervene in the global economy. By one count the number of distinct sanctions regimes globally doubled between 2000 and 2014, even before the sanctions were imposed on Russia in 2022. The Russian invasion of Ukraine in February 2022 marked a turning point in the use of sanctions in that, for the first time, broad and coordinated sanctions were deployed to isolate a G20-member economy, with global repercussions. The sanctions leveled against Russia include not only more traditional blocking statutes against individuals and businesses, but also the freezing of Russian central bank assets and cutting Russian banks off from international transactions.

Global business must anticipate and adapt

The more active insertion of state interests into the global economy has led to a far more complex regulatory environment. It is critical for multinational enterprises to understand the interests of the states in which they operate and the way those interests shape national regulation. Recognition of these sovereign interests may help businesses anticipate both the enforcement of existing regulations and future changes to the regulatory environment. Effective international business strategies will adapt to this environment by developing deeper understandings of national interests and becoming nimbler in their responses to them.

In short, businesses must focus on government legal and regulatory action in new ways. In so doing, they may reap significant benefits, whether obtaining economic subsidies or harnessing sovereign support to address competition-distorting foreign practices. Simultaneously, however, businesses must address new risks, ranging from geopolitics itself to heightened compliance obligations, from unexpected sanctions to enhanced national enforcement actions. The winners in this era will be those best equipped to understand and navigate government influence.

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_{This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.}

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