Geopolitical Risk

Which of the following statements regarding a country’s political cooperation is most accurate?

• If a country is engaged in military conflict, there is a higher cost to cooperation

• A country with few internal resources is not likely to rely on political cooperation.

• Interest prioritization does not determine the depth and nature of political cooperation.

Answer explanation

If a country is engaged in military conflict, there is a higher cost to cooperation. B is incorrect because a country with few internal resources is likely to rely on political cooperation. C is incorrect because interest prioritization does determine the depth and nature of political cooperation.

A consequence of one of the disadvantages of globalization is that:

• Pay differences between countries have narrowed.

• Emerging market trade flows have grown more important.

• Greater economic and financial cooperation has increased interdependence

Answer explanation

Through the process of greater economic and financial cooperation, companies may become dependent on other countries’ resources for their supply chains. On aggregate, this can result in the nation itself becoming dependent on other nations for certain resources (such as rare earth metals, cobalt, or copper). If there is a disruption to the supply chain, including via a moment of political non-cooperation, then firms may not be able to produce the good themselves. A is incorrect because the narrowing of pay differences between countries results from a motivation to pursue globalization, which is related to one of its advantag- es. It is an important way for companies to increase profitability by reducing their costs. Although wage differentials remain, they are decreasing. B is incorrect because the proportion of flows between developed economies as a share of over- all trade continuing to decline as emerging market trade flows rise is a function of increased international investment. This increased investment has provided beneficial aggregate economic benefits, such as increased choice, higher quality goods, increased competition among firms, higher efficiency, and increased labor mobility.

Which of the following outcomes is most likely a result of globalization?

• Unequal gains

• Increased independence

• Decreased access to talent

Answer explanation

Unequal accrual of economic and financial gains is a cost of globalization because improvement on the aggregate does not mean improvement for everyone. B is incorrect because globalization leads to interdependency as companies may become dependent on other countries’ resources for their supply chains. C is incorrect because rather than decreased access to talent, a country might actually globalize to improve access to talent as cooperation and globalization can lead to increased access to resources.

A US company expanding critical spare part inventories for local customers made at its existing Canadian facility after a supply chain disruption is most likely using the coping tactic of:

• Reshoring the essentials

• Reglobalizing production

• Doubling down on key markets

Answer explanation

The COVID-19 pandemic has highlighted the need for certain essential supply chains to be rebuilt domestically for emergency situations, with availability of critical spare parts being an analogy. The close integration of the US and Canadian economies through the revised USMCA agreement effective- ly makes expanded production at an existing Canadian factory an example of reducing manufacturing risk by relocating to home countries via reshoring. B is incorrect because instead of reducing manufacturing risk by duplicating or fortifying its supply chain, the company is simply continuing to use its existing capacity more intensively. C is incorrect because although the production is intended to better supply its home market, there is no evidence that the company is expanding its presence in the US market or shifting its focus to the exclusion of available opportunities elsewhere.

An example of a geopolitical multifaceted tool for furthering national interests is:

• Cabotage

• Armed conflict

• Nationalization of key export industries

Answer explanation

Cabotage is the right to transport passengers or goods within a country by a foreign firm. Many countries—including those with multilateral trade agreements—impose restrictions on cabotage across transportation subsectors, meaning that shippers, airlines, and truck drivers are not allowed to trans- port goods and services within another country’s borders. Allowing cabotage requires coordination on areas like physical security and economic coordination, a highly multilateral (multifaceted tool) process. B is incorrect because armed conflict is the most extreme example of a national security tool. It can be either internal or external to a country in taking a direct and active approach to wield

Which of these is most likely to be described as an event risk?

• An earthquake

• An election

• An ongoing civil war

Exogenous risks are best described as those that:

• Are known and evolve and expand over a period of time.

• Revolve around set dates, such as elections, new legislation, or other date-driven milestones, such as holidays or political anniversaries.

• Are sudden or unanticipated and impact either a country’s cooperative stance, the ability of non-state actors to globalize, or both

Which of the following statements about geopolitical threats in the investment environment is most accurate?

• Geopolitical risk is not always present in the investment environment.

• Highly collaborative, interconnected countries are vulnerable to geopolitical risk

• Geopolitical risk tends to have less of an impact on markets already experiencing a general contraction or economic downturn.

An applicable conclusion drawn from the Geopolitical Risk Index (GPR) is that:

• High geopolitical risk results in tangible macroeconomic effects

• Recurring geopolitical risk events lead to reduced corporate investment.

• The adverse impact of actual events is greater over time than that of the threat of such events.

The basic geopolitical risk type most likely in comparison to have the smallest degree of uncertainty is:

• Exogenous risk

• Event risk

• Thematic risk