For Robert Hormats, two of the biggest geopolitical stories of the past decade are the retrenchment of globalization and the rise of a multi-polar world. He is well positioned to make that judgment. Hormats has been a senior official in the administrations of five different American presidents, including most recently as the Under Secretary of State for Economic Growth, Energy, and the Environment from 2009 to 2013. He is also a business leader who has worked with many leading global companies, a visiting professor at Yale, and a member of the Council on Foreign Relations. McKinsey senior partner Cindy Levy talked to Hormats about his predictions for the next decade, the importance of factoring geopolitical intelligence into corporate decision making, and what companies can do now to increase their resilience in the face of uncertainty. An edited version of their conversation follows.
This conversation is part of a series of interviews with leading geopolitical thinkers and practitioners, held during our inaugural summit on geopolitics on December 2, 2024.
“The world is not linear”
Cindy Levy: Looking back ten years, how were you thinking about the decade to come? And how has that compared to reality?
Robert Hormats: Ten years ago, I—and a great many other people—were looking at the world in a fairly linear way. Over a period of time that approach is always a mistake because the world is not linear. But Thomas Friedman wrote this book called The World is Flat, and indeed the world looked very smooth. We projected more and more globalization, more and more movement of data across borders, a more global capital market, and more people moving around the world looking for jobs. The world was going to be more and more open to people, ideas, money, and data.
And it hasn’t happened that way. There’s more trade nationalism and protectionism. A lot more countries are developing ways of protecting their data and technology and of restricting capital flows. Markets are still fairly open, but not in the way they were a decade ago. We now have a world that is much more fragmented.
We have also seen the rise of China as a major player. A world that was more and more integrated has become a world of power centers, including China and the US, but we also see Iran playing the role of a mini power center in the Middle East and Saudi Arabia trying to do the same. And then years ago, no one was talking about Russia, which is now playing a role in Ukraine as well as trying to develop its influence in various parts of Central Europe, Eastern Europe, and Asia.
Cindy Levy: Looking forward over the next five to ten years, what trends do you anticipate will most affect global corporate health and decision making?
Robert Hormats: The one positive thing we’ve seen in the world of today compared to ten years ago is this huge surge in technology. AI has been the most visible, but there are many others, including 5G and biotechnology. Companies need to make sure they’re taking advantage of these developments to improve productivity. Doing so means getting the right people on board, which can be a big problem. Trade wars and tariff wars can also affect the spread of technology.
Companies that aspire to be global are going to have to deal with all these technology-related issues. For those that can, there are some awfully good opportunities around both the use of these technologies and their production. AI can be invaluable in early-stage disease diagnostics and the development of new drugs, for example, but it also uses a lot of energy, which means we’re going to need new ways of producing and distributing electricity.
The potential risks of tariffs
Cindy Levy: You touched on trade. How would you advise companies to think about and prepare for the potential changes the new administration might make?
Robert Hormats: My advice at the point at which we’re having this discussion is to wait and see. We don’t yet know whether Trump sees the threat of tariffs as a tactic or whether the tariffs themselves are the goal. Trump has said, for example, that he’s going to put a 100 percent tariff on goods coming from the BRICs countries.1 It may be that he is using this threat to get them to give up the goal of replacing the dollar as the world’s reserve currency.
The potential risks from the use of tariffs are substantial. The proliferation of tariffs would likely be highly inflationary and also very harmful to companies that depend on imported components to make their products in the United States.
But taking a step back, almost no country wants to be entirely reliant on China or Russia. The United States and global companies are going to have to figure out ways to give other countries and companies the option of not being so dependent on China, while also making sure that the United States is seen as a reliable trading partner. Our trading partners want stability, with no future surprises.
Overall, geopolitical, geostrategic, and geo-economic issues are becoming more and more important for companies—including, but not only, through the lens of trade and foreign investment. Companies making big financial investments need to have both a degree of understanding of what’s going to happen over the next five to ten years and the agility and resilience to turn on a dime in the face of unexpected developments.
The importance of geopolitical expertise in increasing resilience
Cindy Levy: I know you’ve advised many corporations and sit on a number of boards. We hear that business leaders receive a lot of geopolitical data but struggle to translate that into strategy and decisions. How can companies use that intelligence more productively?
Robert Hormats: That’s one of the ironies of the world. There is more and more data available, but companies have found it difficult to figure out what that means for the way we do business today and tomorrow. I worked on this issue when I was on the National Security Council staff as adviser to Henry Kissinger. I was part of a group that would sit down once every month with a lot of data from the CIA [Central Intelligence Agency] and elsewhere and go over potential opportunities and risk.
But data devoid of context is really not useful. Companies need a group of people to collect data and a group of people to analyze that data. And that second group needs to include people who understand geopolitical issues as well as have a good feel for finance and business. Only with all that in place can they develop informed answers to questions like, how global can they afford to be? Or how great is their appetite for geopolitical risk? Currently, many companies lack access to the expertise needed to inform those decisions. New York and Washington, DC, are less than 250 miles apart, but that distance often feels much longer.
Cindy Levy: To close, let’s go back to resilience. What actions should companies be taking now, and are they likely to be a substantial drain on capital?
Robert Hormats: Until recently we lived, relatively speaking, in a very low-cost world. We expected and relied on just-in-time delivery from China and other countries that made cheap goods by paying low wages to their workers and shipped those goods across the world. That was a time of relatively little instability, during which, for example, ships were not vulnerable to being shot at as they crossed the Persian Gulf. We could make decisions with a high level of confidence, and we developed a certain level of complacency that we would all live happily ever after. But it turns out that’s not the case. The efficiency of a globalized world is being compromised by the fact that we can’t always get goods from the source that is cheapest or that has the best delivery infrastructure.
So what can companies do? They can take a lesson from the US government of the 1970s, which realized, after the oil embargo, that it needed a strategic petroleum reserve to increase resilience and autonomy. We saw a similar phenomenon with the Biden administration, which launched an effort to produce more semiconductors on American soil. Companies need to take advantage of opportunities in North America and to work with companies that have efficient supply lines with the US.
Another important area to consider is rare-earth minerals, which are critical for a lot of cutting-edge technology. China is the biggest producer and refiner of these rare earths, and if we don’t want to rely on China, we’re going to have to develop our own capacity. We do have a supply of these rare-earth minerals here in the US, but you can’t get a license to refine them because doing so can create a lot of environmental havoc. There are many things we need to do to protect ourselves from rare-earth supply shocks. And there’s a similar issue with many of our medicines, where we get the majority of the components of the pills we take, including antibiotics, from China2 and many from India too.3 Data storage capacity will be an issue too, both because there is more and more data and because we don’t necessary want to ship our data abroad. We’re already seen issues with data cables, including in the Baltic Sea.
Companies will also need to develop trusting partnerships with other countries so that they don’t have to worry about the theft of their intellectual property, the disruption of supply chains as a tool to gain political leverage, or a new government that interferes with market activities. To build these relationships, companies need an understanding of where potential partner countries are heading, as well as help in working with the governments of those countries—and even with Washington, DC. This isn’t just about lobbying for what they want. It’s also about mutual education, in which both businesses and governments improve their understanding of the implications of existing and future regulation, including—but not only—around new technologies. This sort of educational relationship won’t work in every country, but it can be very effective.
