EU-US trade deal: top of the iceberg? 3 key messages for board members
Political and market experts have expressed divergent opinions on the trade agreement that EU and US leaders signed on Sunday 27 July1. Regardless of the outcomes for both sides, it is clear that this geopolitical development opens a new page in EU-US trade relations. What makes this arrangement special, is that the execution of the agreement on the European side lies mainly in the hands of business, which, as Paul Krugman noted, will be expected to invest in the US2. Here corporate governance comes into play: responsible for strategic decisions, it shapes choices that companies make. Thus, strong corporate governance becomes indispensable, as it guides responsible choices that ensure long-term viability and trust. That is why corporate governance will remain central in the future success or failure of this deal. Below we would like to share 3 critical messages that gain even more importance in light of the agreement.
1. Uncertainty intensifies and has to be dealt with proactively
The freshly signed agreement may deepen uncertainty that impacts not only two directly involved parties, but also the global economy3. Hence the first message: boards need to embrace an ascending degree of uncertainty. That means the responsibility to master respective tools, to adjust board structure and collective skills’ set, to explore different scenarios and to ensure their readiness for such scenarios. Check materials from the GUBERNA Geopolitics webinar to discover more on these matters4.
2. Scrutiny is key while investing in a compartmented world
US administration not only re-shapes relations with its external partners; at the national level it pushes for a backlash. Consider political initiatives of the US Presidency5 that treat diversity as a threat to national prosperity, targeting both public and corporate sectors.
This campaign illustrates a division within US political and economic circles. On the one hand, innovation-driven companies challenge the existing status quo and push for new business models. On the other hand, supporters of “business-as-usual” model that prioritises short-term gains, push back willing to preserve their power.
To see what is behind the debate, it might be useful to look outside the EU and the US. China has neither DEI, nor anti-DEI initiatives, yet there is a clear trend on board diversity. In Chinese top 100 listed companies boards of more conservative state-owned enterprises (SOEs) remain more homogeneous compared to more entrepreneurial private enterprises. In the latter, the percentage of female board members is twice as high as in SOEs (20% vs 11%), and women hold positions of independent non-executive directors almost 3 times more often (27% vs 10%). Besides, private companies operating in high-growth industries have the most diverse boards6.
In other words, extremely volatile business and social environment requires openness to alternative views, a readiness to be challenged. This understanding emerges in a bottom-up way in China, and is being attacked in a top-down fashion in the USA.
With this very understanding, US corporate leaders keep pushing for diversity7, despite the political pressure against DEI. The companies of almost $10 trillion in total share value, voted with management to continue DEI policies. The list includes tech giants Alphabet, Amazon and Apple; pharmaceutical companies Pfizer and Merck & Co., Inc.; leading tech corporations, such as IBM, The Boeing Company, Lockheed Martin Corporation, Caterpillar; financial corporations Goldman Sachs, Visa, PayPal, and Mastercard; entertainment companies Walt Disney Company and Netflix; Walmart, major US retailer chain.
Apple CEO Tim Cook:
“Our strength has always come from hiring the very best people and then providing a culture of collaboration, one where people with diverse backgrounds and perspectives come together to innovate and create something magical.” The anti-DEI proposal presented at Apple was defeated by 98% of shareholders.8
Diversity helps in navigating high uncertainties of a radical technological shift that the highly interconnected global economy is going through. While political incentives could aim at supporting or hindering social trends, business will decide which way to go.
3. Long-term focus becomes indispensable in the global context
The push for fossil fuels is an explicit part of the EU-US trade deal. As a move away from DEI, it also indicates a confrontation around different visions of the future within US elites. Since 2021, anti-ESG developments have been gaining influence in the country 9, crystallising into a clear trend in 2023. The reasoning behind the shift is manifold, including a radical change in geopolitical situation caused by Russian invasion into Ukraine that transformed the global business landscape.
Constantly growing demand for energy explains why energy transition is unfolding gradually and inevitably. Technological advancement requires energy: AI-related demand for computing power is now doubling every three to four months10; Bitcoin mining consumes as much electricity as the entire country of Poland11. Understandable enough, technology leaders are looking for non-carbon energy solutions to ensure long-term competitiveness of their companies12.
So far, China leads global investment race for clean energy that has accelerated since 2020. According to the International Energy Agency, China spends more on clean energy than the US and EU together (USD 680 billion vs USD 300 billion and USD 370 billion respectively)13. This falling behind vis-à-vis global rival might additionally provoke some groups in US elite to push their conservative agenda through.
At the European level, businesses have been actively working on sustainability transition initiatives. Besides, the European Union has been consistently establishing a clear set of rules to facilitate smooth and well-informed changeover. Yes, Europe is also going through a push back calling for drastic reduction of sustainability efforts. However, the first reporting year has already shown the positive effects of ESRD14, while current ESRS revision promises to sharpen the reporting standards further15.
The trade deal expects European businesses to buy US fossil fuels, although Economic liberties leave the choice open to companies. As change brings opportunities16, so does the priority of sustainable value creation. It remains a major prerequisite for a long-term global competitiveness.
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Global geopolitical shifts increase the level of pressure business is dealing with. However, good governance principles aid in addressing these alterations. Just as a change in a business model challenges a company, the current shift in global business paradigm challenges the entire world. Exploring emerging opportunities and using the period of change for the benefit of its business will be crucial for European companies which are now expected, according to the recent trade agreement, to invest in the US.