Central to Sen. John McCain’s 2008 presidential campaign was the concept of a League of Democracies: “the one organization where the world’s democracies would come together to discuss problems and solutions on the basis of shared principles and a common vision of the future.” The idea faced headwinds. Former Clinton staffers argued that America must engage “all states in a common pursuit to confront our most pressing global challenges,” calling Sen. McCain’s perspective naive and dangerous.
Now, the League of Democracies is coming to fruition organically. The founder is not Sen. McCain but, strangely, Vladimir Putin, whose reckless and unjustifiable invasion of Ukraine has been met with NATO expansion, widespread sanctions and a swift corporate exodus from Russia. Democratic governments—and businesses that depend on the rule of law—find themselves in a dilemma as they move to decouple from autocracies while simultaneously protecting their economic interests and international influence. If they fall short, they will lose the ability to advocate for democratic values and, consequently, the rule of law that is vital to economic stability.
Years of tolerance of autocracies have taken their toll. Despotic roots are deeply entangled in the international economic order and, in many places, threaten to strangle democracy. As Europe struggles to wean itself off of Russian energy after decades of procrastination and complacency, other resource-rich dictatorships such as Saudi Arabia fill the void. Global efforts to transition to electric vehicles depend on supply chains in the cobalt-rich Democratic Republic of the Congo, where the rule of law is weak and Chinese companies have monopolized the mines. And despite legislative efforts to build up US chip-manufacturing capabilities, suppliers in Taiwan remain the most viable option at present, stoking concerns about national security and supply chain sustainability as China continues its regional military blustering.
US politicians, CEOs and consumers have predictably shown little appetite for inflation and supply chain issues, let alone the chaos that would ensue from a hasty breakup with Chinese supply chains if, for example, China launched a full-scale invasion of Taiwan. Still, there are promising signs of a budding commitment to prioritize transparency and ethics.
New US regulations mandated by the Uyghur Forced Labor Prevention Act, for example, require companies to demonstrate that their imports from some regions of China are untainted by forced labor. For many companies, leaving China altogether may prove to be simpler than sorting through opaque supply chains to demonstrate compliance. As the US Department of Homeland Security explains in a report to Congress, “sufficient due diligence may not be possible with regard to goods made in Xinjiang or made using the labor of workers from PRC-labor schemes if barriers prevent safe and secure engagement with the workers.”
The European Union’s draft directive on Corporate Sustainability Due Diligence will similarly require many companies to establish human rights and environmental transparency at the ends of their supply chains, an exceptionally difficult undertaking in autocratic regimes riddled with corrupt officials and government minders. And worldwide, ongoing supply chain disruptions have prompted calls to bring labor back home or to friendly rule-of-law countries. Mexico, for example—with relatively stable democratic institutions and at least tacit support for corporate transparency—may increasingly appeal to companies fleeing the risks of autocracies.
CEOs are stepping away from autocracies alongside policymakers: Following Putin’s invasion of Ukraine, hundreds of companies exited Russia even before sanctions were announced. Similar risks in other countries are causing boards and executives to rethink long-term strategies on which markets to enter, which suppliers to engage and where to build factories.
Companies should anticipate further action by rule-of-law governments to separate business dealings with—and reduce dependence on—autocratic countries. Businesses that continue to operate in high-risk countries should take extra precautions to ensure they are working ethically, transparently and in compliance with local laws and international standards. When a business relationship is opaque or doesn’t pass a “gut check,” compliance teams should be prepared to investigate further and install additional controls or, when necessary, walk away from the relationship altogether. Given that the urgent need to decouple from a large autocratic country is no longer a hypothetical scenario, companies will benefit from creating comprehensive crisis plans or playing out various geopolitical scenarios. Ultimately, if they fail to prepare, CEOs and compliance teams will be caught off guard by swift policy changes, sanctions or instability.
Unquestionably, the cost of shady business dealings in dictatorships is rising, and the fissure between the democratic and autocratic economies is widening. Global reliance on resources, supply chains and labor controlled by problematic despots is not sustainable. Ultimately, democratic governments and businesses must decide how much autocracy they are willing to stomach: What are they willing to forfeit in the short and long term?
Any solution must prioritize democratic, rule-based values while addressing the concerns of businesses and consumers, resource and labor demands, and global economic stability: an almost impossible juggling act. Champions of democracy, whether in boardrooms or in government, must intensify their efforts to promote the rule of law like capitalism depends on it—because it does.