Cross-border value chains. A series of events, ranging from the COVID-19 pandemic to trade barriers and sanctions related to armed conflicts, has disrupted global trade in recent years. To improve resilience, governments and companies are working to restructure supply chains (through dual sourcing and near shoring, for example). The flow of goods, services, and capital is also being shaped by geopolitical alignments among countries, reflecting a more multipolar world. For PE firms, these changes demand sharper analysis of their portfolio companies’ supply chain and end-market exposure across geographies.

Strategic sectors. Governments are expanding the definition of strategic sectors beyond traditional areas like defense to include fields such as clean energy, semiconductors, and biotech. Examples include the US’s Inflation Reduction Act and the EU’s Green Deal Industrial Plan—both of which emphasize green technologies—as well as the US’s CHIPS and Science Act and the European Chips Act. These measures not only inject significant amounts of government funding into strategic sectors but also attract private investment.

Climate regulation and policies. Governments are pledging carbon neutrality to mitigate the impact of climate change, with ambitious net zero and green energy targets and new regulations. For example, governmental carbon pricing instruments now cover 23% of global greenhouse gases. The EU has introduced a carbon border adjustment mechanism to complement its existing cap and trade system, which may inspire other major economies to join a “carbon club.” The US’s Inflation Reduction Act, in turn, provides a variety of tax credits and other incentives to stimulate domestic production of advanced batteries, green hydrogen, and other low-carbon products and energy sources.

Three Key Sectors Disrupted by Geopolitics and Trade

For PE firms, geopolitical and trade dynamics are most impactful in three sectors: industrial goods, tech, and energy.

Industrial goods, such as machinery and automotive products, rely on complex physical supply chains, access to raw materials, and the ability to export physical items to end markets. Geopolitical and trade dynamics are constraining access to both import and export markets, as governments restrict exports of critical technologies or materials, raise tariffs, or incentivize domestic manufacturing, for example. These dynamics can increase both the cost of doing business and the risk of sudden policy shifts that disrupt cross-border supply chains.

Tech, including semiconductors, electronics, the Internet of Things (IoT), and artificial intelligence, is at the forefront of the twenty-first-century economy. Governments are stepping up efforts to influence where these technologies are developed and produced and how they are used, to address national security and other concerns. The US, for example, is restricting the export of sensitive semiconductor technology to certain trading partners, while also incentivizing advanced chip fabrication and R&D in the US through the CHIPS and Science Act. As companies migrate into IoT, AI, and cloud-based infrastructure, they become increasingly susceptible to restrictions on cross-border data flows.

Energy, including hydrocarbons and renewable energy, faces particularly complex dynamics. Geopolitical conflicts are disrupting global oil and gas markets, boosting the profitability of some producers while raising costs for consumers. In parallel, governments are working to price carbon and accelerate the transition to green technologies and energy sources.

Several Possible Global Scenarios

BCG sees four hypothetical but plausible scenarios of differing severity for how the geopolitical landscape could look in the 2030s. These range from a return to cross-border cooperation and emphasis on free trade to global escalation characterized by discord, including potential economic and military confrontations. (See Exhibit 3.)