Geopolitics Threatens the Supply Chain of Our Future

Organizations and governments must keep their fingers carefully on the geopolitical pulse: even companies with mostly domestic production lines are in danger of extreme disruption.

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Four years after the emergence of COVID-19, the enormous supply chain disruption that resulted from global and regional lockdowns has finally calmed down. ‌Last week, the US Federal Reserve published data showing that global logistics difficulties hit a record low during October 2023, with transportation costs still dropping.

There’s a general feeling that pandemic-related supply chain issues have been resolved, with businesses happy to return to “normal” pre-COVID operations. However, in my opinion, it’s still too early to celebrate.

It’s true that the global supply chain has made a remarkable recovery from the pandemic, but political instability, social unrest, and natural disasters are still with us, and threaten us with more supply chain shocks down the line. 

Over the years, economies have become more interdependent and supply chains more extensive. Organizations and governments must keep their fingers carefully on the geopolitical pulse: even companies with mostly domestic production lines are in danger of extreme disruption from supply chain reverberations and must take proactive steps to face these risks head-on.

Political Instability Threatens Supply Routes

Political instability has always been a danger to international trade. In spite of this, in the decades following the end of the Cold War, there was a general belief that the liberal world order had been assured and that the flow of global trade was safe from political disruption. In 2023, however, international political tensions are as high as they’ve ever been, and many world leaders are stoking the fire.

The Russian invasion of Ukraine interrupted the export of vital agricultural products, threatened global production of ammonia-based fertilizers, and obstructed the tech industry. Sanctions on Russian companies caused serious disruptions to the global supply of goods and contributed to a chip shortage, since Russia is a key source of the neon and palladium needed for chip production. Companies worldwide had to hastily reshuffle their international trade partners in a desperate hunt for alternative sources of vital raw materials.

A similar situation is evolving around China. The US-China trade war is forcing companies to diversify supply chains to avoid being caught in the crossfire of tit-for-tat tariffs. Countries such as Vietnam, Thailand, Korea, India and Mexico have gained significantly more trade as companies look for alternative suppliers. Meanwhile, smartphone, electric vehicle (EV) and clean energy companies, as well as many countries pursuing zero carbon goals, are concerned about China’s stranglehold on vital rare-earth elements. They are actively investing in alternative sources and processing chains for these crucial materials.

If China makes good on its threats and attacks Taiwan, the resulting war could close the South China Sea off to trade and exacerbate the international chip shortage. Southeast Asian powerhouses like South Korea, Japan, and Vietnam would become inaccessible, disrupting the supply chain even more. And these are just the threats on the near horizon — regime changes can turn around trade conditions in the blink of an eye and are already a present danger in Africa and Latin America.

Social Unrest Can Disrupt Trade

Social instability can be as significant a threat as political unrest. Protests are common today all over the world and can quickly spill over into riots and violence. For example, in July 2023, France was rocked by riots after a Parisian policeman killed a black teenager. Stores were looted, businesses were closed to protect employees, and some buildings were burned to the ground. Over a billion euros worth of public infrastructure was damaged.

In Panama, protests are currently ongoing against the renewal of a controversial contract giving mining rights to Minera Panamá, a subsidiary of the Canadian firm First Quantum Minerals (FQM). The protests have closed vital roads, disrupted trade and caused an estimated $90 million dollars of losses per day, as well as a severe shortage of products in urban centers.

Even non-violent protests can severely disrupt trade; just look at the fallout from the trucker protests in Canada in early 2022. Protestors blocked key roads near the US-Canada border for 3 weeks and closed the Ambassador Bridge, the route for 45% of the country’s agri-food imports, for 6 days.

Society today is highly polarized, and the high population density of urban centers puts pressure on their social structures. These kinds of consequential protests are likely to get only more common over time, adding to my sense of the unprecedented fragility of the current moment.

Natural Disasters are Looming

Last but not least, natural disasters put trade at risk. Climate change has resulted in a surge in extreme weather events, including floods, hurricanes, and heat waves that cause uncontrolled wildfires, and these too will only become more common as global warming continues. In Pakistan, for example, healthcare facilities ran out of vital medication last year, when floods made it impossible for supplies to get through.

Many pharmaceutical plants are located in China, India, and other parts of South and Southeast Asia which are susceptible to floods and heatwaves. Because of the extended pharma supply chain, most of the world’s generic pharma production depends upon the active pharmaceutical ingredients (APIs) produced in these factories. A localized climate emergency could cause a global catastrophe.

Even relatively minor events like poor inventory management, an unexpected surge in demand for specific products, or a small-scale local natural disaster could have consequences that are felt around the world. Companies like Nestle are heightening their focus on sustainability — not just to please public opinion, but to prevent local incidents from stopping production.

It’s Crucial to Put Mitigations in Place

In 2023, our supply chain remains at great risk. The combination of political tension, social discord, and natural disasters compounds the vulnerability of supply chains, which could be shattered by a blow from any of the three fronts. It’s difficult to predict the future, and near impossible to safeguard any entity from all geopolitical risks.

However, the adoption of technology can be a critical game-changer in providing real-time visibility into changing geopolitical conditions, and the flexibility necessary to adapt to them. Organizations also need to act to insulate their supply chain from localized shocks and set up contingency plans. Companies worldwide must be able to track evolving geopolitical situations and act fast when necessary, to avoid the fallout from a still-vulnerable supply chain.