Globalization Across the Rocky Seas of Supply Chain

Building redundancy into business models and nearshoring operations is integral to survival in this new multi-polar environment. The world is changing, and the seas are no exception.

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Globalization has hinged on the free movement of goods for hundreds of years. A hegemonic sea power has long enforced the rules and set the norms that allowed for freedom of navigation. But the world is shifting, and the seas are feeling the effect of the new multipolar global order that is emerging. As Global Guardian explores in the Worldwide Threat Assessment, climate events and geopolitical realities are affecting supply chains across the globe, causing nations and businesses to confront the reality that they are not sitting in the driver's seat.

Understanding Today’s Landscape

Ninety percent of all globally traded goods travel by sea, where they move through 11 major chokepoints. In other words, the health of international commerce depends on a handful of vital shipping lanes, few of which are controlled by friendly powers. This fragile system is only weakened by growing geopolitical tensions and the impacts of a changing climate. Businesses are left exposed as America’s relative international power shrinks and the vicissitudes of today’s landscape sink in.

Businesses are already experiencing the very real implications of chaos in the world’s major trade arteries. The war between Russia and Ukraine is creating significant threats to shipping in the Black Sea. In the Bab el-Mandeb Strait, through which about 10% of global trade regularly passes, shipping volume has dropped by 70% due to Houthi terrorism. In the Suez, extreme weather conditions have threatened ships’ abilities to navigate through their waters, as evidenced by the 2021 Ever Given disaster. Low water levels at the Panama Canal have reduced the number of ships traveling through by 40-50% and increased prices for last-minute auctioned bookings by as much as ten times the normal fee. It’s clear that key chokepoints can be taken offline quickly, whether by human or natural forces, often with no way to resolve the issues expediently.

Without the ability to get goods across the world efficiently, prices increase for everyone. Businesses find their margins swallowed up by reroutes around Africa and South America or by shortages of key raw materials. Additionally, unsafe shipping lanes will cause insurance premiums to rise across the board, further driving up shipping costs. Consumers will face empty shelves or higher price tags, or both. Our economies depend on shipping. Energy, raw materials, consumer goods – they all travel by ship. Losing control of these major chokepoints has more than geopolitical implications. Without it, businesses find themselves unable to ensure the effective delivery of their goods and products – and our global economy suffers.

Anticipating Future Risks

Major geopolitical shifts can often trigger other major events. While the damage of a single chokepoint going entirely offline is significant enough to have repercussions that are felt throughout the entire supply chain, the closing of two or more chokepoints would have profound macroeconomic consequences. To protect their finances and infrastructure, businesses must understand the potential fallout of losing access to these trade routes and identify ways to pivot.

The potential for heightened instability in the Strait of Hormuz and the South and East China seas poses a significant risk to businesses, regardless of whether they directly rely on ships traversing those ports. As tensions continue to rise between Israel, the U.S. and Iran, there is a real possibility that Iran will block shipping through the Hormuz Strait. One-third of the world’s traded oil passes through this chokepoint, making it a central component of business across the world. The South and East China seas are the center of mass for the global economy, with a respective 37% and 26% of the world’s shipped goods traveling through their waters. Continued escalation between China and its neighbors continues to raise questions about the long-term security of these routes. A disruption among any of these chokepoints would seriously injure international trade; a disruption among all three would cripple it.

Wars create weak points in the international system for more conflict to emerge. The war in Ukraine has taken considerable attention and political will, creating an environment ripe for war in the Middle East. With wars raging in Eastern Europe and the Middle East, China has a cleaner shot at wrestling control over Taiwan and strategic points in the South China Sea. This, in turn, could encourage conflict between North and South Korea. Businesses must understand that geopolitics are now a top-line concern lest they be caught unprepared.

Planning for Long-Term Resilience

No one knows what the world will look like in 10 years. However, it is incumbent upon business executives to build resilience into their business models and supply chains before one of these scenarios becomes a headline.

In 2021, government responses to the pandemic strained and disrupted supply chains across the world – but it also showed businesses the key to weathering instability and uncertainty: redundancy. Until COVID, many businesses worked with the more efficient model of just-in-time inventory. Today, redundancies aren’t financial liabilities – they’re economic necessities. Although less “efficient,” redundancies can give businesses the flexibility and buffers to weather supply shocks while still delivering products to their customers.

But long-term resilience that decouples our dependence on these regions is the only true solution to safeguard against the unpredictable. Corporate executives must work to build supply chain resilience through redundancy and nearshoring, shifting manufacturing and production operations closer to home. Executives must evaluate the current landscape, seriously assess the future threats to their supply chains and act now to safeguard their companies in the medium and long term.

Navigating Disruption

Global trade has long taken for granted the stability and security of shipping routes. That is simply not a fair assumption today. Accepting this reality is the first step toward preparing your business to withstand the pressures of unstable supply chains. Building redundancy into business models and nearshoring operations is integral to survival in this new multi-polar environment. The world is changing, and the seas are no exception.