How geopolitical forces are reshaping global supply chains

In recent years, geopolitical events have exposed the fragility of global supply chains. The pandemic, the Russia-Ukraine war, and the Israeli-Gaza conflict have all clearly demonstrated the fragility of supply lines. These networks are primarily designed to reduce costs by taking advantage of low-cost labor and materials, but are easily disrupted by geopolitical events.

At the same time, Russia’s conflict with Ukraine has led to a change in trade patterns, with Russia cutting back on its large energy exports to circumvent sanctions and the shrinking of its important European market. China and Russia have become a powerful trade alliance and pose a major challenge to the US’s economic and political hegemony. For Europe, high energy prices have accelerated its transition to clean energy.

The report also provides extensive analysis of the impact of two growing trends: deglobalization and dedollarization. America’s competitors and allies alike recognize the risks of relying on the dollar and are increasingly using alternative currencies for trade settlement. For Russia and China, that means the renminbi. While the dollar is still a long way from replacing its position as the world’s trade currency, the long-term trend is clear that alternative currencies, especially the renminbi, will become more important.

Strategic responses to geopolitical changes

While nearshoring and onshoring are still growing in the U.S., Mexico is now one of the most important trading partners for the U.S. It is also worth noting that Chinese manufacturing remains ahead of the curve in geopolitics, with a large number of Chinese factories setting up plants in India, Vietnam, and Mexico to circumvent tariffs.

This geopolitical reality is forcing global supply chain executives to look for alternatives, which in some cases means a retreat from globalization. The extent of the shift depends on industry and region, but the overall trend is a steady move away from the cost-driven, decentralized global networks that have developed since the 1980s toward supply networks rooted in political alliances that favor risk reduction over cost savings.

The high-value, strategically important global semiconductor industry is one example. As the United States and the European Union impose new protective tariffs on Chinese semiconductor exports (as well as other high-tech exports such as lithium-ion batteries and electric vehicles), the semiconductor market has become a strategic pawn in global supply chain operations. The US Chips and Science Act provides more than $50 billion in funding and subsidies for the development of the US semiconductor industry. As part of a $280 billion science and technology fund, the measure aims to protect and foster American innovation and avoid chip shortages and supply bottlenecks that have paralyzed the automotive and other industries during the pandemic.

At the same time, China has placed a high priority on expanding high-value production in areas such as electronics, chemicals, pharmaceuticals and high-tech manufacturing. China’s exports to Russia and emerging economies in Asia and Africa have expanded, making up for the decline in high-value exports to the United States and Europe, such as semiconductors and electric vehicles.

The supply of raw materials used to produce high-value technology products, such as lithium, cobalt and rare earth materials, is now also a strategic asset, much of which is controlled by China. As China restricts the flow of these raw materials, global supply chains for semiconductors and other products become less viable.

All this means that the complex global supply chains that formed to produce increasingly cheap Chinese-made goods no longer make sense. It also means that the price increases for consumer goods we are still experiencing are likely to persist despite some moderation in inflation. At least in the short term, more secure American and European supply chains are more expensive.

All of these issues are discussed in greater detail in the Retail Sourcing Report: Insights & Metrics to Q3/Q4 2024. This report covers a range of issues relevant to retail supply chain professionals and provides detailed insights into the trends and challenges facing the retail supply chain. In addition to analyzing variables such as currency, commodity, and shipping trends, the report also details evolving regional markets and provides forecasts based on expert research. As global supply chains adapt to new geopolitical realities, these actionable insights are more important than ever for supply chain leaders.