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Geopolitics, not Economics, is Front and Center for Global Supply Chains

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Geopolitics, not Economics, is Front and Center for Global Supply Chains

Supply chain managers, long accustomed to weighing economic risks, are now confronted with geopolitical risks that are upending traditional sourcing and transportation decision-making. For the past three to four decades, companies have focused on finding reliable partners at the lowest cost. The natural destination was China, but the looming specter of higher tariffs coupled with a potential war over Taiwan is leading firms to alternative destinations. 

Read also: Supply Chain: Challenges and Key Solutions 

Factories in countries like Poland or Romania come with higher labor costs but minimal geopolitical hurdles. The shift away from China and other single country or region suppliers began to take shape during the Covid pandemic. Factory shutdowns, transportation delays, and rising shipping costs unnerved suppliers and further incentivized the search for new providers. In addition to international tensions with Russia and Iran, supply chains are squeezed with fewer and fewer options. 

The Houthi attacks on shipping vessels have slowed in recent months, but many containerships are still being re-routed around southern Africa’s Cape of Good Hope. If shipping through the Red Sea and the Suez Canal remains limited, elevated transportation costs will remain higher for longer. Emergent trade wars between the US, the European Union, and China are affecting markets worldwide as barriers to cheap Chinese imports, from construction equipment and steel to solar panels and electric vehicles, are growing.

China recently instructed the nation’s largest telecom carriers to phase out the incorporation of foreign chips into their networks over the coming two years. This tit-for-tat trade spat would affect major US chip makers such as Advanced Micro Devices and Intel. Last year, China contributed 15% to Advanced Micro Devices’ revenue, and while local Chinese chips are still considered inferior, they are slowly gaining ground, similar to electric vehicles.

Lastly, US and some EU compliance and regulations are also driving supply chain contingency plans. Volkswagen made the news earlier this year when its shipment of Lamborghini, Bentley, Audi, and Porsche vehicles was detained at US ports. Blacklisted suppliers from China’s Xinjiang region, where reports of Uyghur forced labor is occurring in the manufacturing of magnetic components used in high-end automobiles, were behind the detention. The compliance obstacle course expands by the day, placing supply chain managers in an unenvious position to monitor the ever-evolving maze of regulations.     

From a procurement perspective, disentanglement from China and Russia, especially with metals such as copper, nickel, aluminum, and similar rare-earth metals, is daunting. Russia is a leading supplier of the former, and China has the critical components that go into the manufacturing of US semiconductors. One area of agreement between President Biden and former President Trump is tariffs on vital Chinese imports. Tariffs will further complicate supply chains and likely lead to a continued restructuring of sourcing and transportation for years to come.