Geopolitical instability refers to the disruptions caused by changes in political regimes, international conflicts, and trade disputes that alter the flow of goods and services across borders. The direct impacts of geopolitical events on supply chains are both immediate and far-reaching. Border closures, export restrictions, and sanctions can disrupt critical supply routes, delaying the delivery of goods and increasing costs.
A clear example of this is the global semiconductor industry, which faces heightened risks due to geopolitical tensions involving Taiwan, which is the largest worldwide hub for chip manufacturing. Any disruption in Taiwan’s production capabilities, whether from direct conflict or other trade barriers, ripples across industries from automotive to medical devices to consumer electronics.
Figure 1: Taiwan trading partners with direct impact of geopolitical instability and tariff risk
Beyond these direct disruptions, even the indirect impacts of geopolitical instability amplify uncertainty and complicate supply chain planning. Businesses may delay investments in affected regions due to fears of further political or economic turmoil. Volatile currency exchange rates, another byproduct of geopolitical tensions, also pose challenges for supply chain managers, making supplier payments unpredictable and further eroding profitability. Furthermore, political unpredictability in emerging markets can dissuade multinational corporations from committing to long-term partnerships, limiting growth opportunities for regions and businesses alike.
Companies that understand and address geopolitical challenges proactively are better positioned to adapt, ensuring their supply chains remain resilient in an era of growing political and economic uncertainty.
Tariff risks in supply chains
While tariffs can be an effective means of incentivizing local production, they also introduce significant challenges for businesses that rely on global supply chains. When tariffs are imposed on essential materials or finished products, companies face higher costs, logistical bottlenecks, and the need to rethink sourcing strategies, forcing companies to adapt to rapidly changing regulations.
Two examples of tariff-related disruptions in recent years are the US-China trade war and Brexit. The US-China trade war began in 2018, when the US imposed tariffs on a significant amount of Chinese imports. This began a retaliatory tariff response, and American companies that relied on Chinese suppliers faced increased costs, which were absorbed or passed onto customers. Meanwhile, US exporters faced difficulties due to China’s new tariffs.
Brexit, or the UK’s exit from the European Union, introduced significant tariff risks and trade barriers. Previously, goods moved freely between the UK and EU. However, post-Brexit regulations led to customs delays, increased paperwork, and new tariffs on certain products. British companies that previously relied on just-in-time supply chains experienced disruptions, increased costs, and longer delivery times, forcing businesses to find new ways of navigating changing trade agreements.
In the short term, tariffs lead to higher costs, inventory shortages, and delays. Businesses must either swallow the extra expense or increase prices for consumers. Additionally supply chain disruptions due to sudden tariff changes can result in production slowdowns, making it difficult for companies to meet demand. Companies that depend on foreign raw materials or components are particularly vulnerable to these immediate consequences.
Figure 2: Key tariff metrics with direct geopolitical risk impact
Long term, tariff risks will force companies to redesign their supply chains to minimize exposure to volatile trade policies, adopting strategies like diversification of suppliers and regions. Businesses that proactively adapt to potentially changing trade policies will be better able to navigate uncertainties in the face of protectionist global economic decisions.
Next steps
Managing geopolitical instability, tariff risks, and trade difficulties is important in an overall global supply chain management strategy. Here are three actions your company can take this year to improve and protect operational resilience.
- Diversify: One of the most effective ways to mitigate geopolitical risks is to source from multiple regions. Relying on a single country for critical materials or products exposes businesses to disruptions from trade disputes, sanctions, or political instability. Businesses can better withstand sudden regulatory changes or economic disruptions by spreading risk across multiple suppliers and geographies.
- Leverage advanced technology in risk assessment: Companies that anticipate geopolitical shifts can adjust their strategies effectively before disruptions occur, minimizing potential impacts. Using predictive analytics, AI-drive models, and real-time tracking tools, businesses can assess potential risks in different regions and prepare contingency plans. Conducting regular risk assessments of supplier locations will also help companies identify key vulnerabilities.
- Stay flexible: Develop flexible contracts with suppliers to allow for adjustments in pricing, source, and delivery schedules to minimize overall exposure to geopolitical instability. Additionally, investing in nearshoring and onshoring, where companies relocate production closer to key markets to reduce reliance on global supply chains, will greatly minimize tariff risks and enhance supply chain responsiveness.
Geopolitical instability and tariff risks are unavoidable challenges in global supply chain management, affecting everything from raw material sourcing to final product delivery. By staying informed and adaptable, businesses can build resilient supply chains that withstand geopolitical and economic uncertainties.
