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Risks of global sourcing under geopolitical tensions

The conflict between Hamas, a Palestinian militant group, and Israel is a long-standing and complex issue. On Saturday, October 7, 2023, militants from Gaza launched a major attack on Israel using various means, including rockets, paragliders, and potentially other methods.

In response to the attack, Israel launched retaliatory airstrikes against targets in Gaza. The Israeli Prime Minister, Benjamin Netanyahu, announced measures to restrict the supply of electricity, fuel, and goods to Gaza and said in a video that Israel is at war.

Hamas has framed the attack as a response to several factors, including perceived attacks on women, the desecration of the Al-Aqsa mosque in Jerusalem, and the ongoing siege of Gaza. These issues have historically been sources of tension in the Israeli-Palestinian conflict. Today, I’d like to discuss how geopolitical tensions such as these can disrupt global sourcing strategies and impact supply chains.

From time immemorial, global sourcing, the practice of procuring goods and services from various countries worldwide, has long been the cornerstone of economies. It has brought about efficiency, cost savings, and access to diverse markets, benefiting both businesses and consumers.

One of the most prominent threats to global sourcing is the rise in geopolitical tensions, natural disasters, and trade wars between major economies

However, global sourcing now faces significant risks in an increasingly complex geopolitical landscape. From military invasions and trade wars to geopolitical tensions, the stability of global sourcing is at stake. This article examines the key factors threatening global sourcing, supported by verifiable data and real-world examples, and offers recommendations for businesses to navigate these challenges effectively.

Geopolitical tensions and trade wars

One of the most prominent threats to global sourcing is the rise in geopolitical tensions, natural disasters, and trade wars between major economies. For instance, COVID-19, the ongoing Russia-Ukraine war, and the U.S.-China trade war that began in 2018 have far-reaching consequences.

In 2018, the U.S. imposed tariffs on $250 billion worth of Chinese goods, immediately impacting businesses that relied on Chinese suppliers. Companies like Apple had to re-evaluate their global sourcing strategies, considering the potential long-term risks of over-dependence on one market.

Since then, there have been retaliatory measures, such as increased regulatory hurdles for U.S. companies doing business in China. We have also seen Canada, Mexico, India, and the EU imposing tariffs on the US and vice versa. So, what should businesses do in the face of geopolitical tensions and trade wars?

Recommendation: Diversify sourcing partners

Businesses should diversify their sourcing partners to mitigate risks associated with trade wars and geopolitical tensions. This involves identifying alternative suppliers in different regions reducing dependence on a single country or market. Additionally, companies should keep a close eye on evolving trade policies and adapt their sourcing strategies accordingly.

Military invasion and conflict

Military invasions and regional conflicts pose a significant risk to global sourcing. When a country experiences an army invasion or conflict, supply chains are often severely disrupted, leading to shortages and rising costs. A prime example is the Russian annexation of Crimea in 2014 and the ongoing conflict in Eastern Ukraine, which have had ramifications for global sourcing, particularly in the tech, oil, and agricultural industries.

Although, it is unclear how much Ukraine has spent on the fighting. According to the International Monetary Fund, Ukraine’s economy contracted by 30% in 2022 and is forecast to grow by 1% to 3% this year. On the other hand, the Russian economy will be hampered by the departure of multinationals, the loss of human capital, its disconnection from global financial markets, and a reduction in its policy buffers,” says IMF spokeswoman Julie Kozack.

The invasion and Western sanctions on Russia led to steep fertilizer, wheat, metals, and energy prices, fuelling an inflationary wave and a global food crisis. Given Ukraine has been a significant source of rare earth minerals in producing electronic devices, the conflict disrupted the supply of these crucial materials, prompting businesses to seek alternative sourcing options.

Recommendation: Assess geopolitical stability

In light of the risk of military invasions and conflicts, companies should conduct thorough geopolitical assessments before engaging with suppliers in regions with a history of instability. Evaluating the political and military landscape can help identify potential risks and allow businesses to make informed decisions about their sourcing partners.

Changing geopolitical alliances

The shifting geopolitical alliances and leanings of countries can also threaten global sourcing. Political relationships are dynamic, and a country’s foreign policy change can disrupt established supply chains. The U.S.-Iran nuclear deal is a notable example. When the U.S. withdrew from the agreement in 2018, it re-imposed sanctions on Iran. This directly impacted businesses sourcing goods from Iran, especially in the energy sector. Companies that relied on Iranian oil and related products faced significant supply chain disruptions.

Recommendation: Continuously monitor political developments

To address the risks of changing geopolitical alliances, companies should stay updated on international relations and potential policy changes that may affect their sourcing. This requires ongoing monitoring and proactive risk assessment to adapt to evolving political landscapes.

Cybersecurity threats

Global sourcing heavily relies on digital infrastructure and communication systems in an interconnected world. This dependence exposes businesses to significant cybersecurity threats. For example, the SolarWinds cyberattack 2020, attributed to Russian hackers, targeted numerous organizations, including government agencies and companies. This attack compromised the digital supply chain, raising concerns about the security of global sourcing networks.

Recommendation: Strengthen cybersecurity measures

To safeguard global sourcing operations from cybersecurity threats, businesses should invest in robust cybersecurity measures. Regular security audits, encryption, and the implementation of multi-factor authentication are essential steps to mitigate potential risks.

Environmental and natural disasters

Global sourcing also faces environmental risks, particularly in regions prone to natural disasters. Hurricanes, earthquakes, floods, and other natural calamities can disrupt supply chains, causing delays and shortages. For instance, the 2011 earthquake and tsunami in Japan severely impacted the automotive and electronics industries, disrupting the supply of critical components. Similarly, the 2022 flooding in Nigeria affected millions of people and hectares of arable land, impacting the agricultural output of the affected areas.

Read also: Explainer: Who is Hamas, How did they breach Israel’s defence?

Recommendation: Diversify suppliers and invest in resilience

To mitigate environmental risks, diversify suppliers across different geographical regions, and assess their resilience to natural disasters. Additionally, investing in contingency plans and stockpiling critical components can help buffer the impact of unforeseen environmental disruptions.

Conclusion

Global sourcing has undoubtedly transformed how businesses operate and thrive in the modern economy. However, it is crucial to acknowledge the numerous risks and challenges that accompany this strategy. Geopolitical tensions, trade wars, military invasions, changing alliances, cybersecurity threats, and environmental disasters all threaten the stability of global sourcing.

To navigate these risks successfully, businesses must be proactive in their approach. Diversifying sourcing partners, assessing geopolitical stability, monitoring political developments, strengthening cybersecurity measures, and investing in resilience are crucial strategies. By implementing these recommendations, businesses can safeguard their global sourcing operations and ensure long-term sustainability in an ever-changing world.

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