Can supply chains afford to stay global?

GLOBAL TRADE

As Hormuz exposes the declining force of international law and tensions with China deepen, businesses may have little choice but to bring supply chains closer to home.

THE closure of the Strait of Hormuz has forced businesses to confront an uncomfortable possibility: the age of sprawling global supply chains built around cheap production and guaranteed access may be drawing to a close.

For decades, companies organised supply chains around cost and efficiency, confident that international law and the world’s leading maritime powers would keep trade routes open.

But after a crisis at one of the most extensively wargamed chokepoints confounded governments and corporate planners, analysts warn that assumption can no longer be taken for granted.

A new Sibylline report identifies eight other critical trade arteries vulnerable to disruption, from the Taiwan Strait and Bab el-Mandeb to the Panama Canal and Strait of Gibraltar.

As geopolitical rivalry intensifies, states may increasingly control access, impose conditions or use safe passage as leverage, while businesses unable to guarantee supplies are forced to bring production closer to their customers.

Stewart Paterson, a Geoeconomic Consultant for Sibylline and one of the report’s authors, says the underlying rules-based system is weakening.

Hormuz was supposed to be the crisis for which everyone had prepared. The strait handles around a fifth of global oil flows and its closure has long featured prominently in government and corporate contingency planning.

Instead, it exposed serious gaps. Some businesses failed to anticipate shortages of products derived from hydrocarbon production, including helium and sulphur, while the pace of recovery proved harder to predict than the initial disruption.

The report argues that the failure of the world’s most powerful navy to force the strait’s reopening has challenged the post-war assumption that US military hegemony can guarantee freedom of navigation.

But responsibility does not rest with Washington alone. Britain and other maritime powers have deployed warships to demonstrate their commitment to keeping international waters open.

This included last year’s multinational UK Carrier Strike Group deployment to the Indo-Pacific, led by the Royal Navy flagship HMS Prince of Wales.

The difficulty is that a chokepoint need not be sealed completely to become a powerful geopolitical weapon.

Even the threat of attack can increase insurance premiums sufficiently to deter commercial traffic, while selective access could allow a state to determine which vessels pass and at what price.

Paterson says Tehran could treat control of Hormuz as both a bargaining tool and a source of income.

“I think they do view it as a source of revenue, in this case a potential source of revenue,” he says.

“It’s almost pure blackmail. You pay a lump sum for safe passage.”

This is more than a shipping threat. If Iran can use international waters to extract revenue or sanctions relief, the rules protecting global trade begin to lose their force.

“We are dissolving into a world in which international law really carries little meaning,” Paterson says.

That erosion matters far beyond Hormuz.

Around 20% of global marine cargo passes through the Taiwan Strait, while Taiwan manufactures 90% of the world’s most advanced logic chips.

A prolonged closure would disrupt the electronics, automotive and AI industries and could cause an economic contraction greater than either the Covid pandemic or the 2008 financial crisis.

The neighbouring Malacca Strait carries more than 20% of global maritime trade by volume, including 29% of seaborne oil flows.

Around 80% of China’s imported crude and more than two-thirds of its maritime trade pass through the waterway.

Beijing therefore wants surrounding trade routes to remain open, but fears they could be weaponised against it. Its territorial claims and growing control of contested waters also raise questions about whether China could eventually dictate the terms under which others use them.

Paterson notes that Beijing has resisted becoming reliant on Russian energy, despite Moscow’s ability to meet far more of its needs, because it does not want to exchange one vulnerability for another.

For Western businesses, diversification does not necessarily mean a complete withdrawal from China, but companies remain reluctant to tamper with a model that delivered decades of lower costs, Paterson says.

Part of that resistance is institutional. Many of today’s corporate leaders built their careers by selling investors the “China story”, making it harder for them to acknowledge that the geopolitical foundations of that strategy have shifted.

“The economic costs of decoupling, rejigging supply chains have been greatly exaggerated in the past,” he says.

The shift is already underway. The Reshoring Initiative, a US non-profit tracking manufacturing brought back from overseas, says reshoring and foreign investment accounted for 244,000 announced jobs in 2024, with 1.7m filled since 2010.

Shorter supply chains would carry costs and could increase some consumer prices.

But they would also reduce exposure to disruption, support production and wages closer to home and allow companies to recover more quickly when crises occur.

The alternative is to continue relying on maritime routes threatened by conflict, coercion and climate-related shocks, often in combinations that are difficult to predict.

Disruption at Bab el-Mandeb and Gibraltar could effectively isolate the Mediterranean, while problems at the Panama Canal and US-Mexico border could compound inflation and scarcity in the US.

A confrontation over Taiwan combined with disruption at Malacca would have severe global consequences.

Sibylline recommends that companies identify the chokepoints on which they, their suppliers and their customers depend, test alternative routes and model simultaneous crises rather than planning for each disruption separately.

Companies cannot predict exactly where the next crisis will occur. They can only prepare to keep operating when supposedly guaranteed access suddenly disappears.

The question is not simply whether global supply chains remain the cheapest option, but whether businesses can adapt quickly enough to survive when those supply chains fail.

Paterson warns: “The people who are left behind, the people who are slow to move on this, are the ones who will end up with businesses that are potentially geopolitically challenged to the point of extinction.”