The global shipping industry is vital for moving goods around the world, but it can be heavily affected by geopolitical events. These are events related to international politics and conflicts, such as trade wars, military actions, and pandemics. These situations can disrupt shipping routes, increase costs, and create challenges for businesses.

In this article, we will look at the main causes of geopolitical events and how they impact the shipping industry. We will explore different types of geopolitical events that affect supply chains, including trade wars, pandemics, and economic recessions. We will also discuss how these events change shipping rates and cause shortages or surpluses of shipping containers. By understanding these factors, businesses can better prepare for and manage the effects of geopolitical events on their shipping operations.

What Causes Geopolitical Events? 

The oil tanker Marlin Luanda catches fire after an attack in the Gulf of Aden, the waterway leading into the Red Sea, on January 27, 2024. Indian Navy/AP 

Geopolitical events significantly impact the global trade industry, which relies on the cooperation and coordination of many countries to maintain a smooth supply chain. Every nation benefits economically from imports and exports, contributing to the growth of the global economy. However, any political tension can disrupt this flow of goods, threatening the financial stability of the involved countries. Geopolitical events that can cause such disruptions often arise due to several key factors:

  • Power Dynamics: Countries vying for greater influence and control on the global stage can lead to conflicts over territories, political alliances, and economic dominance. Economic power plays, such as imposing sanctions or forming exclusive trade agreements, can shift global trade patterns and cause instability.
  • Military Activities: Military actions, including interventions, wars, and defense strategies, significantly impact geopolitics. Disputes over maritime boundaries, military exercises in strategic areas, or direct conflicts can disrupt shipping routes and impact the transportation of goods, causing delays and increased costs.
  • Terrorist Activities: Terrorism creates instability and threatens the safety of shipping routes. Attacks on ports, ships, or critical infrastructure can cause significant disruptions in the supply chain. For instance, recent attacks in the Red Sea by the Houthi militia have resulted in hijacked vessels, increased military presence, and rerouting of ships leading to longer transit times and higher costs. 

Types of Geopolitical Events that Affect Supply Chains

Geopolitical events encompass a range of global incidents that significantly influence supply chains and international trade routes. Understanding these events is crucial for businesses to navigate potential disruptions effectively:

  • Trade Wars: referring to economic conflicts between nations, it’s characterized by increasing tariffs, trade barriers, and other restrictive measures aimed at protecting domestic industries and gaining trade advantages. These wars can disrupt global trade flows, impacting various sectors and supply chains worldwide.

    Examples of Trade Wars: US-China Trade War.

    Initiated in 2018, the trade war between the United States and China involved successive rounds of tariffs on hundreds of billions of dollars' worth of goods. This conflict was fueled by issues such as intellectual property theft, technology transfer, and trade imbalances. The tariffs imposed by both sides disrupted supply chains, increased costs for businesses, and led to shifts in sourcing and manufacturing strategies globally.
  • Sanctions and Embargoes: Sanctions and embargoes are international measures used to influence behavior, enforce compliance with international law, or address threats to peace and security. They are imposed when a state's actions, such as aggression or human rights abuses, pose significant international concerns.

    For instance:
    • Sanctions on Iran target its nuclear program and ballistic missile development, impacting global shipping by restricting trade and financial transactions.
    • Cuba faces U.S. embargo restricting trade and tourism, affecting maritime logistics in the Caribbean.
    • North Korea is sanctioned for its nuclear activities, influencing shipping routes and cargo inspections in East Asia.
    • Russia's sanctions over its actions in Ukraine affect energy and technology sectors, disrupting international supply chains.
    • Israel faces calls for targeted measures due to regional conflicts, potential sanctions could impact sectors like defense and technology, influencing Middle Eastern shipping routes.

      Overall, sanctions and embargoes alter trade routes, increase compliance costs, restrict financial transactions, and disrupt the flow of goods globally, reflecting efforts to enforce international norms and achieve diplomatic goals through economic means.
  • Pandemics: Pandemics, such as the COVID-19 outbreak, has profoundly impacted the global shipping industry, disrupting economies worldwide. Shipping, essential for transporting vital goods like food and medicine, faced significant challenges due to pandemic-induced lockdowns and reduced production. With factories closed and port operations slowed by staff shortages, shipping lines scaled back operations to mitigate economic losses.

    As global economies began to recover in late 2020, demand surged, particularly on routes from China to North America and Europe. However, shipping lines operated with fewer vessels and reduced port capacities, leading to severe delays and a shortage of shipping containers. This imbalance between demand and supply skyrocketed freight rates, exacerbating logistical challenges.

    Shippers faced prolonged delays and container shortages, with containers accumulating in ports like those in North America and Europe while others urgently require them elsewhere. This situation underscores the unpredictability and strain the pandemic has placed on global shipping, affecting supply chains across various industries.

How do Geopolitical Events affect the Shipping Industry? 

Geopolitical events exert significant impacts on the shipping industry across various dimensions:

  • Disrupted Transportation: Geopolitical tensions and conflicts often lead to delays and rerouting of ships, resulting in increased transit times and operational costs. These disruptions force shipping companies to adapt quickly to changing circumstances to maintain efficient supply chain operations.
  • Increase in Trade Tariffs: Escalating trade tariffs due to geopolitical disputes raise costs for both exporters and importers. Higher tariffs reduce shipping demand and influence pricing strategies, impacting profitability and market dynamics in global trade routes.
  • Port Congestions and Closures: Geopolitical conflicts can lead to port congestions and occasional closures, severely disrupting maritime logistics. Examples include Yemen and Libya, where ongoing conflicts periodically shut down critical ports, halting essential trade activities and exacerbating supply chain vulnerabilities.
  • Supply Chain Resilience: To mitigate geopolitical risks, shipping companies implement resilient logistics strategies. This includes diversifying transport routes and modes to circumvent unstable regions, ensuring continuous operations despite geopolitical uncertainties.
  • Increased Shipping Rates: Geopolitical tensions often trigger spikes in shipping rates. Factors such as heightened demand, port congestion, and geopolitical instability contribute to historical rate fluctuations during crises, posing financial challenges to stakeholders across the shipping industry.
  • Container Shortages and Surplus: Geopolitical disruptions disrupt container availability, causing imbalances in supply and demand. Shortages occur due to logistical bottlenecks and increased demand, while surplus containers may result from reduced export volumes or disruptions in trade flows, prompting industry-wide efforts to manage inventory effectively.

These impacts underscore the critical need for adaptive strategies and resilience in the shipping industry to navigate geopolitical complexities and sustain global trade operations.

Conclusion

The global shipping industry, crucial for facilitating international trade, is significantly impacted by geopolitical events such as trade wars, pandemics, and sanctions. These events disrupt shipping routes, escalate costs, and present operational challenges worldwide. Trade tensions often result in increased tariffs, affecting exporters and importers by altering global trade dynamics and pricing strategies. Port closures due to conflicts, exemplified by incidents in Yemen and Libya, exacerbate logistical hurdles, leading to disruptions in vital trade activities and underscoring the industry's vulnerability to geopolitical instability.

To mitigate these risks, shipping companies adopt strategies such as diversifying transport routes and modes. Despite these efforts, spikes in shipping rates during crises persist, impacting stakeholders throughout the industry and highlighting the necessity for flexible responses. Moreover, disruptions in global trade flows create fluctuations in container availability, causing logistical complexities and inventory management challenges. These dynamics emphasize the critical importance of proactive measures and robust contingency plans to navigate geopolitical complexities effectively.

Businesses must proactively anticipate and respond to geopolitical shifts to sustain efficient global trade operations amidst evolving international landscapes. By preparing for these impacts, stakeholders can better navigate the dynamic challenges posed by geopolitical events in the shipping industry, ensuring resilience and continuity in supply chain operations.