How Have Geopolitical Risks Affected the Logistics Industry?
- Adit Bhatnagar
- Feb 12, 2025
- 5 min read
Each year, global issues, circumstances, and decisions influence the world and negatively impact essential industries. The global factors that disrupt industries are known as geopolitical risks or geopolitical tensions. These risks are associated with current wars, acts of terrorism, and political tensions between nations.
As these risks affect the globe, the logistics industry is often one of the first to be impacted. The logistics industry plays a vital role in managing the storage and transportation of goods and resources within the supply chain.
Geopolitical issues can disrupt the supply chain process and, over time, affect businesses globally. Supply chain and logistics companies must understand these risks and implement risk management strategies, which may be the only way to overcome geopolitical risks.
The article will highlight the main geopolitical risks this year and their impact on the global logistics industry.
What Are the Main Geopolitical Risks?
There are specific geopolitical risks that have been shown to have a greater impact on how companies operate and make decisions. These challenges are primarily related to ongoing wars, leaders’ decisions, and trade restrictions.
The main risks include the following.
Current Wars: The Russia-Ukraine and Middle East wars have been ongoing for years. They have caused significant issues and negatively affected several economies due to resource shortages and the rise of risky trade zones.
The Election of Trump: The new president of the superpower America has shocked many. His new law implementations and political tension with other countries have made it hard for numerous businesses and professionals.
US and China Trade Tension: The tension between the two superpower nations has worsened, with more trade restrictions and increased tariffs.
Lack of AI Regulations: There has been a noticeable increase in AI and its capabilities. It has been proven that it can be used maliciously. However, almost no nation has implemented laws to regulate its use, even though many IT experts have expressed the importance of controlling and limiting it.
These are the top global risks, but almost every continent and country has growing geopolitical risks. The countless risks will impact how products are moved and stored worldwide, but how?
The Effects of Geopolitical Risks on The Logistics Industry
Lengthier Routes
When a war breaks out between countries, it affects much more than the countries involved. These countries and the area around them are known as war zones. War zones can be extremely dangerous for any international transport, even if the flight or ship is passing by.
Hence, the current war’s geopolitical risks immensely affect the logistics industry. Logistics companies, particularly freight forwarders, must plan routes that avoid these areas and reduce the risk of danger. Companies must transport their cargo via a longer, more complex, and less efficient route to manage geopolitical risk.
For example, in early 2023, the Red Sea and Suez Canal provided the shortest and fastest trade route between Europe and Asia until the Mideast attacks began. The route made up 12% of the total global trade. However, the alternative is the Cape of Good Hope route, which has 3000 to 6,000 extra miles—around two weeks more.
Even aircraft are in danger when flying above a warzone, as sanctions ban European flights over Russian skies. As a result, more companies have to change their routes, which increases transport time and the chance of delays. Every company involved in the supply chain must be aware of the current and growing geopolitical risks and inform its clients that longer routes may cause delays.
Rise in Costs
Transporting goods from one location to another depends on their weight, route, and other factors. In recent years, transporting and storing goods have become much more expensive due to longer routes, fuel, warehouse rent, and international trade regulations.
Geopolitical risks significantly affect the amount suppliers and buyers spend on importing and exporting products. Along with the longer routes, the global economy plays a big part in rising costs. For example, due to the war in the Middle East, oil prices have increased, affecting the entire transport industry.
When discussing the rise in logistics costs, it is essential to consider the increase in tariffs. Political tensions are a significant factor contributing to these higher tariffs. For instance, since Donald Trump returned to power, he has substantially raised tariffs on goods from China by 10%. In fact, he has only recently paused tariffs on Canada and Mexico.
Buyers in the US are spending significantly more on imported products, and freight forwarders are being compelled to charge higher transportation fees. As a result, suppliers incur increased costs to export goods.
Loss of Clients
The logistics industry is about maintaining positive relationships with suppliers, buyers, and freight forwarders. These connections can span the globe, with clients located worldwide. However, ultimately, every company must prioritise its success and stability over business relationships.
A large international client base is crucial to a logistics business’s success and growth. Various political risks can affect client interactions and transactions, creating a supply chain shift in which more clients try to be more cost-effective and efficient.
For example, many Chinese suppliers are predicted to lose business to other nations like Mexico or Vietnam. Many international clients may not want to pay the increase in tariffs or overall logistics costs. They are slowly looking for suppliers closer to their main business location to benefit financially and avoid geopolitical challenges.
Logistics companies must be prepared for this impact and ensure their client base includes local and international clients. Depending solely on international clients could lead to unpredictable client losses if new trade regulations appear or tariffs increase further.
Uncertainty of Payment
When geopolitical risks lead to rising costs and client losses, many companies can find themselves in a difficult financial position. Due to economic or political issues, businesses worldwide may be unable to complete all suppliers’ payments.
Due to the severity of geopolitical risks, logistics companies may face increased instances of non-payment or delayed payments. In recent years, more companies have filed for bankruptcy due to rising costs, competition, and political issues.
This mainly impacts the logistics industry, which works on a credit basis, sending the products before the payment. Therefore, many suppliers will have manufactured and transported products but will not receive payment, which will affect their financial balance.
Non-payment or delayed payment disrupts the supply chain and can result in suppliers falling into financial trouble, just like their clients. No client can be fully trusted, and any business could face financial difficulties in this economy, which is marked by geopolitical risks and tension.
Can Insurance Reduce the Impact of Geopolitical Risks?
Geopolitical risks significantly impact the logistics industry, often leading to substantial financial losses and potential liability issues. One effective strategy for managing these financial risks is to purchase insurance.
There are not many policies that specifically protect companies from geopolitical risks due to uncertainty. However, everyone in the logistics industry can purchase trade credit insurance. The insurance covers financial losses due to non-payment, including economic and political risks. The insurance will reimburse a large portion of the non-payment, allowing suppliers to move on and reducing the disruption caused by the non-payment.
In addition, it can be hard to manage transportation when war zones and countless port regulations exist. Freight forwarders can purchase freight forwarder liability insurance to protect themselves against lawsuits resulting from delays or errors.
Another insurance related to a growing geopolitical risk is cyber insurance. Globally, AI is increasingly creating cyberattacks on the supply chain.Cyber insurance will cover cyber experts’ advice, threat removal, data recovery, informing third parties, and financial loss. It will help logistics firms deal with the outcome of cyberattacks and recover efficiently.
Insurance cannot avoid the impact of geopolitical risks, but it can help manage the outcomes and recover without incurring a negative financial burden.
To learn more about business insurance policies that can help your industry deal with geopolitical risks, contact Red Asia Insurance.
Comments