Geopolitics & Supply Chains: Lessons from a Year of Crisis in the Red Sea

Since the November 2023 hijacking of British tanker Galaxy Leader, the Houthis have carried out more than 130 attacks in the Red Sea, according to the nonprofit, Armed Conflict Location and Event Data (ACLED).

While there is wide agreement on the need for cooperation among countries and multilateral institutions to minimize disruptions to global trade, the Houthis’ determination has thus far inhibited any material progress. Ultimately, no one knows how long it will take for disruptions to end, or how long a return to ‘normal’ could take. 

This latest global supply chain crisis is yet another reminder of the risks shippers must contend with as they move goods around the world. 

What’s Being Done 

Despite the efforts of various groups, governments and multilateral institutions have thus far failed to create the conditions necessary to ensure safe passage of vessels through the Red Sea and into the Suez Canal. 

A wide range of international and regional stakeholders are working to resolve the dispute, including the UN Security Council, which in January passed a resolution demanding a ceasefire. Additionally, the International Maritime Organization (IMO), the World Shipping Council, along with a number of regional bodies (ICS, BIMCO, GCC, EU, CMF), have jointly condemned the attacks and advocated for cooperation and enhanced maritime security operations. Critically, there are limited operational mechanisms or forums for multilateral cooperation in the region.

Operation Prosperity Guardian, a United States-led international coalition force comprising more than 20 nations, was launched in December 2023 with the goal of ensuring the safe passage of commercial ships through the Bab al-Mandab corridor. While the coalition has successfully thwarted numerous attacks through maritime security operations, the Houthis have not yielded. 

The Next Red Sea: Where Else Could Geopolitical Crisis Erupt?

The Red Sea crisis has shown the impact geopolitical conflict can have on global trade. Other strategically important waterways where similar conflicts could cause havoc for shippers include: 

The South China Sea

The strategic importance of the South China Sea is made clear by the fact that almost 60% of global trade passes through it. However, the continued openness and accessibility of the region is constantly under threat due to territorial disputes between China, the Philippines, Taiwan, Vietnam, Brunei and Malaysia. While China has a vested interest in ensuring the continued navigability of the region given its prominent role in global shipping, tensions have risen in recent months between the Philippines and China. Should military conflict boil over in this region, global trade will almost certainly feel the impact.

The Strait of Malacca

The Strait of Malacca connects the South China Sea with the Indian Ocean, and is a critical chokepoint on trade between Asia, the Middle East and Europe. Critically, the Strait facilitates the import of nearly 80% of China’s oil, and thus the accessibility of the waterway is essential to Chinese security interests. International security observers have speculated that military conflict in the region could lead to the United States and its allies blockading access, which would also have material impacts on global trade. Alternative routes such as the Sunda Strait are, however, available and the incremental distance is far less than the current Suez Canal diversions we are seeing around the Cape of Good Hope.

The Strait of Hormuz 

The Strait of Hormuz is a critical chokepoint for global oil trade and sees approximately 90 ships per day. The prolonged closure of this strategically important passage would likely cause an energy crisis. However, the Gulf nations that are reliant on oil revenues have a strong vested interest in ensuring ships carrying their oil to the rest of the world can pass through it safely. But a history of conflict in the region means this risk should not be too heavily discounted. 

Lessons in Supply Chain Risk Management

When you operate a global supply chain, geopolitical risk can’t be completely avoided. But its impact on your business can be managed. 

Control the Controllables

Geopolitical conflict sits far outside the sphere of influence of supply chain and logistics operators.

While geopolitical risk can't be completely avoided, the best way to protect your supply chain against it is to reduce reliance on trade routes that pass through vulnerable passages by diversifying supplier and transportation networks. By doing this, you can reduce your dependency on single chokepoints that can grind your supply chain to a halt. Nearshoring is the most common example of this type of risk control in practice, and the Red Sea crisis is likely to accelerate the shift away from globalization that was already underway.

Safety stock levels can also be increased to protect against disrupted supply networks, although the cost associated with carrying excess inventory means this is more of a stop-gap than a long term solution.

Invest in Supply Chain Visibility

In times of crisis, knowledge is power. Real-time supply chain visibility delivers on-demand situational awareness and serves as a form of insurance by enabling immediate insight into risk exposure.

With less time spent identifying problems, supply chain and logistics teams can shift focus to the implementation of response plans, minimizing disruptions and maintaining operational stability. A good visibility solution will also ensure that the other actors in your supply chain have real-time access to the same information that you do, making it easier to coordinate responses across stakeholders.

Make Contingency Planning a Priority

Where de-risking your supply chain network isn’t possible, contingency planning is your next best alternative.

Engaging in scenario planning exercises and building crisis playbooks allows you to proactively identify potential risks and debate the best approaches before you find yourself in the depths of a crisis scenario.