The impact of global conflicts and regulatory changes on trade

We often hear the term “geopolitics” in the context of international challenges. The word originates from ancient Greek, meaning “earth, land and politics,” and refers to how geography influences politics and international relations. The modern term “geopolitics” was coined by Swedish political observer Rudolf Kjellén in the early 20th Century, and its use spread across Europe after the First World War. Today, “geopolitics” is commonly used as a synonym for international affairs.

Its impact on global trade can be well illustrated by the Iranian Revolution of 1979, which saw the overthrow of the secular Shah of Iran and the rise of Ayatollah Khomeini, a religious leader whose ideology continues through his successors today. The ensuing U.S.-Iran hostage crisis, where 53 American diplomats were held for 444 days, shaped U.S.-Iran relations and led to international sanctions that remain in place. Notably, China and Russia do not adhere to these sanctions.

One current issue affecting global supply chains is the repeated attacks on commercial ships in the Red Sea by Yemeni Houthis since October, in support of Palestinians. Despite a strong naval presence by the U.S. and the European Union to protect commercial shipping, the attacks continue due to ongoing support from Iran. As a result, international shipping faces higher costs and longer transit times, with many ships now opting for the longer route around South Africa’s Cape of Good Hope instead of the traditional, shorter route via the Red Sea, Suez Canal and Mediterranean. This creates ongoing challenges for the shipping industry.

As demonstrated by these examples, long-standing conflicts or rivalries between nations can have lasting effects on global trade and supply chains. The situation in Israel and Palestine is a prime example. Since the establishment of the State of Israel in 1948, peaceful coexistence with Palestinians has been elusive. The barbaric attack by Hamas on Israel on Oct. 7 was followed by predictable Israeli retaliation in Gaza and the West Bank. However, Israel has expanded its military actions into Lebanon to target the Hezbollah militia, backed by Iran, which holds de facto power in Lebanon. Could this escalate into a larger war in the Middle East, disrupting oil and gas flows and halting commercial shipping, potentially sparking another global crisis, inflation, or even a recession? No one knows for sure.

The war in Ukraine is another classic example of geopolitics at play. After Ukraine regained full independence with the fall of the Soviet Union in 1991, its people established democracy during the Maidan Revolution in February 2014. This displeased Russia, which subsequently invaded and annexed Crimea, then part of Ukraine, in March 2014. Emboldened by the relatively muted international response, Russia launched a full-scale invasion of Ukraine on Feb. 24, 2022. Most democracies, including the U.S., Canada, the European Union, the U.K., Japan and South Korea, imposed sanctions on Russia. However, several countries, led by China, India, Brazil and South Africa, along with numerous authoritarian regimes in Africa, the Middle East and Asia, have not imposed sanctions, effectively supporting Russia’s actions. This has contributed to global divisions and significantly affected the cost and availability of key resources such as minerals, metals, grains and fertilizers, exacerbating inflation worldwide.

Canadian supply chain managers must account for these factors in their risk management strategies, develop contingency plans and stay as proactive as possible. In addition to heightened risks and uncertainties, moral and ethical concerns arise—often referred to as ESG (environmental, social and governance) considerations. Do we want to source products from countries that support Russia and disregard the rule of law?

When discussing geopolitics and its impact on supply chains, we tend to think of distant lands, but it can also hit closer to home. A prime example is forced labour laws. Canada has implemented high-level legislation prohibiting forced and child labour in supply chains—essentially, a “thou shalt not” policy. However, the primary obligation for Canadian companies is to issue an annual report to the government. The U.S., in contrast, has stricter laws targeting products from China’s Xinjiang region, where the Uyghur minority faces persecution. The U.S. bans the import of any goods made in whole or in part in Xinjiang, citing forced labour concerns. Canadian companies that do business in the U.S. must navigate this.

In a recent development, a bipartisan group of U.S. lawmakers urged Canada (and Mexico) to adopt similar laws to prevent goods from Xinjiang from entering North America through Canada or Mexico. This would mark a significant shift from mere reporting to actual enforcement at Canadian ports of entry. With such ever-evolving challenges, some may wonder if artificial intelligence is the answer. Will AI save or enslave us? That will be the subject of my next column.