Supply chain under pressure as political tensions rise

Jon Guy examines why the events of this week have driven home the growing threat posed by geopolitical risk and why it has the potential to impact some of the world’s most pressing challenges.

I was always told never discuss religion or politics and it is a lesson that has served me well.

However, the past week has gone to highlight the precarious state of the world’s political balance amid events which have the potential to see that equilibrium tipped.

Monday heralded the opening of London International Shipping Week with the insurance and risk sector to the fore. Broker Willis Towers Watson invited former MI6 chief Sir Richard Dearlove to address the issues for political risk to the shipping sector.

Given over 90% of the world’s goods are moved by sea any negative impact on the maritime sector will have a profound effect across the globe.

His major concerns were around the moves by China to increase their maritime influence, from the South China Sea, the rapid plans for the construction of new naval and merchant vessels and the more subtle moves to adapt ports and vessels which would effectively prohibit the use of the facilities by anything but Chinese built and owned vessels.

He warned these concerns were tangible and within 12 hours news broke that the UK parliament had withdrawn the invitation for the Chinese ambassador to Great Britain to address the House of Commons as the Chinese had previously censored UK MPs.

Sir Richard’s concerns look to have been ever more justified following yesterday’s announcement that Australia, the UK and the US have agreed a new pact that will see UK and US defence technology shared with Australia allowing them, amongst other things, to build a new breed of nuclear submarines.

It has been seen as a deliberate ploy to look to counter the growing influence of China in the region. Unsurprisingly the announcement was swiftly denounced by China who have accused the trio of adopting a “cold war” mentality. It has also enraged France as the pact has also seen Australia scrap a deal for 12 diesel power submarines from French yards. France claims the trio have stabbed it in the back and tensions between the four three have significantly increased.

It all comes against a backdrop of China’s adoption of new rules for vessels transiting the South China Sea. which they deem to be Chinese national waters, from 1 September.

Under the new rules China’s amended its Maritime Traffic Safety Law requiring foreign vessels sailing in the South China Sea to report their information to the Chinese authorities. This covers submersibles, nuclear vessels, ships carrying radioactive materials, ships carrying bulk oil, chemicals, liquefied gas, and other toxic and harmful substances, and other vessels “that might endanger China’s maritime traffic safety.”

It has prompted the Philippines to call on the US to review the mutual defence treaty between the two countries as tensions rise.

Chinese ports currently handle over 1,000 vessels a day and if tensons increase with vessels prohibited from transiting parts of the South China Sea and both Chinese imports or exports reduced or halted the fears of the West over a supply shortage in the lead up to Christmas and beyond would become a bitter reality. The supply chain failures and business interruption that would result have the potentials to cause widespread reduction for global manufacturing.

There is also the threat of unintended consequences. With China one of the world’s biggest energy consumers, a diplomatic row with the UK which results in China refusing to attend the COP26 summit in Glasgow would have potentially catastrophic effects on the world’s efforts to drive ever more stringent emissions targets to combat global warming.

While China is dominating the headlines Sir Richard also highlighted the ongoing threat of a blockade of the Straits of Hormuz amid fears that the dispute between Saudi Arabia and Iran will escalate into armed conflict. The result would be a huge reduction in global oil supply to the west.

We might not want to talk about politics but in the weeks and months to come it is likely we will be unable to avoid it.

Given over 90% of the world’s goods are moved by sea any negative impact on the maritime sector will have a profound effect across the globe.

Follow us on twitter: @risksEmerging

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