By Shashank Pattekar, International Banker
Promoting free and efficient global trade has long been a priority for governments worldwide—that is, until the last decade. With the 2017 advent of the “Trump Era” and with escalating geopolitical rivalry taking centre stage in more recent years, those efforts have largely fallen by the wayside, as trade has become an increasingly potent weapon of state power. Among the most impactful consequences of this shift has been on supply chains, as companies and governments now factor in a whole host of additional considerations before approving trading relationships.
Until the 2010s, the free-trade era of the previously globalised world saw tariffs and protectionist policies generally easing over decades, amid an increasingly liberalised market environment. The resultant tight interconnectedness of nations during this period meant that trade would continue to flow even when political tensions arose, as parties would be insulated from the geopolitical arena by mutual economic interests. This also meant that supply chains were largely optimised for economic efficiency, often stretching across multiple continents.
Over the last decade, that free-trade regime has decisively broken down, with a markedly accelerating force from 2020 onward.
Over the last decade, that free-trade regime has decisively broken down, with a markedly accelerating force from 2020 onward. Instead, myriad combative tools, including tariffs, export controls, economic and financial sanctions, investment restrictions and industrial subsidies have been introduced with growing frequency during this time, such that they have become embedded features of the strategies regularly wielded by governments to contain their economic and geopolitical rivals, protect strategic industries and reshape global production networks.
Indeed, measures that would once have been considered extraordinary are now treated as routine policy instruments. Sanctions have broadened dramatically in scope, extending beyond individuals and firms to entire sectors, such as energy, banking, shipping and advanced manufacturing; export controls on semiconductors, capital equipment and dual-use technologies are now central to geopolitical competition; and tariffs are rerouting trade and capital flows on a global scale.
The deterioration of US–China relations during Donald Trump’s first term as US president represented an early marker of this new reality. The standoff saw the US government hike tariff rates by 25 percentage points on $50 billion of commodities imported from China and by 10 percentage points on an additional $200 billion of commodities. But this was only the beginning of the structural shift.
A much broader acceleration was then observed with subsequent shocks, starting with the COVID-19 pandemic in 2020. With supply chains optimised to minimise costs and inventories while maximising efficiency, industries largely relied on the cheapest and fewest manufacturing sources, which were invariably thousands of miles from end consumers.
When the pandemic halted economic activity across much of the world—supplier operations included—the fragility of those supply chains was brazenly exposed, forcing a major rethink. “As they struggled to keep their businesses running, companies were planning significant strategic changes to the configuration and operation of their supply chains,” McKinsey & Company reported in November 2021. “When we surveyed senior supply-chain executives from across industries and geographies [in May 2020], 93 percent of respondents told us that they intended to make their supply chains far more flexible, agile, and resilient.”
With the world having barely recovered from the pandemic by early 2022, the outbreak of the Russia-Ukraine War demonstrated how deeply trade–energy flows, finance and logistics in particular could be weaponised. With much of the Western world relying on Russia’s abundant natural resources, attempts to sanction the country forced policymakers to confront the stark reality that while trade interconnectedness could achieve new heights of economic cooperation, it could also magnify vulnerability when geopolitical interests and ideologies clashed. And with hundreds of billions of dollars of Russian funds sitting in European financial institutions suddenly frozen following its invasion, Moscow learnt this harsh reality, too.
As economic and geopolitical rivalries between the United States and China have continued to escalate throughout the current decade, moreover, the weaponisation of trade has only further intensified, culminating in skyrocketing tariffs on crucial imports levied from last April onward, first by Trump and then by Beijing in response. Ngozi Okonjo-Iweala captured this escalating shift. “The negative macroeconomic effects will not be confined to the United States and China but will extend to other economies, especially the least developed nations,” the World Trade Organization’s (WTO’s) director-general declared in a statement on April 9, in the midst of the tariff-hike frenzy. “Of particular concern is the potential fragmentation of global trade along geopolitical lines. A division of the global economy into two blocs could lead to a long-term reduction in global real GDP by nearly 7 percent.”
Tariff rates have since come down after the two parties agreed in late October to dial back tensions. Nonetheless, the global shift in trade policy was, once again, laid bare for the world to absorb.
So, why are these seismic trade events occurring so frequently now? As the US-China standoff shows, geopolitics has returned as a defining feature of the global economy. Governments increasingly view dependence on foreign suppliers—particularly for such essentials as energy, food, defence and advanced technology—as a strategic risk.
Technology has also increasingly fallen under the “national security” domain, partly as a consequence of this fraught geopolitical landscape. Semiconductors, artificial intelligence (AI) infrastructure, advanced materials and energy technologies are now central to both economic competitiveness and military capability. Controlling their production has thus become a crucial strategic objective rather than a purely commercial one.
The treatment of semiconductors aptly demonstrates how this particular change has impacted trade and global supply chains in recent years. With semiconductor manufacturing dominated by Taiwan Semiconductor Manufacturing Company (TSMC), which produces chips for leading US tech firms including Apple and Nvidia, chips are typically shipped to Southeast Asia for assembly, testing and packaging before being forwarded to factories around the world.
“This process, an archetype of globalization, has allowed each participant to focus on their respective comparative advantage, driving down costs and enabling the industry’s blistering rate of innovation,” the Council on Foreign Relations (CFR) noted in April 2024. “At the same time, however, this industry, which is vital to the global economy and to national security, has become heavily reliant on one manufacturing hub, Taiwan, which has raised anxieties in the United States regarding the fragility of the supply chain.”
To bolster supply-chain resilience, the US has been spending hundreds of billions of dollars to resurrect its domestic semiconductor-manufacturing industry. “By 2030, semiconductors could be a $1 trillion industry, with fabs producing a wider and more complex variety of chips and designs,” McKinsey noted in November. “The United States could account for 30 percent of advanced-node semiconductor fabrication capacity. But that potential will not become a reality if fabs cannot get the chemicals and materials they need when they need them. That is why establishing a reliable, resilient supply matters—and why the effort to do so must start now.”
The preference for boosting domestic and/or lower-risk production capacity in such circumstances has also been labelled as “de-risking”, “reshoring”, “nearshoring” and “friendshoring”, all of which signal a policy of reconfiguring supply chains to ensure they exist within familiar and safer economic and political environments. Production today is thus re-clustering into more controlled, geopolitically aligned blocs.
With friendshoring causing production to be relocated to existing economic and/or political allies, for example, investment into Mexico, Eastern Europe and parts of Southeast Asia has surged as a result. And while this means supply chains may no longer be optimised for economic efficiency, it appears to be a trade-off that companies are now willing to accept as an inescapable price of operational continuity within a highly politicised trade environment.
For companies, meanwhile, the weaponisation of trade is prompting a consideration of incorporating political risk into the calculus of their capital-expenditure decisions. As such, many firms are seeking to redesign their supply chains to reduce their potential exposure to tariffs, sanctions and export controls. Multi-sourcing is also increasingly replacing single-supplier optimisation, while inventory buffers are being expanded after decades of the “just-in-time” paradigm.
Ultimately, then, efficiency is no longer the dominant objective. While supply chains were optimised for decades to minimise costs and inventories, resilience, national security and geopolitical reliability take precedence today, even when they squeeze profitability margins.