Global supply chains and geoeconomics

In MBA-513, the cohort redesigned Cedarline's supply chain for cost, speed and inventory. Dr. Tan opens the tenth session by asking them to look at the same supply chain through a different lens: power. Who could cut it, and why? Grace answers first. Second Ascent's zippers come from one Japanese company's factories, one of them in China; its waterproof membranes from Taiwan. If relations between China and Taiwan deteriorated, she says, both could stop at once. Owen adds that the gas turbines Prairie Ridge depends on use rare earth magnets refined almost entirely in China. Dr. Tan says that this is geoeconomics: the use of economic tools, including trade, investment, finance and technology, to pursue geopolitical goals, and the way it is reshaping where companies make and buy things.

From efficiency to resilience

For three decades, supply chain strategy aimed mainly at cost. Companies concentrated production in the cheapest locations, often China, held little inventory and relied on long, finely tuned chains. The model delivered enormous efficiency, and it carried hidden risks that became visible after 2020. The pandemic closed factories and ports; a ship blocked the Suez Canal for six days in 2021; Russia's invasion of Ukraine cut supplies of energy, grain and metals; attacks on shipping in the Red Sea from late 2023 forced many vessels around Africa; and conflict in the Middle East in early 2026 disrupted energy supplies and shipping again. Meanwhile, governments began using supply chains deliberately as instruments of pressure.

Companies have responded by giving more weight to resilience: the ability to absorb a disruption and recover quickly. Resilience costs money. It may require holding more inventory, qualifying second suppliers, paying more to produce closer to customers or designing products that can use alternative parts. The strategic question is not whether to trade efficiency for resilience, but how much resilience is worth for each product and input, given the likelihood and impact of disruption.

The tools of geoeconomics

Governments use a growing set of economic tools for strategic ends. Tariffs, discussed in lesson 3, raise the cost of goods from particular countries. Sanctions prohibit dealings with designated countries, firms or people; the sanctions imposed on Russia since 2022 by the European Union, the United States, Canada, the United Kingdom, Japan and others are the most extensive ever applied to a large economy, and the EU extended its regime in September 2026 to 2029. Export controls restrict sales of sensitive technologies: since October 2022 the United States has progressively restricted exports of advanced semiconductors and chip-making equipment to China, and allies including Japan and the Netherlands have adopted related controls.

China has used similar tools. It imposed export controls on gallium and germanium, used in electronics, in 2023, and on several rare earth elements and magnets in 2025, before agreeing in late 2025 to suspend some of the newest controls for a year as part of a truce with the United States. Since China refines most of the world's rare earths and many other critical minerals, such controls can halt production lines far from China. Investment screening allows governments to block foreign acquisitions in sensitive sectors; Canada, the United States, the European Union, Japan and the United Kingdom have all tightened their regimes since 2018. Subsidies and industrial policy, such as American, European, Japanese and Canadian programs for semiconductors, batteries and clean energy, aim to build domestic capacity in strategic industries.

Fragmentation and connector countries

Research at the International Monetary Fund and elsewhere has documented how trade has begun to shift along geopolitical lines. Since 2022, trade and investment between countries in rival blocs have grown more slowly than trade among allies. At the same time, connector countries, which trade extensively with both sides, have gained. Mexico became the largest source of American imports in 2023, overtaking China. Vietnam, India, Indonesia, Malaysia and Turkey have attracted factories moving out of China. Some of this shift is genuine relocation of production; some is rerouting, in which Chinese inputs are assembled or transshipped through connector countries, which is why the United States and others have tightened rules of origin and enforcement.

Economists estimate that severe fragmentation could reduce world output by several percent in the long run, with the largest losses in emerging and developing economies that depend on trade with both blocs. For companies, fragmentation means that supply chain decisions now carry political as well as economic consequences. A factory in a connector country may face new tariffs if its home country's alignment changes; a supplier owned by a firm from a rival bloc may become subject to sanctions or controls.

Strategies: China plus one, nearshoring and friendshoring

Companies have adopted several overlapping strategies. China plus one keeps production in China, often for the Chinese and Asian markets, while adding capacity in at least one other country to serve other markets and reduce dependence. Nearshoring moves production closer to customers, such as from Asia to Mexico or Central America for the North American market, or from Asia to Turkey and eastern Europe for Europe; it shortens lead times, reduces inventory and shipping risk and, under USMCA, can qualify goods for duty-free treatment, though labor costs are higher. Friendshoring, a term popularized by the US Treasury in 2022, concentrates supply chains among politically allied countries. Reshoring brings production back home, usually with heavy automation, and has been significant in a few strategic industries, such as semiconductors and batteries, but limited elsewhere because of labor costs and shortages.

Each strategy has costs. Production outside China often costs more, at least at first, because suppliers, skilled workers and infrastructure are less developed; many inputs still come from China even when final assembly moves. Nearshoring to Mexico exposes companies to its own risks, including security, energy supply and the future of North American trade rules. Dr. Tan stresses that moving production rarely eliminates dependence on rival countries; it often moves it one tier further back in the supply chain, where it is harder to see.

Seeing the whole chain

Most companies know their direct suppliers well and their suppliers' suppliers poorly. Yet many disruptions start several tiers back: a chemical plant that makes a coating, a mine that supplies a mineral, a mill that spins a yarn. Mapping the supply chain beyond the first tier is the first step in managing geoeconomic risk. It is also increasingly required by law. The United States' Uyghur Forced Labor Prevention Act, in force since 2022, presumes that goods made wholly or partly in the Xinjiang region of China were made with forced labor and bars them unless the importer proves otherwise; cotton, polysilicon and aluminum have been major targets. Canada has prohibited imports of goods made with forced labor since 2020 and, since 2024, requires larger companies to report on the steps they take to prevent forced and child labor in their supply chains. The European Union has adopted a forced labor regulation that will ban such products from its market from late 2027, and its corporate sustainability due diligence directive requires large companies to identify and address human rights and environmental harms in their chains, though its scope and timing were reduced in 2025 and 2026.

For Cedarline, which uses cotton in some casual lines and buys from factories that source fabric from many countries, these rules make supply chain mapping a legal necessity, not just good practice. Shipments that cannot be traced to their fiber source risk being detained at the border.

Stress-testing the supply chain

Companies increasingly stress-test their supply chains against scenarios: a closure of a key shipping lane, the imposition of sanctions on a supplier's country, an export ban on a critical input, a natural disaster at a key plant. For each scenario they estimate the time to recover, how long it would take to restore supply, and the time to survive, how long the company could continue to meet demand from inventory and alternative sources. MBA-513 introduced these measures for Cedarline's membrane supplier. A geoeconomic stress test extends the approach to political scenarios, which may last much longer than physical disruptions: a factory flooded by a typhoon may be back in weeks, but an export ban or sanctions regime can last for years.

# Choosing a sourcing mix under geoeconomic scenarios (costs per jacket, home currency)
sources = {"Country A (current)": 104.0, "Country B (connector)": 109.0, "Nearshore": 121.0}
# scenarios: (probability over the planning period, extra cost per jacket by source)
scenarios = {
    "base":                    (0.60, {"Country A (current)": 0.0,  "Country B (connector)": 0.0,  "Nearshore": 0.0}),
    "new tariffs on A":        (0.20, {"Country A (current)": 26.0, "Country B (connector)": 4.0,  "Nearshore": 0.0}),
    "shipping disruption":     (0.15, {"Country A (current)": 9.0,  "Country B (connector)": 9.0,  "Nearshore": 1.0}),
    "export ban affecting A":  (0.05, {"Country A (current)": 80.0, "Country B (connector)": 12.0, "Nearshore": 3.0}),
}
mixes = {"all A": {"Country A (current)": 1.0},
         "70/30 A and B": {"Country A (current)": 0.7, "Country B (connector)": 0.3},
         "50/30/20": {"Country A (current)": 0.5, "Country B (connector)": 0.3, "Nearshore": 0.2}}
for name, mix in mixes.items():
    costs = {}
    for sc, (p, extra) in scenarios.items():
        costs[sc] = sum(w * (sources[s] + extra[s]) for s, w in mix.items())
    expected = sum(scenarios[sc][0] * c for sc, c in costs.items())
    worst = max(costs.values())
    print(f"{name:<14} base {costs['base']:6.1f}  expected {expected:6.1f}  worst case {worst:6.1f}")

all A          base  104.0  expected  114.5  worst case  184.0
70/30 A and B  base  105.5  expected  113.7  worst case  165.1
50/30/20       base  108.9  expected  115.1  worst case  153.1

The illustration shows a familiar pattern. Concentrating on the cheapest source has the lowest cost in the base case and a respectable expected cost, but a very high cost in the worst case. Diversifying raises the base cost slightly but sharply reduces the worst case. The 70/30 mix also lowers the expected cost, because the chance of new tariffs on the main source is substantial; adding a nearshore source raises the expected cost a little but cuts the worst case further, so it buys insurance rather than savings. The right mix depends on the probabilities, which are judgments, and on how much the company values protection against the worst case; a company with thin margins and high debt should value it more.

Dr. Tan adds two cautions about such models. First, scenarios are not independent: a conflict that leads to an export ban is also likely to disrupt shipping and raise tariffs, so the worst case may be worse than any single scenario suggests. Second, the cost of a disruption is not only the higher price of the jacket. If supply is cut off altogether, the company loses sales, and perhaps customers, for a season. A proper analysis adds the margin lost on sales that cannot be made, which usually strengthens the case for diversifying critical inputs.

Designing for flexibility

The most robust supply chains are designed to switch. Products can be designed to use common parts and materials available from several sources, or with alternative specifications approved in advance. Suppliers can be qualified in advance even if they receive little business, so that volume can be moved quickly. Contracts can include flexibility on volumes and locations. Inventory of critical inputs can be held strategically rather than uniformly. And information systems that track origin, content and supplier ownership allow a company to see within hours, rather than weeks, which products a new tariff or sanction affects. Dr. Tan tells the cohort that the companies that handled the tariff changes of 2025 and 2026 best were not those with the lowest costs, but those that already knew exactly what was in every product and where it came from.