How Geopolitical Conflicts Threaten Global Shipping and Trade
In recent years, shipping interests have become accustomed to significant geopolitical disruptions, such as the invasion of Ukraine, Russian attacks on shipping, and the Houthi blockade of maritime traffic in the Red Sea. The possibility of large-scale conflict is now considered a given in the industry, although there are no precise metrics for its costs. The insurance company Lloyd’s has provided an estimate of the maximum potential impact of a hypothetical geopolitical conflict, and the figure is staggering.
In the latest edition of its systemic risk series, Lloyd’s focused on a hypothetical regional conflict that would cause widespread disruptions to global trade patterns. Since approximately 80 percent of the world’s imports and exports are transported by sea, the disruption of global shipping lanes would represent one of the greatest economic threats in the event of an escalating regional conflict.
Lloyd’s examined a scenario similar to the invasion of Ukraine or a hypothetical Chinese takeover of Taiwan: one superpower invades a major economy, disrupting global trade flows and supply chains. The invasion strategy includes internet blackouts, cyberattacks on infrastructure, and a physical blockade of trade in and out of the country. In addition to strikes on military targets, the invading force targets power generation, transportation, and communications.
Meanwhile, another superpower and its allies respond to the invasion by supporting the smaller nation, leading to an escalating conflict and mutual sanctions. Opposing forces confront each other in the affected region, and the invading force declares a naval blockade of nearby shipping lanes. Vessel operators are forced to reroute around the conflict area, and trade volumes are impacted by sanctions and transportation difficulties.
The conflict ultimately escalates into military action between the two sides, resulting in the shutdown of nearby shipping lanes and other alternative routes. This affects supply chains for raw materials, food, microchips, and equipment, causing shortages and contributing to rising inflation worldwide.
“Industries dependent on critical materials such as semiconductors and rare minerals—healthcare (medical devices), technology, automotive, and many more—are likely to face chronic shortages and delays,” Lloyd’s concluded. “The cascading effects of global trade disruptions, combined with escalating sanctions and closed shipping lanes, are likely to lead to inflation or food shortages in some states.”
Lloyd’s estimates that the five-year economic losses from this scenario could range from $8 trillion to $50 trillion, equivalent to a global GDP loss of about 1 to 7 percent. The most likely loss level would be around $15 trillion; Lloyd’s predicts that the probability of the most extreme $50 trillion scenario is about half a percentage point.
Given its prominent role in the global economy, China would be the most affected country in all scenarios, as it is deeply interconnected with trade, according to Lloyd’s. Europe and the Asia-Pacific region would also suffer significant economic losses, while North America would be substantially less affected in monetary terms, sustaining only $5 trillion in losses over five years in the worst-case scenario (10 percent of the global impact).
