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The fragility of global supply chains has become painfully clear in recent years. In a dramatic and unprecedented move, the U.S. captured Venezuelan President Nicolás Maduro, triggering uncertainty in oil markets and destabilizing regional trade flows.
The Russia–Ukraine war disrupted grain and energy exports, sending shockwaves through markets worldwide. At the same time, rising tensions between China and the United States are forcing companies to rethink supply routes, manufacturing locations, and sourcing strategies.
For businesses and policymakers alike, grasping these cascading effects is no longer optional—it has become essential for building truly resilient global supply chains.
Ultimately, the question remains: do geopolitical risks cripple supply chains, or do they push them to evolve and strengthen? The paper Do geopolitical risks impede the global supply chain? published in Finance Research Letters tackles this complexity head-on. Chi Wei Su, Rongrong Dong, and Meng Qin uncover a dynamic, two-way relationship between geopolitical risk and supply chain pressure. Over time, the relationship shows that tension doesn’t always break supply chains but it can also drive innovation and cooperation.
For a detailed exploration of this research, navigate the interactive tabs below.
Do Geopolitical Risks Impede the Global Supply Chain?
A time-varying analysis of bidirectional causality between geopolitical risks and global supply chain pressures, revealing complex interactions with significant policy implications.
Su, Dong, & Qin (2025) investigate the bidirectional causal relationship between geopolitical risks (GPR) and global supply chain pressure (SCP) using monthly data from 1998-2024. Employing innovative bootstrap rolling-window techniques, the study reveals time-varying interactions where geopolitical risks can both impede and stimulate supply chain resilience, while supply chain pressures can simultaneously alleviate or exacerbate geopolitical tensions depending on economic circumstances.
Summary
This study addresses a critical gap in understanding the complex, bidirectional relationship between geopolitical risks and global supply chain pressures. While previous research has examined unidirectional effects, this paper provides the first systematic investigation of how these two factors interact over time.
The Core Problem: Geopolitical risks arising from military conflicts, economic sanctions, and trade tensions have increasingly disrupted global supply chains. However, the dynamic nature of this relationship—how it changes over time and operates in both directions—remains poorly understood.
Key Contributions:
- Bidirectional Analysis: Examines causality running both from GPR to SCP and from SCP to GPR
- Time-Varying Approach: Uses rolling-window techniques to capture changing relationships over different periods
- Both Positive and Negative Effects: Reveals that geopolitical risks can both increase and decrease supply chain pressures depending on circumstances
- Policy Focus: Provides evidence-based recommendations for building resilient supply chains in turbulent geopolitical environments
The Critical Insight: The relationship between geopolitical risks and supply chain pressures is not static or uniformly negative. Supply chain diversification, technological innovation, and economic interdependence can mitigate or even reverse expected negative effects.
Theoretical Framework: Bidirectional Causality Mechanisms
The study establishes two complementary theoretical pathways explaining the complex relationship between geopolitical risks and global supply chains.
1. From Geopolitical Risk to Supply Chain Pressure
- Labor and Production Disruptions: Conflict-related casualties deplete labor forces and diminish manufacturing capacity
- Infrastructure Damage: Critical transportation networks face disruption when belligerents target infrastructure
- Trade Restrictions: Commerce is constrained through retaliatory sanctions, tariffs, and restraining orders
- Energy Market Volatility: Inflationary pressures emerge when conflicts disrupt energy exports in key producing regions
- Mitigating Factors: Supply chain diversification, economic recovery policies, and digital technologies can offset these disruptions
2. From Supply Chain Pressure to Geopolitical Risk
- Resource Competition: Supply chain pressures intensify competition over critical resources like semiconductors and oil
- Inflationary Spiral: Supply chain disruptions trigger inflation and resource shortages, exacerbating geopolitical tensions
- Protectionist Responses: Nations may implement trade barriers in response to supply chain vulnerabilities
- Mitigating Factors: Enhanced economic interdependence raises conflict costs, while technological cooperation can reduce tensions
3. Control Mechanism
The model incorporates Economic Policy Uncertainty (EPU) as a control variable, recognizing that both GPR and SCP are influenced by broader policy uncertainty that affects global economic conditions.
Methodology & Data
Research Design & Analytical Approach
The study employs advanced time-series econometric techniques to capture dynamic relationships:
- Bootstrap Rolling-Window Granger Causality: Addresses parameter instability in traditional VAR models by examining causality in sub-samples
- Residual Bootstrap Method: Improves Granger causality testing by correcting size and power properties of likelihood ratio tests in finite samples
- Parameter Stability Tests: Implements Sup-F, Ave-F, Exp-F tests and Lc statistics to identify structural breaks
- Time-Varying Analysis: Uses rolling windows of at least 20 periods to analyze changing relationships over time
Data Sources & Variables
- Time Period: Monthly data from January 1998 to December 2024
- Geopolitical Risk Index (GPR): Developed by Caldara and Iacoviello (2022), measuring risks from wars, terrorism, and nuclear tensions
- Global Supply Chain Pressure Index (SCP): Created by the Federal Reserve Bank of New York (Benigno et al., 2022)
- Control Variable: Economic Policy Uncertainty (EPU) index to account for broader policy environment effects
Statistical Procedures
Preliminary Tests:
- Unit root tests (ADF, PP, KPSS) to verify stationarity
- Normality tests (Jarque-Bera) confirming non-normal distributions
- Lag length selection using sequential modified-LR tests and Akaike Information Criterion
Main Analysis: Bivariate VAR systems with bootstrap-based modified-LR tests, extended to include EPU as control variable.
Key Findings
1. Time-Varying Causality from GPR to SCP
Significant periods where geopolitical risks Granger-cause supply chain pressures:
- 2005:M9-2006:M4 (Positive Effect): Middle East conflicts disrupted energy supplies, raising transport costs and increasing SCP
- 2009:M12-2010:M6 (Negative Effect): Post-financial crisis stimulus measures and enhanced supply chain resilience decreased SCP despite geopolitical risks
- 2016:M4-2017:M5 (Negative Effect): AI growth helped predict and mitigate disruptions, enhancing supply chain stability
- 2023:M10-2024:M3 (Positive Effect): Multiple regional conflicts (Middle East, Eastern Europe, East Asia) disrupted energy and commodity flows
2. Time-Varying Causality from SCP to GPR
Significant periods where supply chain pressures Granger-cause geopolitical risks:
- 2007:M7-2008:M3 (Positive Effect): Extreme climate events and pre-crisis instability triggered commodity inflation and geopolitical tensions
- 2014:M10-2015:M7 (Negative Effect): Falling oil prices reduced SCP while increasing geopolitical risks in oil-dependent economies
- 2018:M11-2019:M4 (Negative Effect): Sino-American trade war disruptions had localized impact, limited compared to military conflicts
- 2022:M9-2023:M9 (Positive Effect): Russia-Ukraine conflict disruptions triggered inflation and resource competition, escalating GPR
3. Full-Sample vs. Sub-Sample Results
- Full-Sample Analysis: Shows no significant bidirectional causality, misleadingly suggesting no relationship
- Sub-Sample Analysis: Reveals multiple significant periods of causality in both directions, demonstrating time-varying relationships
- Key Insight: Parameter instability makes full-sample analysis inadequate for capturing the dynamic nature of GPR-SCP interactions
4. Asymmetric Effects
The study reveals that geopolitical risks do not invariably intensify supply chain pressures. Growing globalization has prompted nations and enterprises to diversify supply chains, reducing over-reliance risks and creating negative causality periods where increased GPR actually decreases SCP.
Implications & Future Research
Theoretical Contributions
- Bidirectional Framework: Establishes a comprehensive theoretical model explaining both GPR→SCP and SCP→GPR pathways
- Time-Varying Analysis: Demonstrates the importance of sub-sample approaches for studying dynamic economic relationships
- Complex Causality: Shows that geopolitical risks can have both positive and negative effects on supply chains depending on context
- Integration of Multiple Factors: Incorporates technological innovation, economic interdependence, and policy responses into the analysis
Policy Implications
For Governments:
- Establish strategic reserves for critical materials (microchips, energy) and diversify trade partnerships
- Prioritize supply chain stability by building disaster-responsive ecosystems with real-time monitoring
- Strengthen multilateral cooperation to prevent geopolitical escalation from supply chain tensions
- Invest in digital infrastructure and AI to enhance supply chain visibility and resilience
For Corporations:
- Adopt blockchain and artificial intelligence for supply chain transparency and risk prediction
- Diversify suppliers of critical goods and secure alternative production and logistics routes
- Develop adaptive inventory strategies that can respond to geopolitical disruptions
- Participate in industry consortia for shared risk mitigation and information sharing
For International Organizations:
- Establish dedicated forums for supply chain security dialogue
- Develop early warning systems for geopolitical risks affecting critical supply chains
- Promote standards for supply chain resilience and transparency
- Facilitate multilateral agreements to prevent trade restrictions during crises
Limitations & Future Research
- Sector-Specific Analysis: Future research should examine differential effects across industries (energy, semiconductors, food)
- Regional Variations: Study how GPR-SCP relationships differ across economic regions and development levels
- Additional Moderators: Investigate how digital transformation, climate change, and demographic shifts moderate these relationships
- Micro-Level Data: Incorporate firm-level data to understand how individual companies respond to geopolitical-supply chain interactions
- Longer Time Horizons: Extend analysis further back in time to capture additional geopolitical cycles
The study concludes that enhanced global connectivity and cooperation are critical for establishing crisis-resilient supply chains. Both governments and businesses must strengthen multilateral cooperation while resisting protectionism to enhance supply chain resilience in an increasingly uncertain geopolitical landscape.
References
Su, C. W., Dong, R., & Qin, M. (2025). Do geopolitical risks impede the global supply chain? Finance Research Letters, 85, 107811. https://doi.org/10.1016/j.frl.2025.107811
Key Data Sources: Geopolitical Risk Index (Caldara & Iacoviello, 2022), Global Supply Chain Pressure Index (Federal Reserve Bank of New York), Economic Policy Uncertainty Index.