The Geopolitical Risk Premium Embedded in Global Supply Chains

By: Spencer Graham

Feb. 6, 2026

Shift from Efficiency to Geopolitical Resilience

​For decades, geopolitical risks in supply chains were seen as persistent events. Firms are optimized for efficiency, minimizing costs and speed. They do this operating under the assumption that political disruptions are scattered rather than structural.

​This no longer holds. In today's world, political disruptions are persistent and policy driven. Tariffs, sanctions, and industrial policy influence these disruptions. To account for this, markets are beginning to price geopolitical risk but are failing to account for the whole picture. Global supply chains now carry an embedded risk premium.

​In financial markets, risk premiums account for the volatility that investments may face. Geopolitical influence introduces a comparable source of risk. When regulatory exposure, political alignment, and sudden changes in supply chains occur, firms must recognize these factors as internal costs.

​Other supply chain risks that affect the supply chain include weather, demand, and logistics. These firms typically can handle these issues by diversifying their cost centers by going from a single source to multi source. But firms can’t hedge geopolitical risk like they can with other risks in their supply chains.

​Geopolitical risk is different because it is policy-driven and often persistent once imposed. Unlike weather disruptions or demand shocks, political constraints are rarely temporary. Their scope and timing are determined by governments rather than markets, making them difficult to hedge through conventional risk management strategies.

​As a result, global supply chains are exposed to not only the countries in which they operate but also to the political conditions of transit routes and strategic chokepoints. This expands the scope of the potential risk to reach well beyond production and sourcing decisions.

​The disruption of shipping routes in the Red Sea illustrates this dynamic. Although the physical structure of trade wasn’t impacted, geopolitical influence derailed vital shipping lanes. Firms had to reroute their ships around the horn of Africa, incurring delays and higher costs. Suez Canal container ship transits fell by ~90% between late 2023 and early 2024 (World Bank analysis), with traffic down ~66–75% in key periods.

State Power Reshaping Global Supply Chains

​Supply chains have increasingly come under the influence of state power. Governments now actively shape them through tariffs, sanctions, export controls, and industrial policies. This influence is not merely to regulate markets, but to advance national strategic interests.

​In the United States, for example, tariffs and sanctions have been deliberately used to encourage domestic production while also limiting competitors. Regardless of political motivation, this state intervention has shifted from being occasional to structural. As governments increasingly treat supply chains as strategic tools, firms are forced to treat political alignment as a core economic constraint. These policies directly affect expected returns and the valuation of companies with global supply chains.

Geopolitical Risk in the Technology Sector

​The technology sector provides a clear example of how geopolitical risk becomes an economic cost. In recent years, the United States government has reshaped global technology supply chains, particularly those connected to China. These policies were not responses to market conditions, but intentional efforts to restrict access to critical technologies.

​Export controls limit more than the flow of finished products. They restrict access to raw materials, production equipment, and technical expertise. As a result, firms operating outside of the U.S have been forced to restructure their supply chains. This interaction also works against the United States in the case of semiconductor chips. Advanced chip production costs 30% more in the United States than in Asia because of the limitations of geopolitics. Production systems that were once globally integrated must now be separated across political boundaries.

​As a result of this restructuring, firms are required to duplicate production capacity and operate at smaller scales. These changes make it harder for firms to remain efficient and decrease their fixed costs.

​The technology sector exemplifies how geopolitical risk becomes intertwined with firms’ decision making process. When access to certain markets or finished goods depends on political alignment, supply chains are forced to look further than cost. Instead, firms accept reduced exposure to political volatility even if they must pay higher costs with lower returns.

​The willingness of firms to accept higher costs and lower returns is not confined to the technology sector. Across industries, this trade-off increasingly takes physical form through nearshoring and regionalization strategies.

Broader Implications: Nearshoring, Capital Trade-offs, and Market Impact

​Nearshoring is often described as using production facilities that are closer to the importing country. Firms relocate production to reduce exposure to foreign policy changes, even if it causes challenges. This hasn’t stopped companies from pursuing nearshoring. McKinsey’s 2025 Supply Chain Risk Pulse survey found that 33% of respondents are pursuing nearshoring plans as a response to geopolitical uncertainty.

​This shift does not eliminate risk. It shifts risk across regions while not solving any of the core issues. Higher labour expenses, infrastructure constraints, and regulatory exposure become accepted features of production in exchange for political durability.

​Changes in decision making impacts how firms view capital allocation. Firms invest more heavily in fixed assets to support duplicated or nearshored production. As a result, returns on invested capital decline, even when underlying demand remains strong.

​Working capital requirements also increase. Firms hold higher levels of inventory to buffer against disruption and policy uncertainty. While this improves short-term resilience, it ties up capital and reduces financial flexibility. Margins become more sensitive to cost increases rather than demand fluctuations.

​At the macro level, supply chains increasingly optimized for resilience rather than efficiency now carry a structural geopolitical risk premium. This raises the overall cost of global production and proves that geopolitical risk has become a lasting force in shaping markets.