6.1 Geopolitical and economic risks

Learning objectives

• Describe the main threats that global interactions create for individuals and businesses, including hacking, ransomware, identity theft and data breaches.

• Examine the implications of state and corporate surveillance for personal freedoms.

• Explain how physical, economic, political and accidental events disrupt global supply chains, and why just-in-time production increases the risk.

• Distinguish between tax avoidance and tax evasion, and explain how profit repatriation, transfer pricing and tax havens threaten the economic sovereignty of states.

• Evaluate the global minimum corporate tax as a response to tax avoidance.

• Explain how disruptive technologies such as drones and 3D printing create new risks for states.

• Examine the relationship between increased globalisation and renewed nationalism and tribalisation, including the limits of the evidence.

• Analyse two examples of geopolitical tension: the Red Sea shipping crisis and the war in Ukraine’s effect on the Black Sea grain trade.

• Discuss whether the advantages of globalisation outweigh the geopolitical and economic risks it creates.

Introduction

The same connections that make globalisation valuable also spread new risks. Digital networks let criminals steal money and data from anywhere in the world, long supply chains can be broken by a single storm, blockage or attack, and transnational corporations can move profits to wherever taxes are lowest. These risks affect individuals, businesses and whole states, and they help to explain why support for nationalism has grown in many countries.

Two key concepts run through the topic. Process: technological and globalising processes, such as the growth of the internet, just-in-time production and the international movement of capital, create the risks. Power: states, TNCs, criminal groups and armed movements compete to control data, trade routes and tax revenue, and the balance of power between them affects who bears the risk. The topic builds on risk, vulnerability and resilience, transnational corporations, and supply chains, and leads into the study of how individuals, states and civil society can build resilience.

New risks in an interconnected world

A risk is the likelihood that a hazard or threat will cause harm, combined with the size of the harm. Globalisation changes risk in two ways. It creates new threats, such as cyberattacks and the shifting of profits between countries, that did not exist before digital networks and global capital markets. It also changes exposure and vulnerability, because when places depend on each other, an event in one place can harm people far away within hours.

These risks are unequal. Large firms and rich states can buy cybersecurity, hold larger stocks and hire tax lawyers, while small businesses, low-income households and lower-income countries are often the most exposed. Scale also matters: a ransomware attack on one hospital is a local disaster, but the same malware can spread to thousands of organisations in many countries at once.

Threats to individuals and businesses: cybercrime

Hacking and ransomware

Cybercrime is crime carried out with computers and the internet, either by attacking computer systems or by using them to commit traditional crimes such as fraud and theft. Much of it depends on hacking, gaining unauthorised access to a computer system, network or account. Hackers may be individuals, organised criminal groups or agents of states, and because the internet crosses borders, they can attack targets in other countries where police have no power to arrest them.

Not all hacking is criminal: companies employ “ethical hackers” to test their own defences. It becomes cybercrime when access is gained without permission to steal, damage, spy or demand money.

Ransomware is malicious software that locks or encrypts a victim’s files and demands payment, usually in cryptocurrency, to unlock them. It is one of the most damaging forms of cybercrime for businesses and public services, because an organisation that cannot reach its own records may have to stop work completely. Some ransomware spreads by itself from computer to computer across networks, which allows a single attack to become global within a day.

Sources: Wikipedia articles on the WannaCry ransomware attack, the 2017 Ukraine ransomware attacks, the Colonial Pipeline ransomware attack and the 2024 CrowdStrike-related IT outages (citing the UK National Audit Office, the White House, the FBI and Microsoft), accessed 2026.

The four events show different sources of cyber risk. WannaCry and Colonial Pipeline were criminal attacks for money. NotPetya, which hit a country at war, shows how a state-linked attack aimed at one country can spread to firms worldwide, because global companies share networks and software. The CrowdStrike outage was an accident, but it shows the same underlying vulnerability: when millions of computers depend on a few software suppliers, a single fault becomes a global shutdown.

Identity theft and data breaches

Identity theft is the use of another person’s personal information, such as a name, date of birth, bank details or passport number, without permission, usually to commit fraud: opening bank accounts, taking out loans or claiming benefits in the victim’s name. Victims can lose money, find their credit record damaged and spend months proving who they are.

Criminals obtain personal data in two main ways. Phishing tricks individuals into giving away passwords or bank details, through emails, text messages or websites that pretend to be from a trusted organisation. A data breach is an incident in which personal or confidential data held by an organisation are accessed, stolen or published without authorisation, which can expose millions of records at once.

Breaches happen through hacking, through mistakes such as leaving a database unprotected online, and through insiders who copy data. Because large organisations hold records on millions of customers, one breach can expose more people than many years of individual phishing.

The costs are large and rising. In the USA alone, consumers reported losing more than US$12.5 billion to fraud in 2024, and the Federal Trade Commission received more than 1.1 million reports of identity theft. For organisations, IBM’s 2026 study put the global average cost of a data breach at US$4.99 million, a record high and 12% more than a year earlier. These figures count only reported cases, so the true totals are higher.

Sources: US Federal Trade Commission, Consumer Sentinel data for 2024 (published March 2025); IBM, Cost of a Data Breach Report 2026.

Surveillance and personal freedoms

Surveillance is the systematic monitoring of people’s behaviour, communications or movements, by governments or companies. Digital technology has made it far cheaper and more extensive: phones record location, social media record contacts and opinions, and cameras with facial recognition can identify people in a crowd. Surveillance raises a central question about personal freedom, the ability of individuals to think, speak, communicate, move and associate without unjustified interference.

Personal freedoms are protected in international law, for example by the rights to privacy and to freedom of expression in the Universal Declaration of Human Rights (1948), but each state decides how far to limit them in the name of security.

• State surveillance in democracies. In June 2013 Edward Snowden, a contractor for the US National Security Agency (NSA), gave journalists thousands of classified documents showing that the NSA and its allies collected data on the communications of millions of people, including through a programme called PRISM that drew on data held by major internet companies. Governments argued that the programmes prevented terrorism; critics argued that they broke privacy rights.

• Spyware. The Pegasus Project, an investigation by journalists in 2021, reported that spyware made by the Israeli company NSO Group had been used by governments against journalists, activists, lawyers and opposition politicians. A leaked list of 50,000 phone numbers was said to include possible targets; NSO said that it sells only to governments for fighting crime and terrorism.

• China’s social credit system. China has built a set of national and local credit rating and blacklist systems that track businesses, officials and individuals, for example barring people who fail to pay court-ordered debts from buying air tickets. Media reports often describe a single score for every citizen, but the system is in fact a collection of different schemes, many of them aimed at businesses. Combined with extensive camera networks and online monitoring, it gives the state great capacity to observe behaviour.

• Corporate data collection. Technology firms collect very large amounts of data about users to sell targeted advertising. This creates risks of data breaches and of data being shared with governments, and gives a few companies considerable power over information.

Surveillance involves a trade-off. More monitoring can help police to stop terrorism, child abuse and fraud, and may make people feel safer. But it can also deter people from speaking freely, joining protests or contacting journalists, and in states with weak legal limits it can be used to identify and punish critics. The balance depends on place: the same camera network operates differently in a country with independent courts and a free press than in one without them.

Some governments have responded by strengthening data protection. The European Union’s General Data Protection Regulation (GDPR), adopted in April 2016 and in force from 25 May 2018, gives individuals rights over their personal data and allows fines of up to €20 million or 4% of a company’s worldwide annual turnover, whichever is higher. Because firms that want to sell in the EU must follow it, the GDPR has influenced data rules far beyond Europe. Protecting systems against attack, through cybersecurity and secure digital identities, is part of the study of building resilience to these risks.

Risks to global supply chains

A supply chain is the network of firms, places and transport links that turns raw materials into finished goods and delivers them to consumers. Many products now cross borders several times: a smartphone may contain minerals mined in Africa and South America, chips made in Taiwan and South Korea, and assembly in China or India, before it is shipped to buyers worldwide. Long, specialised chains keep costs low, but every link and every route between them is a point at which the chain can break.

Supply-chain risk is the possibility that an event will disrupt the flow of materials, components or products along a supply chain, causing delays, shortages, higher costs or lost sales. The risk is greatest where a chain depends on a single supplier, a single place or a single transport route, a single point of failure. Narrow sea passages such as the Suez Canal and the Strait of Hormuz, which large shares of world trade must pass through, are known as chokepoints.

Just-in-time production

Many manufacturers use just-in-time production, a system in which materials and components arrive just as they are needed, so that factories hold very small stocks. The method was developed by Toyota in Japan and spread worldwide from the 1980s. It cuts the cost of storage and waste and lets firms respond quickly to changes in demand. Its weakness is fragility: with little stock to fall back on, a factory can stop within days if one delivery fails.

Four kinds of supply-chain risk

Sources: Wikipedia articles on the 2011 Thailand floods, the 2020–2023 global chip shortage and the 2021 Suez Canal obstruction, accessed 2026.

The chip shortage shows the danger of concentration. Taiwan’s TSMC alone made more than half of the world’s contract-manufactured chips in 2020, so disruption in a few plants in East Asia stopped car factories in Europe and North America. The *Ever Given* shows how a chokepoint multiplies risk: about 50 ships a day used the Suez Canal in 2021, carrying about 12% of world trade, so a single grounding delayed goods on several continents.

Political risks are growing in importance. Sanctions, export controls and conflicts can close markets or routes for years rather than days, and unlike an earthquake they can be repeated or extended. Companies have responded by building up stocks, finding second suppliers, and moving some production closer to home or to friendly countries, strategies known as re-shoring, near-shoring and friend-shoring. These responses increase resilience but raise costs, which is why firms rarely abandon global supply chains altogether. Such changes also link to energy security, because oil and gas follow some of the most exposed routes.

New threats to the sovereignty of states

Sovereignty is a state’s authority to govern its territory and make its own decisions, including over laws, borders and taxes, without outside interference. Globalisation challenges it in several ways. TNCs can move money and profits across borders more easily than governments can follow them, wealthy individuals can hold their assets abroad, and new technologies let people and objects cross borders, or be produced, in ways states find hard to control.

Profit repatriation

When a TNC invests in a host country through foreign direct investment, it expects a return. Profit repatriation is the transfer of the profits made by a TNC’s foreign subsidiary back to the parent company in its home country, or to wherever the group is headquartered. It is legal and normal, but it means that much of the income created by foreign investment leaves the host country.

Large outflows of repatriated profit can weaken a host country’s balance of payments, its record of all money flowing into and out of the country, and reduce the funds available for local investment. They help to explain why a country’s gross domestic product (GDP), which counts all production inside it, can be much larger than its gross national income (GNI), which subtracts income paid to foreigners: Ireland, host to many US technology firms, is the best-known example. Governments sometimes limit repatriation, tax it or require a share of profits to be reinvested, but strict controls can deter the investment they need.

Tax avoidance, tax evasion and tax havens

Tax avoidance is the legal use of tax rules to pay less tax, for example by booking profits in a country with low tax rates. Tax evasion is the illegal non-payment of tax that is owed, for example by hiding income or assets from the authorities. The line between them can be thin, and arrangements that are legal may still be criticised as unfair, which is why governments keep changing the rules.

Tax evasion, by contrast, is a crime in almost every country, and it is usually committed by hiding money rather than by moving it openly.

A tax haven is a country or territory with very low or zero taxes on some kinds of income, often combined with secrecy about who owns companies and accounts. Examples include the Cayman Islands, Bermuda and the British Virgin Islands, and some larger economies are also used for profit shifting because of their low rates or special tax rules, such as Ireland, the Netherlands, Luxembourg and Singapore. Estimates of the wealth held in tax havens range from about US$7 trillion to US$10 trillion.

TNCs shift profits mainly through transfer pricing, the prices that subsidiaries of the same company charge each other for goods, services, loans or the use of brands and patents. If a subsidiary in a tax haven owns the group’s brand and charges a high royalty to a subsidiary in a high-tax country, profit moves to the haven, where it is taxed lightly. Tax authorities require these prices to be set at “arm’s length”, as if the subsidiaries were independent firms, but for unique assets such as brands there is no market price to compare.

The OECD has estimated that profit shifting by multinationals costs governments between US$100 billion and US$240 billion in lost revenue a year, equal to 4–10% of all corporate income tax collected worldwide. The losses matter most to lower-income countries, which rely more heavily on corporate tax than high-income countries do. Wealthy individuals add to the problem by holding assets through offshore companies and trusts, some legally and some to hide them.

Leaks and court cases

• The Panama Papers (April 2016): 11.5 million leaked documents from the Panamanian law firm Mossack Fonseca showed how politicians, celebrities and business people used offshore companies. Holding an offshore company is legal, but journalists found some used for fraud, tax evasion and avoiding sanctions.

• The Paradise Papers (from 5 November 2017): more than 13.4 million documents, mostly from the offshore law firm Appleby, showed how large companies and wealthy individuals used offshore structures to reduce tax.

• Apple and Ireland: on 30 August 2016 the European Commission ruled that Ireland had given Apple illegal state aid by allowing it to pay very little tax on profits booked through Irish subsidiaries, and ordered Ireland to recover about €13 billion plus interest in unpaid tax for the decade to 2014. Apple and the Irish government appealed; Ireland called the decision “an intrusion into Irish sovereignty”. On 10 September 2024 the EU Court of Justice upheld the Commission’s decision.

Sources: Wikipedia articles on the Panama Papers, the Paradise Papers, Apple’s EU tax dispute, Tax haven and Base erosion and profit shifting (citing the ICIJ, the European Commission, the Court of Justice of the EU and the OECD), accessed 2026.

The Apple case shows that sovereignty over tax is contested between levels of government. Ireland used its sovereign right to set low taxes to attract investment and jobs; the EU, of which Ireland is a member, argued that special treatment for one company broke the rules of its single market. Other EU states, which lost revenue as profits moved to Ireland, supported the Commission. Each stakeholder appealed to fairness and sovereignty: for Ireland they meant its right to set its own tax rates, for the Commission and other member states equal treatment of firms within the single market.

A global minimum tax

Because profits move between countries, no single state can stop tax avoidance on its own: if one raises its rate, firms can move profits elsewhere. This produces a “race to the bottom” in corporate tax rates. In response, the OECD and the G20 negotiated a global minimum tax for large multinationals. In June 2021 the G7 finance ministers endorsed a minimum rate of at least 15%, and on 8 October 2021 more than 130 countries in the OECD/G20 Inclusive Framework, including Ireland, Hungary and Estonia, agreed a two-pillar plan. Under Pillar Two, if a large group pays less than 15% in a country, other countries can collect a top-up tax.

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Many countries, including EU members and Switzerland, began applying the rules from 1 January 2024. The deal has limits. The 15% rate is lower than many countries’ standard rates, so some profit shifting remains worthwhile; the rules include exemptions for real investment in factories and staff; and enforcement depends on every country applying them.

In January 2025 the new US administration issued an executive order stating that the global tax deal would have no force in the USA. On 5 January 2026 the countries of the OECD/G20 Inclusive Framework agreed a “side-by-side” arrangement under which US-headquartered groups remain subject only to US minimum taxes and are exempt from the Pillar Two top-up tax. Because many of the largest multinationals are American, the exemption narrows the agreement’s reach.

The global minimum tax is the most ambitious attempt so far to restore states’ control over taxing globalised companies, but it shows the limits of sovereignty in a global economy: to protect their tax base, states had to give up some freedom to set their own rates. Its effectiveness depends on the participation of the most powerful economies, and that remains uncertain.

Sources: Wikipedia, Global minimum corporate tax rate (citing the OECD and the US Treasury, 5 January 2026), accessed 2026.

Disruptive technologies

A disruptive technology is an innovation that changes how goods are made, how services are delivered or how power is used, and displaces established methods. Some disruptive technologies weaken the ability of states to control their territory, borders and economies, because they are cheap, widely available and hard to regulate. Two examples are drones and 3D printing.

Drones

A drone is an aircraft without a pilot on board, controlled remotely or flying autonomously. Drones have military, commercial and private uses, and they have become cheap enough for armed groups and individuals to use. Their effects on sovereignty are mixed: they give states new tools for surveillance and war, but they also let others enter a state’s airspace easily and cheaply.

• War. In the 2020 conflict over Nagorno-Karabakh, Azerbaijan used Turkish Bayraktar TB2 and Israeli Harop drones extensively against Armenian forces. In the war in Ukraine, both sides use large numbers of small, cheap first-person-view (FPV) drones, and Russia has used Iranian-designed Shahed drones; in 2024 Ukraine created the world’s first military branch dedicated to drones.

• Disruption of civilian life. Reported drone sightings near the runway closed Gatwick Airport, near London, between 19 and 21 December 2018, affecting about 1,000 flights and 140,000 passengers. No culprit was found.

• Delivery and services. Since October 2016 the company Zipline has delivered blood and medical supplies by drone to rural clinics in Rwanda under a government agreement, and it has since operated in Ghana, Nigeria, Kenya and other countries.

3D printing

3D printing (additive manufacturing) builds objects layer by layer from a digital design, using plastic, metal or other materials. A design file can be sent anywhere in the world and printed locally, so production can take place close to the user rather than in large factories abroad. This could reduce the need for long supply chains and support the re-shoring of some manufacturing.

The same features create risks for states.

In May 2013 the US group Defense Distributed published online the design for the Liberator, a pistol made almost entirely on a 3D printer; the plans were downloaded more than 100,000 times in two days before the US government demanded that they be removed. Printed guns have no serial numbers and are hard to trace, which challenges gun laws. Design files can also be copied freely, which threatens intellectual property and the tax revenue from goods that are traded and taxed at borders. Other digital technologies, such as artificial intelligence and cryptocurrencies, raise similar questions about how far states can control activity that crosses borders digitally.

Globalisation, nationalism and tribalisation

Since the 2000s, support has grown in many countries for movements that put the nation first, distrust international institutions and want tighter control of trade and migration. Many observers link this to globalisation itself: the more open and interconnected the world becomes, the stronger the reaction from those who feel they have lost out. The relationship is complex, and a correlation between the two trends has to be separated from cause.

Nationalism and tribalisation

Nationalism is a political ideology and feeling that puts the interests, identity and independence of a nation first. It can be civic, based on shared citizenship and institutions, or ethnic, based on shared ancestry, language or religion. It has positive forms, such as the national movements that ended colonial rule, and exclusive forms that treat outsiders and minorities as threats.

Tribalisation is the retreat of people into narrower group identities, based on ethnicity, religion, region or political loyalty, and a growing hostility or distrust between these groups. In politics, it appears as polarisation, with groups that get their news from different sources, rarely talk to each other and see opponents as enemies rather than fellow citizens. Social media can deepen it by creating echo chambers, online spaces where users mainly meet views like their own.

Echo chambers are partly created by users, who choose whom to follow, and partly by platforms, whose algorithms show people more of what they have already engaged with.

Separatism is one form that both can take: the pursuit of independence, or much greater self-government, for a region within an existing state. Separatist movements usually rest on a distinct regional identity, language or history, and often on a sense that the region pays more to the state than it receives.

Why globalisation can provoke nationalism

• Economic losers. Trade and offshoring have raised incomes overall, but jobs in some industries and regions, such as manufacturing towns in the USA, the UK and France, have disappeared. People in these places may support politicians who promise to protect national industries.

• Cultural change and migration. Rapid change in the ethnic, religious or linguistic make-up of places can make some residents feel that national identity is under threat, which links to the rise of anti-immigration movements.

• Loss of sovereignty. Membership of international organisations, trade agreements and global markets limits what national governments can decide. “Take back control”, the slogan of the Leave campaign before the UK’s 2016 vote to leave the European Union, appealed directly to this feeling.

• Social media and echo chambers. Global platforms let movements organise and spread their messages across borders, while algorithms and personal choices sort users into like-minded groups.

Evidence of a correlation, and its limits

One way to test the link is to compare measures of globalisation with the timing of nationalist politics. World trade grew from 25.8% of world GDP in 1970 to a peak of 60.3% in 2008, then fell sharply in the financial crisis of 2008–2009 and has since moved between about 52% and 62% without a clear rising trend, a pattern sometimes called “slowbalisation”. Several of the most prominent nationalist successes came after this peak, during the slower period: the Brexit vote and the “America First” campaign of 2016, and the growth of parties that question European integration.

The chart supports a link between a long period of rapid globalisation and a later political reaction, but it cannot prove that one caused the other. Other drivers were at work at the same time: the financial crisis and the austerity that followed, technological change that replaced many routine jobs, long-term changes in values between generations, and new media. Countries with similar exposure to trade have had very different levels of nationalist support, which suggests that national history, institutions and political leadership matter as well.

Forms of renewed nationalism

Sources: Wikipedia articles on the 2017 Catalan independence referendum, the 2014 Scottish independence referendum, the 2016 EU membership referendum, America First (policy) and Hindutva, accessed 2026.

The Catalan and Scottish cases show how the state’s response shapes separatism. The UK government agreed to the Scottish referendum and both sides accepted the result. Spain’s government and courts treated the Catalan vote as illegal; police tried to stop it, leaders who organised it were prosecuted, and the conflict became a constitutional crisis. In both regions supporters of independence argued that they would remain part of the European Union, which shows that separatism and support for international co-operation can go together.

Geopolitical tension and sanctions

Nationalism and competition for resources, routes and influence produce geopolitical tension: strained relations between states or groups over territory, resources, security or influence, which may lead to conflict. Globalisation makes such tension more costly for everyone, because the parties are linked by trade, investment and supply chains, and it also gives them new weapons, such as tariffs, export controls and the ability to cut off energy or food.

Sanctions are one of the most important of these weapons. They are penalties imposed by one or more countries on another country, organisation or individual, such as bans on trade, freezes of assets, travel bans and exclusion from financial systems, intended to change their behaviour. Sanctions are a form of hard power that works through the global economy: they are only possible because states and firms are interdependent, and they impose costs on the countries that impose them as well as on their targets.

Russia, Ukraine and the Black Sea grain trade

Russia annexed Crimea from Ukraine in 2014 and launched a full-scale invasion of Ukraine in February 2022. Ukraine is one of the world’s leading grain exporters, supplying more than 45 million tonnes a year to world markets before the war, mostly through its Black Sea ports. The invasion halted these shipments completely; about 20 million tonnes of grain were held up in Ukrainian ports, and world food prices rose, raising fears of hunger in import-dependent countries in the Middle East and Africa, such as Egypt.

On 22 July 2022, in Istanbul, Ukraine and Russia each signed agreements with Türkiye and the United Nations, though not with each other: the Black Sea Grain Initiative created a safe corridor for grain ships from Ukrainian ports, and a parallel agreement allowed exports of Russian food and fertiliser. By mid-July 2023 more than 1,100 voyages had carried nearly 33 million tonnes of grain and other food to more than 40 countries, 57% of it to developing countries, and wheat prices fell back to pre-war levels.

Russia argued that the parallel promises on its own exports had not been kept and let the deal expire on 17 July 2023. Ukraine said it had no new demands and opened its own corridor along its coast; the first ship to use it left Odesa on 16 August 2023.

Sources: Wikipedia, Black Sea Grain Initiative (citing the UN Joint Coordination Centre, the FAO and the BBC), accessed 2026.

The grain trade shows several themes of the topic at once. A conflict in one region became a food security risk for distant places, because global food supply depends on a few exporters and a few routes. Both sides used the trade as a source of power, and international organisations and a third country, Türkiye, acted as brokers. Sanctions on Russia, imposed by the EU, the USA and their allies from 2022, and Russia’s response, also rerouted Europe’s energy supplies, which links to energy security.

US–China technology controls

From October 2022 the USA introduced export controls that restrict the sale to China of advanced computer chips and of the equipment used to make them, citing national security concerns about China’s military and technological progress. Earlier restrictions had already barred US government agencies from buying equipment from the Chinese firms Huawei and ZTE. Taiwan, home to TSMC, the largest contract manufacturer of advanced chips, sits at the centre of this tension because of its importance to both economies and the unresolved dispute over its political status.

China responded with controls of its own on minerals it dominates, including restrictions on exports of several rare earth elements from April 2025 and wider controls announced in October 2025, some of which were suspended for a year after a US–China trade agreement on 30 October 2025. The dispute shows how geopolitical tension turns supply chains into weapons: each side uses its control of a vital link (chip technology, refined minerals) to put pressure on the other, and firms worldwide must adjust where they buy and sell.

Weighing the advantages of globalisation against its risks

The balance depends on who and where. For a manufacturing exporter such as Vietnam or a consumer buying cheap electronics, the advantages are large and the risks manageable. For a worker in a closed factory, a hospital hit by ransomware or a state losing tax revenue, the risks are immediate. Over time, many risks can be reduced through resilience: diversifying suppliers, strengthening cybersecurity, agreeing international rules such as the global minimum tax. Globalisation therefore does not have to be reversed to reduce its risks, but its benefits depend on how well states, firms and civil society manage them.

Case study: the Red Sea shipping crisis, 2023–2026

The place and its importance

The Red Sea links the Indian Ocean to the Mediterranean through two chokepoints: the Bab-el-Mandeb Strait between Yemen and the Horn of Africa (Djibouti and Eritrea) in the south, and Egypt’s Suez Canal in the north. Together they form the shortest sea route between Asia and Europe. Before the crisis, about 75 ships a day passed through the Bab-el-Mandeb, carrying containers of manufactured goods from East Asia to Europe, oil and gas from the Gulf, and grain to East Africa and the Middle East.

Much of north and west Yemen, including the Red Sea coast near the strait, is controlled by the Houthi movement (Ansar Allah), which has fought the internationally recognised Yemeni government and a Saudi-led coalition since 2014–2015 and is backed by Iran. The geography of the strait therefore gives a non-state armed group the power to threaten one of the world’s busiest trade routes.

The causes: a regional conflict reaches the shipping lanes

After the start of the war in Gaza in October 2023, the Houthis launched missiles and drones towards Israel from 19 October 2023 and then began attacking merchant ships in and near the Red Sea that they said were linked to Israel, and later to the USA and the UK. In November 2023 they hijacked the car carrier Galaxy Leader and held its 25 crew until January 2025. The Houthi leader said on 25 January 2024 that the aim was to support Palestinians in Gaza. By 2025 at least 30 ships had been damaged, two hijacked and four sunk.

The attacks turned a regional conflict into a global supply-chain risk. Most large container shipping companies stopped sending ships through the Red Sea from December 2023 and diverted them round the Cape of Good Hope, adding roughly ten days to a voyage between Asia and northern Europe and about US$1 million of fuel per voyage.

The impacts: rerouted trade

The chart shows how quickly a supply chain can be redirected. Between 2023 and 2024, average daily transits through the Bab-el-Mandeb fell by about 56% (from 74.5 to 32.5 ships a day) and through the Suez Canal by about 46%, while traffic round the Cape of Good Hope rose by about 78%. Traffic did not recover after the ceasefires of 2025: in September 2026 about 27 ships a day used the strait, fewer than at any time since early 2024, during the wider regional war of 2026 in which the Houthis resumed attacks on Israel.

Sources: Wikipedia, Red Sea crisis (citing UNCTAD, the US Defense Intelligence Agency and the Suez Canal Authority), accessed 2026; IMF PortWatch, Daily Chokepoints Data, monthly means of daily transits, January 2023 to September 2026.

Stakeholders’ positions and responses

The Houthis presented the attacks as solidarity with Palestinians and pressure on Israel and its supporters to end the war in Gaza, and said that ships not linked to Israel could pass. Israel, the USA, the UK and the EU described them as attacks on freedom of navigation and on international trade. Egypt and Saudi Arabia, whose economies depend on the route, wanted the attacks to stop but did not join naval action. Shipping companies made decisions on safety and cost; some continued to use the route at higher insurance rates.

• Naval protection. The USA launched Operation Prosperity Guardian, a multinational force to protect shipping, on 18 December 2023; the EU launched Operation Aspides on 19 February 2024.

• Diplomacy and law. In January 2024 the UN Security Council adopted Resolution 2722, condemning the attacks and affirming freedom of navigation.

• Military strikes. The USA and the UK struck Houthi targets in Yemen from January 2024. On 6 May 2025 the USA announced a ceasefire with the Houthis, who agreed to stop targeting American ships.

• Ceasefire in Gaza. The Houthis halted their attacks on shipping and on Israel when the Gaza peace plan took effect on 10 October 2025. On 28 March 2026, during the war involving the USA, Israel and Iran, they resumed attacks on Israel.

The responses had limited success. Naval escorts protected some ships and shot down many missiles and drones, but they did not restore confidence: most container lines kept using the Cape route because the risk to crews and cargo remained, and insurers continued to charge high premiums. Traffic stayed at less than half of its pre-crisis level for nearly three years. The case shows that when a conflict threatens a chokepoint, naval protection alone does not bring trade back; shipping firms and their insurers decide when the risk to crews and cargo is low enough to return.

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What the case shows

• Explain why the Bab-el-Mandeb and the Suez Canal are single points of failure for trade between Asia and Europe.

• Suggest why traffic did not return to the Red Sea after the ceasefires of May and October 2025.

• To what extent did the crisis show that interdependence makes the world economy more vulnerable rather than more peaceful?

Sources: Wikipedia, Red Sea crisis, accessed 2026; IMF PortWatch, 2026; NASA/METI/AIST ASTER imagery.

Exam practice

Paper 3 sets one question on each of the three HL extension units, and you answer one of them. Each question has a part (a) worth 12 marks and a part (b) worth 16 marks, both marked with markbands.

A common weakness in answers on geopolitical and economic risks is to describe many risks in a list. Choose fewer, explain each mechanism (how the risk arises from global interactions) and give one well-developed example for each.

A data question on the case study chart

Part (a): an analysis question

Part (b): a discussion question

Summary

• Global interactions create new risks for individuals, businesses and states, and these risks are unequally shared between places and groups.

• Hacking, ransomware (WannaCry, NotPetya, Colonial Pipeline), phishing, data breaches and identity theft are growing forms of cybercrime; accidental failures such as the CrowdStrike outage show the same digital interdependence.

• State and corporate surveillance (Snowden 2013, Pegasus 2021, China’s social credit systems) involves a trade-off between security and personal freedom; the GDPR is one response.

• Supply chains face physical, economic, political and accidental risks; just-in-time production, single suppliers and chokepoints increase vulnerability.

• Profit repatriation, transfer pricing and tax havens reduce states’ tax revenue; tax avoidance is legal and tax evasion illegal; the 15% global minimum tax is an important but incomplete response.

• Disruptive technologies such as drones and 3D printing bring benefits but weaken states’ control over airspace, weapons and trade.

• Globalisation is linked to renewed nationalism and tribalisation through economic losers, cultural change, loss of sovereignty and echo chambers, but the correlation has other causes too.

• The Red Sea crisis (2023–2026) and the war in Ukraine’s effect on grain exports show geopolitical tension turning trade routes and food into weapons.

• The advantages of globalisation remain large, but they depend on building resilience to its risks.

Self-check

• To do:

  I can describe the main cyber threats to individuals and businesses, with named and dated examples.

• To do:

  I can examine how surveillance affects personal freedoms, giving the views of different stakeholders.

• To do:

  I can explain physical, economic, political and accidental risks to supply chains and why just-in-time production increases them.

• To do:

  I can distinguish tax avoidance from tax evasion and explain profit repatriation, transfer pricing and tax havens.

• To do:

  I can evaluate the global minimum tax.

• To do:

  I can explain how drones and 3D printing threaten the sovereignty of states.

• To do:

  I can examine the link between globalisation and nationalism, including the limits of the evidence.

• To do:

  I can analyse the Red Sea shipping crisis and the Black Sea grain trade as examples of geopolitical tension.

• To do:

  I can weigh the advantages of globalisation against its geopolitical and economic risks.