Shipping disruptions and oil shocks have had limited impact
In the Middle East, Houthi attacks on merchant ships in the Red Sea have forced many vessels to reroute around the Cape of Good Hope, adding time and cost. Yet these disruptions have had limited effects on trade and inflation—thanks to spare shipping capacity, port efficiencies and just-in-case inventory strategies.
This resilience was also evident during recent attacks on Iranian military and nuclear facilities, when oil prices barely budged. A direct U.S. strike on Iran pushed prices up by just $7 per barrel, suggesting markets are increasingly looking through geopolitical scenarios that once seemed unthinkable.
Exporters must prepare for evolving global risks
That said, geopolitical risks shouldn’t be ignored by exporters. Like climate change, its effects may take time to materialize. Russia first invaded Crimea in 2014, but Germany only recently began restructuring its economy away from dependence on cheap Russian energy. Now in its fourth year, the war in Ukraine has shifted European economies toward defence sector investments, and governments worldwide have committed to remilitarization.
In Asia, our base-case scenario is that China will rely on coercive tactics—such as cyberattacks, military drills, trade embargos and economic pressure—in pursuit of Taiwan’s reunification. However, a full-scale invasion could cut off western access to high-end semiconductors critical to the buildout of the digital economy.
Institutional erosion and inward focus could reshape trade
Another concern for Canadian exporters is that countries often turn inward during periods of elevated geopolitical stress. For a trade-dependent economy like Canada’s, this shift toward domestic sourcing could pose challenges. A paper by the Centre for Economic Policy Research found that elevated geopolitical risk can reduce international trade by 20% to 30%—equivalent to a global tariff increase of up to 11%.
Another important trend to watch is the future of international institutions that underpin global trade. Today’s geopolitical climate is eroding trust in organizations like the World Trade Organization (WTO). Canadian exporters will need to monitor how these institutions evolve—or what new mechanisms might emerge to replace them.
The bottom line: Geopolitical risk is rising, but trade endures
Geopolitical risk is rising as countries assert independence and move away from the unipolar and bipolar systems of the 20th century. Yet globalization remains largely intact. While markets often overreact to short-term developments, they can also underestimate long-range consequences. Today’s geopolitical risk events may be quietly reshaping the future of global integration and co-operation.
Canadian exporters shouldn’t be deterred from pursuing international opportunities now—but it’s essential to stay alert to the broader geopolitical trends that could shape tomorrow’s risks and rewards.
For a deeper understanding of global risks, EDC’s Country Risk Quarterly provides a snapshot of more than 70 markets worldwide. It’s one of our most valuable tools, offering analysis of the political, economic and structural changes Canadian exporters may face when expanding internationally.
This week, a very special thanks to Ian Tobman, manager of Country & Sector Intelligence in our Economic and Political Intelligence Centre.
As always, at EDC Economics, we value your feedback. If you have ideas for topics that you’d like us to explore, please email us at economics@edc.ca and we’ll do our best to cover them.
