Navigating supply chain resilience amid rising geopolitical risk
2025 global outlook: Supply chain resilience tested amid geopolitical risk and economic shifts
Governments around the world entered 2025 under pressure, having to contend with economic rivalries, election outcomes, and rising domestic and international tensions. The global landscape is increasingly defined by disruption, as nations pursue growth while navigating fractured alliances and intensifying geopolitical risks.
Climate-related disasters — such as prolonged droughts and devastating floods — continue to wreak havoc on supply chains, straining infrastructure and testing the resilience of logistics networks. Armed conflicts and widening sanctions are reshaping trade flows, while political uncertainty in the US is making it difficult for governments to chart a clear policy course.
Rather than drawing countries closer together in response to shared threats, these crises are contributing to a more divided world order. The surge in protectionist policies and the spread of industrial strategies — particularly among major powers such as the US and China — are fueling deeper geopolitical tensions and redefining global commerce. Technological competition, especially in areas such as AI and defense, are adding further complexity to an already volatile global environment.
Governments are also struggling with persistent inflation and sluggish growth, all while dealing with the fiscal aftershocks of stimulus measures from the COVID-19 pandemic. High public debt levels have left little room for additional support, reducing the ability of advanced economies to fund green transitions or assist emerging markets in adapting to climate change.
Internally, political fragmentation continues to hinder effective governance. The sweeping leadership changes brought about by the 2024 global election megacycle have introduced fresh voices into parliaments and regulatory bodies. However, unstable coalitions in several key economies are hampering progress on climate action, AI regulation, and responses to active or emerging conflicts. Nationalist and populist movements remain influential, fueling discontent and, in some cases, triggering unrest.
Meanwhile, geopolitical conflicts in areas such as Ukraine and the Middle East remain unresolved and vulnerable to further escalation. These ongoing conflicts are heightening uncertainty and forcing governments to recalibrate their diplomatic and security strategies. In response, countries are embracing a more pragmatic and flexible approach to international relations — seeking alignment to serves mutual interests, even amid intensifying competition. This shift is particularly visible within multilateral groups such as the G20 and BRICS, where side deals and informal alliances are emerging as new paths to cooperation.
Global supply chains remain under strain, burdened by a combination of environmental regulation, political risk, supply chain risk and unstable trade relationships. Companies are facing increased scrutiny around sourcing, emissions and logistics, requiring supply chain leaders to maintain operations and mitigate risks by becoming more agile.
Four dominant forces are now shaping the global environment in 2025:
- Economic angst: The anchors around the global economy — low inflation, rock‑bottom interest rates, seamless trade and broad international cooperation — have shifted, injecting uncertainty into the global growth outlook. Structural drags such as weak productivity and aging demographics are slowing growth, while mounting protectionism and geopolitical rivalries are discouraging investment. The world economy is still expected to expand modestly through 2025, but that expansion is fragile.
- Domestic discontent: As the 2024 megacycle elections reverberates into 2025, shifting political majorities will reorder alliances, rewriting trade pacts, defense deals and diplomatic ties. Yet, the same churn is heightening domestic instability, as widening inequality, automation‑driven job losses and deep political polarization strain outdated social contracts and spur demand for retraining and new forms of worker support.
- Elusive alliances: In 2025, the world is being defined by heightened geopolitical risk. Great powers have reshuffled alliances to gain a tactical edge, advanced economies have hardened protectionist policies, emerging markets have wielded newfound influence to demand fairer global rules, and smaller states are relying on multilateral forums to shield themselves from climate threats and trade barriers.
- Trade troubles: Conditional globalization has taken hold. Governments are routinely steering trade with tariffs and export controls, keeping inflation sticky. Since the 2024 US election, Washington has rolled out steep new levies on a broad range of Chinese goods, triggering swift countermeasures from Beijing and mirrored tariff packages from Brussels and several key emerging economies. Trade barriers meant to shield domestic industries are splintering the global marketplace, raising costs, sapping supply chain efficiency and adding fresh tension to already‑fragile international relations.
In this environment, organizations must adopt adaptive strategies, with a focus on resilience and long-term planning. Building flexibility into operations — especially across global supply chains — will be crucial in managing uncertainty and capitalizing on opportunities in a world where geopolitical tensions are redefining the rules of engagement.
Strategies for building supply chain resilience: Technology toolkit for enabling resilience
Deploying technology to enhance a supply chain resilience initiative demands a keen focus on return on investment. While some large enterprises have the resources to invest in emerging technologies, most participants in the supply chain sector will not pursue digital transformation without a high likelihood of a reasonable return on investment (ROI).
Financial impact is a primary driver of digital transformation among supply chain companies. According to S&P Global Market Intelligence 451 Research’s Supply Chain Digital Transformation Enterprise Survey 2023, over 30% of respondents identified new revenue opportunities or cost savings as the main drivers for digital transformation within their organizations.
Currently, just over one-third of supply chain organizations have deployed AI and machine learning technologies, with an additional 30% in the proof-of-concept stage. Among these companies, AI and machine learning are ranked as the third-most important technologies supporting digital transformation efforts, following cloud computing and internet-of-things connectivity.
The supply chain management outlook has grown more cautious about adopting new technologies due to past experiences with questionable promises. Technologies such as blockchain and autonomous vehicles, which were initially touted as revolutionary, have yet to deliver significant ROIs.
Fuel efficiency and sustainability are also critical for supporting supply chain resilience. Among commercial transportation companies, fuel efficiency is one of the most important digital transformation projects as improved fuel efficiency can increase a company's cash reserves, providing a financial buffer during supply chain disruptions. The ROI from fuel efficiency can also enable supply chain companies to invest in other projects to enhance supply chain resilience.
Competing for supply chain dominance: Challenges and strategies for emerging markets
Emerging markets are facing increasing competition as they work to establish and sustain their positions in global supply chains, retain manufacturing sector employment, and ensure national security through access to critical materials and products. Historically, these economies have relied on leveraging basic materials and low-value-added assembly manufacturing for exports, a strategy central to China’s economic rise since 2004.
Recently, Vietnam followed China’s playbook, attracting firms seeking cheaper labor and lower risk from trade protectionism in key customer markets such as the US. Vietnam’s exports per employee surpassed China’s as early as 2014 and have grown 5.8% annually over the past five years, with projections of 5.1% growth over the next five years. India is pursuing a similar path, focusing on its domestic market and offering innovative support mechanisms to boost manufacturing in higher-tech industries.
However, the sustainability of this supply chain development pipeline is uncertain. While it has benefited certain countries, it may not remain viable for emerging markets that have already capitalized on this strategy. As more countries adopt this approach, the increased competition for the same end markets could diminish its effectiveness, presenting a significant risk.
Competing with emerging markets: Balancing investment, stability and supply chain resilience
In the race to attract global investments, emerging markets face the delicate challenge of fostering a competitive edge while remaining compliant with global industrial rules. Assuming labor costs are equal, success hinges on two primary strategies: attracting foreign multinational investments and nurturing homegrown "national champions" — state-supported firms that can compete on the global stage — all while avoiding the pitfalls of unfair subsidies.
The foundation of this competition is enhancing the domestic market’s appeal to attract investment and export-driven growth. A key factor in achieving this lies in improving the ease of doing business, with governments playing a pivotal role in reducing regulatory burdens, mitigating risks of disruptions such as labour strikes or poor infrastructure, and strengthening the enforcement of contracts to ensure stability.
Beyond investment and market access, supply chain resilience has become a vital component in maintaining competitive advantage. In a volatile global landscape, emerging markets must not only focus on attracting capital, but ensuring that their supply chains are capable of managing geopolitical risks, labour disruptions and infrastructure challenges. This involves improving infrastructure, diversifying suppliers and developing strategies for risk management, all of which contribute to a more robust and resilient supply chain.
According to S&P Global Market Intelligence, countries in the Association of Southeast Asian Nations (ASEAN) consistently scored low on labor strike risks, while Mexico and India face higher risks, with Mexico's labour risks tied to the US-Mexico-Canada Agreement (USMCA). This highlights the complexity of regional trade deals, which offer trade advantages but introduce regulatory challenges. However, these trade agreements can still offer a competitive edge for countries with lower labor costs by positioning them as attractive manufacturing hubs for broader markets within the trade bloc.
The large domestic markets of countries such as India and China, which offer internal growth, stability and a resilient supply chain, may make it unnecessary for them to participate in regional trade agreements. Ultimately, the key to thriving in this competitive landscape is finding the balance between investment attraction, risk mitigation and supply chain resilience, ensuring a steady pathway toward sustainable economic growth.
Competing with the future: Building technology infrastructure and skills
While labor has traditionally served as the foundation of emerging markets' economic growth through supply chain integration, the real challenge for these markets in the coming decade may not come from competition with cheaper frontier markets, more dynamic emerging economies or high-spending developed nations. Instead, the accelerating decline in labor requirements may pose the most significant threat. As advanced manufacturing technologies evolve, the need for labor, particularly in assembly-based industries, is diminishing. Technologies such as additive manufacturing, coupled with rapid advancements in robotics, machine vision and artificial intelligence (AI), are revolutionizing production processes and reducing the need for human labor.
This shift presents a unique opportunity for developed economies, which, despite having higher labor costs, are increasingly motivated by factors such as proximity to markets, reduced geopolitical risks and job reshoring. As automation advances, the incentive for manufacturers to move operations closer to home intensifies. This can undermine the historical advantage held by emerging markets, especially as labor-intensive industries are increasingly mechanized.
While sectors such as apparel may remain resistant to full automation in the short term, the broader trend suggests a technological transformation across manufacturing sectors. Emerging markets that want to sustain economic growth will need to pivot. The competitiveness of these markets will depend heavily on their ability to invest in advanced manufacturing technologies and the skills needed to operate and maintain these technologies.
Currently, emerging markets are falling behind in terms of investment in industrial automation products. In 2023, they accounted for only 30% of the $12.1 billion global trade in industrial robots and similar technologies. China, which has led in industrial automation, still represents a significant portion of this share, but other emerging markets are lagging.
Without a concerted effort to boost investments in manufacturing systems and the skills to sustain them, emerging markets risk being caught between two competing forces: the low-labor-cost advantage of frontier economies and the increasingly mechanized and highly productive economies of developed nations. To stay competitive, these markets must prioritize technological infrastructure and skills development for the next wave of economic growth and supply chain resilience.
Economic X factors in 2025: Climate change, AI and their impact on supply chain resilience amid geopolitical risk
In 2025, two of the most disruptive forces shaping the global economy — climate change and AI — are having increasingly visible, yet difficult-to-predict effects. Their impact is particularly acute in areas tied to supply chain resilience and national competitiveness, further complicating ongoing geopolitical issues.
Climate change continues to fuel extreme and erratic weather patterns, putting stress on global supply chains and threatening food and resource security. Companies are being pushed to adapt, whether by diversifying suppliers, relocating production to less climate-vulnerable regions or investing in more sustainable operations. These shifts are crucial to strengthening supply chain resilience, especially as governments introduce tighter environmental regulations.
The transition to cleaner energy and lower carbon emissions is creating both opportunity and strain. Green initiatives are driving new employment and innovation, but the financial burden of decarbonizing global value chains remains immense. Many advanced economies, already balancing the need for increased defense spending in response to heightened geopolitical tensions, are finding it harder to maintain long-term commitments to climate financing. This has placed emerging markets at a disadvantage, as their resources or subsidies are often lower than that of developed economies, reinforcing economic dependency on wealthier nations to support green tech development.
The demand for critical minerals essential to clean energy and battery technologies now exceeds available supply, further straining industries and inflating prices. This shortage is creating new chokepoints in global trade and escalating geopolitical risk in mineral-rich regions.
Meanwhile, AI continues to be a rare bright spot in the global economy, fueling a resurgence in tech exports and offering efficiency gains across sectors. Yet, this technological shift is reshaping labor markets in complex ways. While automation enhances productivity and creates new roles, it is also displacing certain jobs, with varying effects depending on the country and sector.
The global regulatory landscape remains unprepared to manage the societal and economic fallout from rapid AI adoption. Concerns around wealth concentration, social inequality and uneven access to technology are growing. Nations with weak infrastructure are especially vulnerable and could fall behind in the AI race and lose ground in global competitiveness.
As the global economy absorbs these shocks, countries and corporations are confronting a world where geopolitical tensions, climate instability and uneven tech advancement interact in unpredictable ways. Strengthening supply chain resilience and rethinking growth strategies are no longer optional, they are essential for survival.
Supply Chain Outlook
US administration escalates geopolitical risk, challenges supply chain resilience
President Donald Trump has rolled out a sweeping new tariff regime, announcing baseline duties of 10% on all imports and significantly higher rates for key trade partners such as China, the EU, South Korea and Japan. The plan, framed as a move toward “reciprocal” trade treatment, marks a dramatic escalation in US trade policy, with broad implications for supply chain resilience, inflation and geopolitical tensions.
Initial rollout of Trump’s “universal tariff” blueprint (announced April 2, 2025)
In an April 2 press conference, Trump outlined a default 10% duty on imports from all countries. Nations deemed to have disproportionately high trade barriers, whether through tariffs or nontariff measures such as value-added taxes or regulatory restrictions, faced significantly higher levies.
The initial set of baseline rates, introduced April 2, include:
- China: 34%
- EU: 20%
- Japan: 24%
- South Korea: 25%
- India: 26%
- South Africa: 30%
- UK: 10%
- Brazil: 10%
Trump characterized the new policy as a necessary after decades of what he described as unfair foreign trade practices. He cited currency manipulation, export subsidies, intellectual property theft and discriminatory regulations as issues that have hollowed out US industries and undermined the country’s supply chain resilience.
“These tariffs reflect not only what our trade partners charge us, but also the other barriers they’ve put up — [value-added taxes], pollution havens and a patchwork of rules designed to keep US products out,” Trump said.
Auto and de minimis tariffs add to geopolitical risk and supply chain pressure
In addition to the initial tariffs, a flat 25% tariff on all automobile imports came into force April 2. On May 2, Trump also signed an executive order to phase out the de minimis exemption for Chinese imports — a key provision that allows under $800 in value to enter the US tariff-free. This is expected to affect Chinese e-commerce platforms such as Temu and AliExpress. Learn more about auto and de minimis tariffs updates.
For now, the de minimis exemption remains intact for other countries, but White House officials said it could be revoked once US Customs and Border Protection implements a full duty collection system. Analysts noted that the decision could reshape consumer behavior and logistics strategies across the supply chain.
Implementation timeline: Impacts on global supply chain resilience
- April 5, 2025: 10% baseline tariffs take effect
- April 9, 2025: Higher reciprocal tariffs go live
- April 3, 2025: 25% auto tariffs apply to all car imports
- May 2, 2025: De minimis exemption removed for Chinese shipments
The staggered rollout leaves room for potential diplomatic negotiations. Trump officials have previously delayed similar measures, including 25% tariffs on Canada and Mexico, which were ultimately narrowed under the provisions of the United States-Mexico-Canada Agreement (USMCA).
USMCA-compliant goods will continue to be free of duties, while noncompliant items will face a 10% or 25% tariff depending on the sector. Energy and potash products fall under the 10% category, while most other noncompliant imports will be charged 25%.
Trade partners respond: Geopolitical tensions rise, supply chains in the crosshairs
Trump’s move drew immediate responses from the US’ major trading partners. The EU, China, Canada and Mexico all signaled their intent to respond, although most have yet to unveil specific countermeasures.
Ursula von der Leyen, president of the European Commission, called the tariffs “a major blow to the world economy,” warning that the bloc is preparing retaliatory steps unless negotiations succeed. Canadian Prime Minister Mark Carney said new measures are forthcoming, though Canada’s exposure is limited to auto imports that are not compliant with the USMCA. Mexican President Claudia Sheinbaum echoed similar sentiments, noting that Mexico’s response would not be “tit-for-tat,” but would nonetheless be substantial.
China’s Ministry of Commerce accused the US of violating international trade rules, labeling the tariffs as “unilateral bullying” and promising strong countermeasures.
These developments underscore rising geopolitical risk for multinational firms navigating cross-border trade. As countries prepare responses, businesses are reassessing supply chain resilience and evaluating diversification strategies to buffer against future geopolitical shocks.
US–China tensions escalate: New tariff threats heighten geopolitical risk
Tensions with China have been particularly acute. Trump said he would impose an additional 50% tariff on Chinese imports — on top of the 34% reciprocal duty and 20% tariff already in place — if Beijing proceeds with its plan to impose matching retaliatory tariffs.
The White House confirmed that the proposed 50% hike would be additive, bringing the total duty on Chinese imports to 104%, not including existing most favored nation (MFN) tariffs and previous duties.
Trump’s ultimatum followed reports of China planning to implement a 34% retaliatory tariff on US goods when the latest reciprocal US tariffs take effect April 9.
China’s response to geopolitical issues disrupt high-tech supply chains
In response to US tariffs implemented in March, China had enacted a 15% tariff on American poultry, wheat, cotton and corn, as well as a 10% tariff on soybeans, pork, beef, dairy and other agri-food products. These measures took effect March 10, with exemptions for goods that were already in transit.
China's second round of retaliation, effective April 10, includes:
- A matching 34% tariff on all US imports
- Suspension of sorghum and poultry imports from select US firms
- Export limits on rare earth minerals to certain US companies
- Antidumping probes into US and Indian medical equipment
- An anti-monopoly investigation into DuPont's Chinese subsidiary
These actions reveal how geopolitical issues are increasingly influencing commercial policy and affecting sectors integral to modern supply chains, including semiconductors and electric vehicle (EV) components.
US agriculture and food sectors warn of supply chain disruption
US agricultural groups were quick to voice alarm over the trade developments. Zippy Duvall, president of the American Farm Bureau Federation, said the new tariffs risk undermining farm income and could erode the US’ market share.
“More than 20% of our farm income comes from exports,” Duvall said. “Farmers rely heavily on imports of fertilizer, tools and inputs. These tariffs are going to hit hard.”
Although some relief came in the form of continued exemptions for USMCA-covered agricultural products, industry leaders said broader supply chain disruption is inevitable. Cathy Burns, CEO of the International Fresh Produce Association, warned of increased food prices and market volatility due to the global impact of the tariffs.
Long-term outlook: Geopolitical risk demands stronger supply chain resilience
Despite calls for de-escalation, hopes for a resolution remain dim. Trump has indicated that the tariffs will remain indefinitely unless what he deems as unfair foreign trade practices are resolved.
China has shown no signs of backing down, with officials reiterating that threats and pressure are not the right way to resolve disputes. Commentary in state-run Chinese media warned that continued US actions could lead to a loss of global confidence in the US dollar, potentially prompting China to sell US Treasurys.
As the world’s two largest economies exchange increasingly severe trade measures, the risk of a renewed global trade dispute that could rattle markets, disrupt supply chains and reverberate through nearly every sector of the economy looms large. Businesses now face a critical juncture where navigating geopolitical risk and reinforcing supply chain resilience may determine their long-term competitiveness.
Sustainable supply chains: Environmental regulations grow
Climate change is causing sustainability to become a focus in supply chain decision-making, with businesses and regulators emphasizing reuse and recycling initiatives. These efforts are being influenced by environmental regulations and shifting market dynamics. For example, the global trade of wood waste products fell 14.1% between 2023 and 2021, largely due to reduced demand for biomass fuel and furniture.
It is likely that the attention has now shifted to the plastics sector. While the EU has adopted the Packaging and Packaging Waste Regulation, a global consensus remains elusive since an agreement has not yet been reached for the UN Global Plastics Treaty. As regulatory frameworks evolve, companies will need to adapt their supply chain strategies to meet increasing sustainability expectations.
The financial burden of environmental supply chain regulations is set to grow as 2025 marks the final year of the transition period for the EU’s Carbon Border Adjustment Mechanism (CBAM). Starting in 2026, companies will be required to make direct payments based on quarterly emissions reporting, adding a new cost layer to global trade.
These payments will be tied to the cost of EU Emissions Trading System (ETS) permits and the carbon intensity of production, particularly affecting high-emission industries such as steel and aluminium. Producers in Turkey and India are expected to be at a disadvantage due to their higher carbon footprints, potentially reshaping trade flows as businesses seek lower-emission alternatives.
Two major EU sustainability regulations were delayed in 2024 but remain on the horizon. The Regulation on Deforestation-free Products (EUDR), originally postponed due to implementation challenges, is now set to take effect at the end of 2025 for midsize and large companies. However, its rollout could become even more complex with the anticipated implementation of the EU-Mercosur trade agreement, which involves agricultural exports from South America — one of the regulation’s key focus areas.
Meanwhile, the Corporate Sustainability Due Diligence Directive is expected to move forward with revised rules. These regulations signal a tightening of environmental and ethical compliance requirements, compelling businesses to adapt their supply chains to meet stricter sustainability standards.
Maritime shipping costs are set to rise as the EU’s ETS expands, requiring firms to cover 70% of emissions in 2025, up from 40% in 2024, leading to a 75% increase in permit costs.
For now, the impact remains limited, with average surcharges at $29 per forty-foot equivalent unit (FEU). This represents a fraction of bunker fuel costs at $309 per FEU and current shipping rates at $5,000 per FEU, according to S&P Global Commodity Insights data. However, if ETS permit prices triple and 100% compliance kicks in, surcharges could surge to $217 per FEU — a significant increase considering the average shipping rate of $1,289 per FEU in 2023. As environmental costs rise, shippers will need to factor emissions compliance into their long-term pricing and strategy.
The ETS is just one of the regulatory hurdles ahead for shippers, with additional carbon emission regulations from the International Maritime Organization (IMO) set to be adopted in mid-2025. These measures will further increase the industry’s need to reduce its carbon footprint.
The adoption of cleaner fuels has been concentrated on liquefied natural gas (LNG), which makes up 46.5% of orders for new container vessels, according to S&P Market Intelligence data. Methanol follows at 35.7%, though many of the vessels designed to run on the fuel type will not be delivered until 2026 or later. Alongside fuel shifts, simple technological solutions such as wind shields and shore-based power are expected to play a significant role in reducing emissions. As new regulations come into effect, shippers will need to adapt their fleets and operations to meet evolving environmental standards.
Fuelling the energy transition: Green fuels and hydrogen's role in supply chains
The transition to green fuels is expected to accelerate in 2025, driven by the need for heavy investment and supportive regulatory frameworks. For green fuels, zero-carbon hydrogen sources are essential, while biofuels compete with food production for agricultural land and water resources.
The hydrogen sector is still in its infancy, with international trade in hydrogen electrolyzers valued at just $1.96 billion in the 12 months to June 30, 2024. Carbon electrodes, a critical component in the hydrogen electrolysis process, totaled $2.04 billion in the same period. Mainland China is already dominant in this sector, accounting for 23.4% of electrolyzer exports and 59.3% of global carbon cathode exports. As the energy transition gains momentum, companies and governments will need to secure access to these vital technologies to power their supply chains.
The shift to electric and new energy vehicles (NEVs) is reshaping the global automotive landscape, sparking supportive investment policies and protectionist tariffs in 2024. In 2025, the effects of ongoing policy reviews — especially for the Inflation Reduction Act and the Trump administration’s tariffs — will reverberate across the industry.
US and European automakers are adjusting their investment strategies, while mainland Chinese producers are responding to tariffs by expanding manufacturing capacity in Europe and shifting their vehicle export mix. These adjustments reflect a broader effort to mitigate the effects of tariffs and secure access to key markets as the automotive sector transitions to more sustainable technologies.
Weaker demand growth for EVs and an oversupply of lithium slowed new investments in batteries and materials in 2024. As the energy transition continues, restrictions on critical mineral exports by mainland China in 2025 could pose additional challenges for the manufacturing of clean energy technologies.
The lower lithium price environment is expected to persist through 2025, supported by continued supplier discipline. However, prices are forecast to rise 67.5% by the end of 2026, according to S&P Global Market Intelligence. This rebound in lithium prices will likely drive further investments and secure supply chains for the growing EV and energy storage sectors.
Supply chain decision-makers face the dual challenge of supporting the expansion of datacenters for AI applications and aligning with energy transition goals to boost efficiency and reduce emissions. US imports of datacenter construction materials surged 59.6% year over year in the third quarter of 2024, with power control products increasing 25.2% and cooling devices increasing 47.1%.
However, transformer shortages and tariffs on Chinese lithium-ion batteries could significantly affect the cost of energy storage solutions in 2025, posing challenges for datacenter development and the energy efficiency goals required for sustainable AI growth.
EU's Regulation on Deforestation-Free Products: A new era for global supply chains
The EU’s Regulation on Deforestation-Free Products (EUDR) will set a new standard for environmental accountability in global trade. This regulation requires companies to perform mandatory deforestation and forest degradation due diligence on their global suppliers. Targeting commodities such as cattle, soy, cocoa and palm oil, the EUDR imposes severe penalties for noncompliance, including fines of at least 4% of annual turnover, the confiscation of goods, and temporary bans from EU procurement and tenders.
Key components of the EUDR:
Due diligence frameworks: Companies must establish annual supply chain due diligence frameworks to screen their suppliers, ensuring that products entering the EU have not caused deforestation. These frameworks must be submitted to member states for verification.
Comprehensive commodity coverage: The regulation applies to cattle, cocoa, coffee, palm oil, rubber, soy, timber and their derivatives. It also includes products made or derived from these commodities, such as beef, charcoal, chocolate, leather and printed paper products.
Compliance deadlines: The EUDR will come into effect Dec. 30, 2025, for medium and large companies and June 30, 2026, for micro and small enterprises.
Broader scope and implications:
Beyond deforestation, the EUDR mandates that supply chain due diligence statements include information confirming compliance with land use, labor and human rights laws in supplier countries, including the rights of Indigenous communities. This comprehensive approach ensures that the regulation promotes ethical sourcing practices globally.
Impact on key markets:
- Asia: Major palm oil producers such as Indonesia and Malaysia will need to adhere to stricter sustainability and human rights standards to maintain their market access in the EU.
- Latin America: The agribusiness sectors in Brazil and Argentina, particularly those involved in cattle and soy production, will face increased pressure to adopt sustainable practices.
- Africa: Cocoa exporters from countries such as Côte d’Ivoire and Ghana will need to ensure their products meet the EUDR’s stringent requirements. This delves into the far-reaching effects of the EUDR on companies placing products in the EU and key sourcing markets in Latin America, Asia-Pacific and sub-Saharan Africa. By demanding greater transparency and ethical practices, the EUDR aims to foster a more sustainable and responsible global trade environment, setting a new benchmark for future regulations.
When the EUDR takes effect, companies importing EUDR-related products into the EU can expect heightened regulatory scrutiny, particularly from customs authorities. This increased oversight is expected to continue for at least a year, with noncompliance leading to substantial fines.
The EUDR is integral to achieving the EU’s broader environmental objectives, including commitments to the European Green Deal and Paris Agreement on climate change. During a debate on the EUDR in April 2023, Austrian Member of the European Parliament Alexander Bernhuber emphasized the necessity for member states to rigorously enforce the regulation to ensure compliance by countries, regions and companies.
This regulation underscores the EU’s commitment to sustainability and environmental protection standards by making compliance crucial for companies trading with the EU market.
The EUDR reflects a robust political will to combat deforestation, driven by the EU’s significant role in global deforestation. Between 2008 and 2017, the EU’s consumption of deforestation-linked products was responsible for an estimated 19% of global tropical deforestation. [BY1]
Key penalties and enforcement measures:
- Fines: Noncompliance can result in fines of up to 4% of a company’s total annual turnover within the EU.
- Additional sanctions: Other penalties include the confiscation of revenue from noncompliant transactions, exclusion from public procurement and funding for up to 12 months, and ineligibility for grants and concessions for 12 months.
- Enforcement mechanisms: The EUDR mandates the establishment of a systematic information exchange mechanism among member states, customs authorities and the European Commission. Companies must present due diligence statement certifications to customs organizations, who have the authority to confiscate noncompliant products.
The EUDR will significantly affect companies importing EUDR-regulated products and preparedness levels vary among businesses. According to the 2022 S&P Global Corporate Sustainability Assessment (CSA), 34.2% of the largest companies in the S&P Europe 350 index have set targets to reduce, offset or eliminate deforestation within their operations or supply chains. Some sectors are also showing progress, with 35.1% of food product companies and 33.3% of paper and forest-related product companies setting similar deforestation reduction targets.
As the EU enforces stricter environmental standards, companies will need to enhance their compliance efforts to align with these regulations, reflecting a significant shift toward greater sustainability and accountability in global supply chains.
The EUDR is poised to increase operational costs for European and non-European firms, while potentially encountering resistance from supplying countries. Under the EUDR, the level of due diligence required will vary based on the deforestation risk assigned to exporting countries by the European Commission, which will use a three-tier risk classification system. Low-risk countries will face simplified procedures, while standard and high-risk countries will need to provide more detailed supply chain due diligence, including satellite imagery and geospatial data.
The European Commission estimates that compliance costs could range from $170 million to $2.5 billion annually. These expenses may be absorbed by reducing profit margins along the supply chain or passing them on to end consumers in EU member states. As firms adjust to these new requirements, the financial and operational impacts will need to be carefully managed, and resistance from high-risk supplying countries could further complicate compliance efforts.
The EU is set to offer substantial support to countries committed to combating deforestation, as highlighted in the EUDR. The regulation mandates that member states provide technical and financial assistance to "least developed countries," aligning with broader EU commitments under the Paris Agreement and European Green Deal. Notably, during the 2021 UN Climate Change Conference (COP26), European Commission President Ursula von der Leyen pledged €1 billion to the Global Forest Finance Pledge over five years.
While the EU aims to assist some supplying countries, many nations that deforest are unlikely to introduce anti-deforestation legislation in the near term, focusing instead on enforcing existing commitments. Countries such as Côte d’Ivoire see the EUDR as an opportunity for increased EU financial support, having already implemented GPS tracking for cocoa beans and introduced electronic tracking cards for farmers. Ghana has also launched a mandatory national traceability system to align with the EUDR.
However, challenges persist. The World Resources Institute reported a 10% increase in global deforestation to 4.1 million hectares in 2022, which complicates the task at hand. Weak enforcement capabilities limited international funding and poor track records — exemplified by Brazil’s struggle to meet its deforestation targets despite pledges — raise concerns about the ability of producing countries to meet EUDR standards. Countries failing to meet EUDR expectations may be classified as high-risk, affecting their trade dynamics with the EU.
Steering supply chains through geopolitical uncertainty: Navigating the future of global trade
In an era marked by geopolitical volatility and supply chain disruption, the need for resilience has never been more pressing. The future of global trade is complex, with evolving risks and unexpected obstacles that demand businesses to remain agile and strategically prepared. While global supply chains demonstrated an impressive recovery after the COVID-19 pandemic, looming uncertainties — from shifting trade policies to escalating geopolitical tensions — require companies to not only react, but anticipate and adapt.
Resilient supply chains are now a necessity. In an increasingly interconnected world, companies must leverage advanced technologies, embrace sustainable practices and refine their due diligence processes to safeguard operations against disruption. Regulatory pressures, such as the EU Corporate Sustainability Due Diligence Directive (CSDDD), highlight the need to integrate environmental, social and governance (ESG) factors into supply chain management, pushing businesses to act proactively rather than reactively.
The global trade landscape continues changing due to trade barriers, tariffs and a shift to domestic resilience. The solar power sector, grappling with supply chain challenges, underscores the importance of diversification and the need to invest in local capabilities and international partnerships. As technological advancement and reshoring change how companies source, produce and deliver goods, staying ahead of the curve is essential.
Building supply chain resilience is not just about surviving volatility. It is about positioning for long-term success in an unpredictable future. The key lies in strategic foresight, investment in innovation and a commitment to sustainability. By embracing these guiding principles, businesses can ensure their supply chains are not only resilient and adaptable amid uncertainty, but capable of leading in a fast-evolving global marketplace.