Geopolitical Risk and Supply Chain Diversification

Why It Matters

Diversification reshapes regional production networks, offering firms resilience without sacrificing cost advantages, and signals to policymakers that reshoring mandates may be unrealistic.

Key Takeaways

• Japanese firms increase ASEAN affiliates while keeping China base
• Geopolitical risk raises import diversification probability by up to 1.4%
• Full relocation from China remains rare due to sunk costs
• Policy focus should shift from reshoring to regional diversification
• ASEAN emerges as strategic hub for risk‑hedging supply chains

Pulse Analysis

Geopolitical tensions—from the US‑China trade war to the Russia‑Ukraine conflict—have re‑entered the core of global economic strategy, prompting governments to champion "friend‑shoring" and firms to reassess exposure. The widely cited Geopolitical Risk (GPR) index quantifies these shocks, revealing measurable macro‑economic ripples that extend into corporate supply‑chain decisions. As risk perception intensifies, companies are compelled to embed resilience into their networks, balancing efficiency with the need to mitigate disruption.

The Doan et al. (2025) analysis of Japanese multinationals provides granular evidence of this shift. Firms with higher dependence on Chinese inputs or affiliates responded to heightened GPR scores by adding new import sources and establishing manufacturing footholds in ASEAN, raising diversification odds by up to 1.4%. This incremental "China‑plus‑one" approach preserves the cost and scale benefits of existing Chinese operations while creating parallel capacity elsewhere, a pattern echoed across sectors seeking to hedge against political volatility without incurring the prohibitive costs of full relocation.

For policymakers, the findings suggest that calls for wholesale reshoring may overlook the economic calculus firms face. Instead, supporting regional diversification—through infrastructure upgrades, trade facilitation, and targeted incentives in Southeast Asia—aligns with corporate risk‑management strategies and sustains global value‑chain integration. As geopolitical fragmentation unfolds gradually, a nuanced policy mix that encourages multi‑node networks rather than binary decoupling will better safeguard supply‑chain stability and competitive advantage.