Lloyd’s of London has published a scenario which reveals the global economy could be exposed to losses of $14.5 trillion USD over a five-year period from the threat of a hypothetical geopolitical conflict causing widespread disruption to global trade patterns and supply chains.
Geopolitical Conflict is the fifth scenario in Lloyd’s systemic risk series with assessments of the most significant global threats facing society today. According to Lloyd’s, with more than 80% of the world’s imports and exports – around 11 billion tons of goods – at sea at any given time, the closure of major trade routes due to a geopolitical conflict is one of the greatest threats to the resources needed for a resilient economy.
Hypothetical conflict scenario
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Rising tensions: A superpower experiences tensions with a neighboring territory controlling vital shipping routes after a regime change.
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Hostile attack: The superpower invades, initiating cyber-attacks and a blockade, disrupting the targeted territory’s critical infrastructure and global trade.
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Escalation of alliances: A supporting superpower and allied nations form coalitions, avoiding trade routes and imposing sanctions, exacerbating trade and supply chain disruptions.
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Brinkmanship: The invaded country threatens to close shipping lanes, leading to military exercises and heightened tensions between opposing coalitions.
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Emergency powers: The invading superpower seeks legislative authority to control shipping lane access, while allied coalition forces increase their presence.
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Diplomacy: Governments attempt negotiations to prevent further escalation, but the presence of military forces undermines trust, leading to the closure of shipping lanes.
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Paralysis: As goods cease flowing through the region, the global supply chain collapses, leading to significant price increases and inflation.
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Stalemate and skirmish: Tensions result in violence and damage to critical infrastructure, causing shortages and financial market shocks. Civil unrest grows worldwide in response to the escalating crisis.
Using global Gross Domestic Product (GDP) as its central measurement, Lloyd’s and Cambridge model calculates the global economic loss of a geopolitical conflict scenario as:
- $14.5trn is the global economic loss over a five-year period (the weighted average across the three severities we have modelled)
- The global economic loss ranges from $7.8trn in the lowest severity scenario up to $50trn in the most extreme scenario
The economic impacts of this scenario stem primarily from severe damage to infrastructure in the conflict region and the need for realignment of global trade networks due to the enforcement of sanctions and the effects of compromised shipping lines.
The impact on businesses depends on the region they are located in and its factors such as involvement in the conflict, reliance on international trade and the goods that would be delayed or lost due to the supply chain disruptions.
Europe for example, which is heavily reliant upon other industrially advanced states for supplies like semiconductors for car and electronics manufacturing, could stand to lose up to $3.4 trillion USD, Lloyd’s concludes.
