# Study Notes: Geopolitical and Economic Risks ## Key Concepts in Global Supply Chain Disruptions Global supply chains are highly sensitive to various external factors, which can disrupt the flow of goods and services. These disruptions can arise from environmental, political, economic, and technological factors. ### Environmental Factors Environmental events such as natural disasters can severely impact supply chains by halting production or transportation. - **Example 1**: The 2011 floods in Thailand forced the closure of up to 1,000 factories, leading to a global shortage of hard drives and $20 billion in economic losses. - **Example 2**: Hurricanes in the USA disrupted the production of goods due to damaged infrastructure and supply chain interruptions. Environmental disruptions often have ripple effects, impacting industries globally, not just locally. --- ### Political Factors Political instability, protectionism, and trade restrictions can create significant challenges for global supply chains. - **Protectionism**: Governments may impose tariffs or quotas to protect domestic industries, increasing costs for international businesses. - **Conflict**: The Arab Spring protests disrupted supplies from the Middle East and North Africa. Similarly, the conflict in Ukraine led to sanctions against Russia, reducing the flow of goods. - **Resource Nationalism**: Governments in politically unstable regions may nationalize resources, creating uncertainty for investors. Businesses operating in politically unstable regions should diversify their supply chains to mitigate risks. --- ### Economic Factors Economic conditions such as currency fluctuations, trade restrictions, and labor strikes can destabilize supply chains. - **Currency Fluctuations**: Exchange rate volatility can increase costs for firms reliant on imports or exports. - **Debt Crises**: The European debt crisis among PIIGS countries (Portugal, Ireland, Italy, Greece, and Spain) created uncertainty for global markets. - **Labor Strikes**: Countries with strong trade unions or a history of strikes can disrupt production and logistics. Ignoring the impact of rising interest rates on supply chain costs can lead to financial mismanagement. --- ### Technological Factors Failures in transport and ICT (Information and Communication Technology) networks can disrupt supply chains. - **Transport Failures**: While rare, infrastructure breakdowns can halt the movement of goods. - **ICT Reliability**: Many companies underestimate the importance of robust ICT systems. A 2013 survey revealed that over 75% of companies experienced supply chain disruptions in the previous two years. Investing in insurance and backup systems can help mitigate losses from technological failures. --- ## Profit Repatriation and Tax Avoidance ### What is Profit Repatriation? Profit repatriation refers to transferring profits earned in a foreign country back to the home country. This is often done to: - Protect against expropriation. - Take advantage of favorable currency exchange rates. **Example**: Volkswagen repatriates profits earned globally back to Germany, converting them into euros. Profit repatriation laws vary by country, influencing the profitability of foreign direct investments (FDI). --- ### Tax Avoidance by TNCs (Transnational Corporations) Tax avoidance involves legal strategies to minimize tax liabilities, often by exploiting loopholes or favorable tax regimes. #### Case Study: Apple in Ireland - Apple paid as little as **0.005% tax** in Ireland in 2014, far below the standard 12.5% corporate tax rate. - The European Commission ruled this tax deal illegal, as it was not available to other companies. - Apple avoided repatriating profits to the USA to evade the 35% US corporate tax rate. Apple attributed sales to a "head office" that existed only on paper, allowing it to avoid taxes in countries where its products were sold. --- ### Tax Avoidance in Low-Income Countries (LICs) Tax avoidance by TNCs significantly impacts LICs, depriving them of critical revenue for development. - **Example**: Zambia Sugar, a subsidiary of Associated British Foods, paid less than 0.5% tax on $123 million in profits between 2007 and 2012. It repatriated over one-third of its profits to low-tax countries like Ireland and Mauritius. - **Impact**: Zambia loses over $2 billion annually due to tax avoidance, which could otherwise fund health and education. Christian Aid estimates LICs lose $160 billion annually due to tax avoidance, enough to address global hunger. --- ## Disruptive Technological Innovations: Drones Drones, or unmanned aerial vehicles (UAVs), are transforming industries with their versatility and efficiency. ### Applications of Drones - **Disaster Response**: Surveying damage, locating victims, and monitoring large crowds. - **Agriculture**: Providing farmers with data on crop health and environmental conditions. - **Construction**: Conducting structural surveys of buildings. The drone industry is expected to generate over $80 billion by 2025, creating 30,000 manufacturing jobs and 70,000 technical jobs. --- ### Ethical Concerns - **Military Use**: Drones used in warfare may desensitize operators to violence and cause civilian casualties. - **Surveillance**: Privacy concerns arise from the use of drones for monitoring individuals or groups. Balancing the benefits of drones with ethical considerations is crucial for their responsible use. --- ## Key Takeaways 1. **Global Supply Chains**: Vulnerable to environmental, political, economic, and technological disruptions. 2. **Profit Repatriation**: Critical for assessing the profitability of foreign investments. 3. **Tax Avoidance**: While legal, it raises ethical concerns, especially in LICs where it exacerbates inequality. 4. **Drones**: A promising technology with applications across industries, but ethical concerns must be addressed. Understanding the interconnectedness of these factors is essential for managing global risks and building resilience.