Key takeaways

Rising geopolitical tensions, including trade restrictions and conflicts, are increasingly disrupting global supply chains, posing significant risks at critical chokepoints. Strong substitution effects and the use of inventories have helped to mitigate adverse output effects of chokepoint disruptions, but they often come at the cost of higher input prices. An effective policy response to chokepoint disruptions requires a tailored approach that takes account of the cause, centrality and the private sector’s ability to substitute and draw on buffers.

Geopolitical tensions bring chokepoints into focus

Geopolitical factors are playing an increasingly prominent role in driving supply chain disruptions. This trend is evident in firms’ earnings calls, which highlight the rising incidence of geopolitically driven disruptions, alongside a renewed surge in logistics concerns that had previously spiked during the pandemic. A supply chain chokepoint is an economically important product or node—such as a firm, industry in a country, production location or transport route—for which substitutes are limited or cannot be activated quickly. While a disruption to an ordinary node may be temporary and localised, a disruption to a chokepoint can spread more broadly through production networks. Its economic importance may stem from the direct use of an output across many sectors, as with refined oil products, or from significant indirect effects through supply chain connections, as with semiconductors, which are critical inputs for industries as diverse as automotive manufacturing and modern food production.

A key form of chokepoint arises from production network centrality—when nodes lie on numerous production paths, making them critical to the functioning of global supply chains. Many of these nodes are concentrated in large economies and in manufacturing sectors. Notable examples include German machinery manufacturing, Chinese manufacturing of electrical machinery and fertiliser production in the Middle East, all of which have become more central over time. The scope for substitution depends on how concentrated production is; for instance, supply chains for electrification metals have increasingly taken a hub-and-spoke form centred on China due to sustained investment and industrial policy measures.

Macroeconomic implications

Evidence confirms that chokepoint disruptions have a quantitatively significant effect on economic activity and prices. For instance, a one standard deviation increase in disruptions at key country-sector nodes of the global supply network is associated with a 50% larger decline in global industrial production growth compared with an equally large disruption at less critical nodes. Moreover, within one year, disruptions at key nodes also raise downstream firms’ producer prices by about 70 basis points, while those at less important nodes have minimal impact. Additional analysis indicates how the size of these effects depends on multiple factors, including the nature of the disruption, the scope for substitution, inventory levels and margins. Firms are more likely to seek substitutes and reallocate production in response to trade restrictions and other geopolitical disruptions than to natural disasters or health crises, presumably because the former are expected to be more persistent.

The scope for substitution, in turn, influences the relative magnitude of the quantity and price effects. Substituting across suppliers generally limits the impact on quantities but often implies paying higher input prices. A case in point is Japan’s response to China’s restrictions on rare earth exports: between 2012 and 2014, Japan reduced the share of its rare earth imports from China from around 80% to about 45%, yet purchases from other countries were much more expensive. Simulations of models incorporating international input-output linkages illustrate how these differences translate into output effects. In a scenario where trade costs in high-tech electronics sectors rise by 150% globally, the short-run GDP losses are estimated to be around 1% in most countries and as high as 4% for economies heavily reliant on these sectors. In the long run, losses are considerably smaller, averaging about 0.3%.

Policy implications

The standard policy prescription for responding to supply shocks is to look through the first-round inflation effects, provided expectations remain anchored and the risk of second-round effects is low. This prescription remains valid in the case of disruptions at chokepoints. Yet such disruptions can have larger, more persistent and potentially non-linear effects compared with similar shocks at less central nodes. The scale and persistence of the macroeconomic effects depend on the position and centrality of the disrupted node, as well as the availability of substitutes and operational buffers. A disruption to a central node, especially one located upstream, can have much larger effects than its direct impact. Even where substitution is strong and mitigates output losses, recourse to more expensive inputs may result in higher prices.

Sufficiently large cost increases could also trigger pricing cascades. Low inventories and limited spare capacity could magnify these effects, amplifying price pressures and making the effects increasingly non-linear. Assessing demand conditions is also critical, as strong demand can deplete buffers more rapidly and facilitate cost pass-through. Furthermore, the policy mix can influence the speed and effectiveness of supply repair. Maintaining production, rebuilding inventories, replacing suppliers and expanding capacity normally requires external financing. Tighter policy may therefore restrict this financing, slowing supply normalisation. Well-targeted fiscal measures, such as credit guarantees, can support supply repair without boosting demand, reducing the burden on monetary policy. Clear and timely communication is also crucial to preserve credibility and distinguish unavoidable relative price adjustments from persistent inflation.