Could the Iran crisis reshape global supply chains again?

By Cesar Polvorosa, Jr.

(Part 1)

WHEN OIL TANKERS are blockaded in the Strait of Hormuz, the consequences can reach far beyond the Persian Gulf. For countries like the Philippines — an economy that imports almost all its oil — events thousands of kilometers away can quickly translate into higher gasoline prices, rising transportation costs and eventually higher food prices at home.

Thus, the Iran vs US and Israel war that started on Feb. 28 has immediate economic implications for Asia. Iran commands control over the strategic Strait of Hormuz, which carries roughly one-fifth of global oil shipments, making it one of the most important chokepoints in the global trading system. When disruptions occur there, energy markets react almost instantly, sending price shocks through transportation networks, manufacturing supply chains and agricultural production systems.

The Philippines is particularly exposed. The country imports most of its crude oil from the Middle East, leaving it vulnerable to supply disruptions and price volatility triggered by geopolitical events in the region.

Recent diplomatic efforts illustrate how real these concerns have become. Manila has sought and reportedly gotten assurances from Tehran that Philippine-flagged vessels and energy shipments would be allowed safe passage through the Strait of Hormuz so that oil supplies and Filipino seafarers could continue moving through the vital route.

Such diplomatic moves amidst severe volatility reveal a deeper reality about globalization: international trade may be driven by economic efficiency, but it ultimately depends on geopolitical stability.

GLOBALIZATION’S HIDDEN ASSUMPTION
Economics textbooks often describe globalization as a system where countries specialize according to comparative advantage and trade freely across borders. For decades, global production networks were organized primarily around efficiency. Multinational enterprises’ (MNE) supply chain span different countries to take advantage of lower labor costs, specialized production capabilities and favorable trade policies. This system allowed firms to minimize costs while integrating markets across continents.

This framework rests on a largely unspoken assumption: that geopolitical conditions remain stable enough for global trade routes to function normally. Business-as-usual conditions assume the smooth functioning of globalization that depends on secure maritime corridors and predictable political relationships between states. When those conditions deteriorate, supply chains can quickly become vulnerable.

Recent history has repeatedly challenged this assumption. The COVID-19 pandemic disrupted global manufacturing networks and exposed the risks of concentrated supply chains. The trade tensions between the US and China forced MNEs to reconsider production locations. Russia’s invasion of Ukraine reshaped global energy flows and food markets.

Military engagement, confined to bombings as of April 6 involving Iran, the US and Israel, has impacted Persian Gulf states. The spreading conflagration raises the possibility of another shock — this time centered on one of the world’s most strategically important maritime corridors.

Because energy prices influence transport costs, fertilizer production and industrial inputs, disruptions in oil supply can ripple across entire supply chains. The result can be a simultaneous combination of inflation, currency pressures and sluggish economies.

These developments are pushing many firms to reconceptualize the structure of their production systems. Increasingly, firms are shifting from a model based purely on efficiency toward one that balances efficiency with resilience.

Resilience in this context refers to the ability of supply chains to continue functioning even when disruptions occur. Instead of concentrating production in a single country, MNEs are exploring strategies that diversify manufacturing across multiple locations. Regional production networks, redundant suppliers, selective import substitution and shorter logistics chains are becoming more attractive as businesses attempt to reduce exposure to geopolitical risk.

ENERGY AND FOOD SECURITY
The connection between energy and food security is often underestimated.

Oil prices affect almost every stage of modern agriculture: the production of fertilizer, the operation of farm machinery, irrigation systems and the transportation of crops to domestic and international markets. When oil prices surge, food prices often follow.

Thus, disruptions in the Strait of Hormuz impact not only energy markets but also global agriculture. Fertilizers such as ammonia and urea — essential inputs for modern farming — are produced using energy-intensive processes and are frequently transported through the same maritime corridors that carry oil shipments. For countries dependent on imported energy and agricultural inputs, this creates a double vulnerability that exerts upward pressure on food prices.

For the Philippines, the implications are clear. Energy inflation can easily spill over into food inflation, particularly in an economy where logistics and transportation costs play a significant role in agricultural supply chains.

LESSONS FROM JAPAN
One useful comparison comes from Japan, an advanced economy that has long confronted the challenge of deep dependence on global supply chains.

Like the Philippines, Japan imports most of its energy resources and a significant portion of its food supply. Yet Tokyo has long treated food and energy security as strategic priorities rather than purely market outcomes.

Japan’s food self-sufficiency ratio stands at roughly 38% on a calorie basis, one of the lowest among major developed economies. Despite this dependence, the government maintains strong policies designed to preserve domestic agricultural capacity.

The most notable is Japan’s rice policy. Rice is the Japanese staple crop and central to their national identity. The government has long protected domestic rice farmers through tariffs, subsidies and strict import controls.

From an economic perspective, such policies might appear inefficient since domestic rice production is costlier than the global average. Domestic rice production ensures that Japan retains a minimum level of food security should global supply chains face major disruptions.

Japan complements this agricultural policy with other measures: large strategic petroleum reserves, diversified energy suppliers and active diplomacy with Middle Eastern energy exporters. Collectively, these policies reflect a broader principle: in a world where geopolitical shocks can disrupt supply chains, resilience can require accepting higher costs in exchange for greater security.

Climate change adds another layer of uncertainty to global food supply chains. Increasingly frequent droughts, floods and extreme weather events are affecting the agricultural sectors of major exporting countries. Japan’s long-standing policy of maintaining domestic rice production, despite higher costs, reflects a strategic recognition that food security cannot rely entirely on global markets in an era of climatic uncertainty.

(To be continued.)

Cesar Polvorosa, Jr. is a professor of economics and international business at a Canadian university. He is an occasional contributor on Philippine and international economic development and geopolitics. His literary works have been published in North American and Asian anthologies and publications, including Likhaan: Book of Poetry and Fiction. He was an economist at the Philippine central bank and an AVP at a Philippine bank.