The Price of Safety: The World Economy Is Rebuilding Everything Globalisation Removed

For forty years, companies stripped warehouses, spare capacity, duplicate suppliers and idle ships from the global economy. It made almost everything cheaper, but it also left an intricate trading system increasingly dependent on the assumption that factories would remain open, ships would keep sailing and borders would remain passable. War, sanctions and broken trade routes are now forcing businesses and governments to put some of that redundancy back, and the cost of doing so is beginning to surface in freight bills, inventories, insurance premiums and new industrial investment.

A few days ago, an oil tanker was booked to perform what, until recently, would have been one of the more unremarkable journeys in international commerce. It would enter the Persian Gulf, load roughly two million barrels of Iraqi crude and carry them across the Arabian Sea to India.

What was remarkable was the price. Reliance Industries agreed to pay between $23 million and $25 million to charter the very large crude carrier for the voyage, according to Reuters. Before the war, a comparable journey might have cost around $2 million. The oil had not become more difficult to pump, the distance between Iraq and India had not changed, and the tanker had not suddenly become twelve times more productive. What had changed was everything surrounding the voyage.

The Strait of Hormuz, through which the ship would have to pass, had become a place where mines, missiles, drones, sanctions, naval patrols and insurance underwriters mattered as much as currents, weather and fuel consumption. A journey that once belonged principally to commerce had become an exercise in geopolitical risk, and a barrel of oil acquired a new cost before it had travelled a mile.

Something similar, though usually less spectacular, is happening throughout the world economy. Companies are holding components they once regarded as wasteful inventory. Manufacturers are cultivating second and third suppliers that may cost more than the first. Governments are accumulating minerals, medicines and energy equipment. Oil producers are acquiring additional tankers and expanding pipelines around waterways that have carried their exports for generations. Countries that spent decades allowing shipyards, mines and strategically important industries to migrate abroad are discovering that recreating them is considerably more expensive than allowing them to disappear.

The organising principle of the global economy is changing in a way that is easy to miss because the old system is not collapsing. Most goods still move, most factories still depend on international supply chains and most companies still care intensely about efficiency. What has changed is the weight now assigned to interruption. For much of the past forty years, businesses became extraordinarily skilled at asking how much redundancy could safely be removed. The question now being asked in boardrooms and ministries is how much redundancy is worth paying for when the cost of being caught without it has risen.

The world that Toyota built

The revolution began, appropriately enough, inside a factory.

Toyota’s production system became one of the great managerial innovations of the twentieth century because it challenged something businesses had long accepted as unavoidable. Warehouses were filled with components waiting to be used, parts accumulated beside assembly lines and finished cars stood waiting for customers. All of it represented capital that had already been spent but had not yet earned anything.

Toyota’s answer was Just-in-Time production. Instead of maintaining large cushions of stock throughout the manufacturing process, parts would arrive when they were needed and production would respond closely to demand. Inventory ceased to be regarded simply as protection against uncertainty and became evidence that somewhere in the production system money, space or time was being wasted.

Western manufacturers began adopting the method widely from the 1980s, just as containerisation, computers, telecommunications and trade liberalisation made it possible to carry Toyota’s insight far beyond the factory floor. A manufacturer no longer needed a component to be sitting in a warehouse in Ohio if it could know, with sufficient confidence, that a supplier in Guangdong would place it on a ship on Tuesday and that it would arrive in Los Angeles three weeks later.

The savings were enormous. Federal Reserve researchers have estimated that roughly 70 per cent of American manufacturers came to use Just-in-Time production, while the aggregate US inventory-to-sales ratio fell by roughly 35 per cent between 1980 and 2018.

Yet inventory was only one form of redundancy being removed. Companies concentrated production in the factories that could make things most cheaply; countries imported goods that others could produce more efficiently; shipping companies built larger vessels and concentrated them on the busiest routes. Energy markets came to depend upon pipelines and maritime chokepoints capable of moving immense quantities of oil and gas at extraordinarily low unit cost.

The system worked so well that one of its most important assumptions gradually disappeared from view. The factory in Guangdong, the container terminal, the canal, the pipeline and the tanker did not merely have to be efficient. They had to be available when they were needed, and for several decades they usually were.

When efficiency becomes fragility

Covid provided the first global demonstration of what happened when enough of those assumptions failed simultaneously. Factories stopped because components costing a few dollars were unavailable. Automakers discovered that the absence of a semiconductor could immobilise a vehicle containing tens of thousands of dollars’ worth of perfectly available parts. Shipping containers accumulated on the wrong side of oceans, ports became congested and companies that had spent decades reducing inventory suddenly began ordering extra stock at the same time, creating shortages elsewhere in the system.

There was, however, a comforting way of interpreting the pandemic. It was an extraordinary natural interruption, terrible but temporary. Once factories reopened and ships returned to their schedules, the old system might reassemble itself.

What followed made that interpretation increasingly difficult. Russia’s invasion of Ukraine rearranged energy, grain and fertiliser markets. The confrontation between the United States and China turned semiconductors, rare earths and critical minerals into instruments of state policy. Houthi attacks in the Red Sea forced ships away from the Suez Canal. Sanctions helped create parallel tanker fleets, insurance arrangements and payment systems. Then came the war with Iran and the disruption of the Strait of Hormuz.

None of these events alone has destroyed globalisation, but together they have changed the calculation underlying it. The most efficient route can no longer automatically be assumed to be the safest route, and the cheapest supplier may no longer be the cheapest supplier once the cost of interruption is included.

Saudi Arabia illustrates the problem particularly clearly. It can move oil westwards across the kingdom to Yanbu rather than sending all of it through Hormuz. The United Arab Emirates has a pipeline carrying crude to Fujairah on the Gulf of Oman. Egypt’s SUMED system provides another way of moving oil between the Red Sea and Mediterranean. These routes exist because governments once paid to build alternatives to systems that already worked perfectly well. In ordinary times that spare capacity can look wasteful; during a crisis, the same infrastructure begins to look remarkably like insurance.

The complication is that even the alternative may cease to be secure. Houthi threats against Saudi shipping in the Red Sea have complicated the very route that allows Saudi Arabia to reduce its dependence on Hormuz. Tankers can instead head north towards Suez, oil can cross Egypt by pipeline, cargoes can be transferred between ships and smaller tankers can perform journeys that larger vessels once completed directly. Commerce adapts, but adaptation consumes more ships, more fuel, more handling, more insurance and more time.

Reuters has calculated that one rerouted Saudi-to-Asia journey avoiding the most dangerous waterways can stretch from about 19 days to around 48, with fuel costs rising from roughly $1.26 million to about $2.87 million before around $1 million in Suez charges. The cargo still arrives, but the journey absorbs far more of the system’s capacity merely to accomplish what used to be routine.

The invisible price of danger

Insurance provides perhaps the clearest measure of this changing world because insurers are in the business of attaching prices to events everyone hopes will not happen.

A tanker does not have to be struck by a missile for a missile to increase the price of oil. It is enough that an underwriter believes it might be. War-risk premiums for some Red Sea voyages have risen sharply during the latest escalation. On routes involving northern Saudi ports, quotations reportedly moved from around 0.25 per cent of a vessel’s value towards 1 per cent, while some southern Red Sea voyages have attracted rates of between 1 and 2 per cent.

For a ship worth $100 million, seemingly small percentages become substantial costs. In the Hormuz danger zone, the numbers can become larger still, with war-risk costs for some very large crude carriers reportedly running into many millions of dollars for a single voyage.

Those costs do not remain at sea. The insurer charges the shipowner, who incorporates the premium into the charter rate. The trader pays more to move the cargo, the refiner pays more to obtain the crude and eventually some portion of that additional expense reaches businesses and households thousands of miles from the missile battery that created it. It may appear in the diesel purchased by a haulage company in Birmingham, the jet fuel bought by an airline in Frankfurt or the fertiliser ordered by a farmer preparing next year’s crop.

Globalisation did not abolish distance, but it made distance remarkably cheap. In an increasingly insecure world, distance is acquiring a price again.

Buying a spare

The same calculation is taking place inside factories, although there the language is different.

General Motors recently established a $4.5 billion purchasing facility intended to protect access to critical components during future disruptions. The arrangement is revealing because GM has not simply decided to recreate the enormous warehouses that manufacturers spent decades dismantling. Instead, a separate company can purchase and hold selected components, financed by banks and supported by GM guarantees. It is an attempt to obtain the protection offered by inventory without surrendering all the financial advantages of lean manufacturing.

Toyota’s experience is more revealing still because it was Toyota that taught much of the industrial world to eliminate unnecessary stock. After the 2011 earthquake and tsunami exposed the vulnerability of some critical supply chains, the company reassessed the treatment of components whose absence could stop an entire production line. Suppliers were subsequently required to maintain substantially larger stocks of certain semiconductors.

Toyota did not repudiate Just-in-Time. It refined the idea by recognising that not every component carries the same risk. The lesson of the past few years is therefore not that every factory should contain enormous warehouses filled with everything it might conceivably need. Inventory remains expensive, components become obsolete and capital sitting on shelves cannot simultaneously be invested in machinery, research or expansion. The emerging system is more selective: companies remain lean where interruption can be tolerated and deliberately maintain buffers where the failure of a single supplier could stop production altogether.

Pharmaceutical companies face an even sharper version of the same problem. GSK has described efforts to build greater regional resilience and dual sourcing into parts of its supply chain. Such arrangements inevitably cost something because two qualified sources are rarely cheaper to maintain than one optimised source, but the point is not to make every input more expensive. It is to prevent one missing input from shutting down the whole system.

The return of the strategic stockpile

Governments have arrived at much the same conclusion, although their version of the warehouse can contain everything from antibiotics to transformers.

The European Union has developed a stockpiling strategy covering essential goods including food, water, fuel, medicines, medical equipment, critical raw materials and energy equipment. Britain has sought to increase domestic production and recycling of critical minerals while reducing excessive dependence on individual foreign suppliers. The International Energy Agency has been examining strategic mineral stocks in response to an extraordinary concentration of refining capacity in a small number of countries.

For six important minerals, the three largest refining countries controlled an average of roughly 86 per cent of global supply in 2024. That concentration made economic sense when refining gravitated towards the places capable of doing it most cheaply; it becomes more troubling when governments begin asking what happens if access to one of those places is interrupted.

A strategic stockpile is therefore an unusually clear symbol of the new economics. It produces no income and, in ordinary circumstances, contributes very little to output. It requires warehouses, security, management and capital, and some of its contents may have to be rotated or replaced. For years it can look like money doing nothing, until the week when the normal supply does not arrive.

The United States is applying the same reasoning to its electricity system. Washington has committed money to strengthening domestic transformer manufacturing and has examined reserves of large transformers that could replace equipment destroyed or disabled during a major emergency. These are enormous pieces of industrial equipment that can take a long time to manufacture and transport, which means the value of keeping one in reserve is inseparable from the time it would take to replace it after a crisis.

Ships as inventory

At sea, redundancy sometimes takes the form of the ships themselves.

The UAE’s ADNOC has expanded tanker capacity and used chartered vessels as part of the increasingly complicated process of moving crude from inside the Persian Gulf towards transfer points beyond the immediate danger zone. Tankers can shuttle cargo to other ships, voyages can be divided into stages and vessels can be positioned where the normal commercial system no longer provides sufficient capacity.

There is a striking similarity between this and GM’s component arrangement. One company secures additional parts so that factories can continue operating if a supplier fails; another secures additional shipping capacity so that oil can continue moving when the normal transport network becomes unreliable. In both cases, the company is paying for continuity, but the comparison also reveals the deeper macroeconomic cost: capital that once would have been devoted chiefly to expanding output is increasingly being used to preserve the ability to keep existing output moving.

That distinction matters. A new factory that raises production can lift productivity. A second factory built only to ensure that the first can be replaced if trade breaks down may be strategically invaluable, but its economic return looks different. The same is true of reserve ships, duplicate pipelines, strategic inventories and domestic production maintained at higher cost than the world market would otherwise require.

If this pattern becomes widespread, the price of resilience will not appear as a single levy called geopolitical security. It will be dispersed through corporate balance sheets, freight rates, public subsidies, insurance premiums, inventories and infrastructure spending. Some of it will show up in consumer prices; some will appear as lower margins or higher taxes; some will be visible only as capital that could have been used elsewhere.

This is also where the argument needs scepticism, because almost every inefficient industry would prefer to describe itself as strategic. The language of resilience can easily become a justification for protectionism. A factory that cannot compete can ask for subsidies. A politically connected producer can demand tariffs against foreign rivals. Governments can spend enormous sums preserving industries whose disappearance would cause inconvenience rather than genuine strategic danger.

There is nothing intrinsically wise about duplication, and domestic production does not automatically make a supply chain secure; a factory at home may still depend on imported machinery, chemicals, minerals or components. The useful test is whether the additional capacity protects the economy against a plausible failure serious enough to justify what it costs.

Globalisation after globalisation

This is why describing what is happening as deglobalisation is misleading.

Most world trade continues to move. Container ships still cross the Pacific by the thousands. European factories still depend upon Asian components. Multinational companies continue to manufacture wherever combinations of skill, infrastructure, market access and cost make production attractive. World trade has proved remarkably resilient through one geopolitical shock after another.

Sal Mercogliano, the maritime historian and former merchant mariner who has chronicled the disruption of the world’s shipping routes, makes an important qualification even while warning about the growing threats at sea: the overwhelming majority of cargo is still moving. Shipping, as he puts it, behaves rather like water. Block one route and it finds another.

That resilience is one reason repeated predictions of globalisation’s imminent collapse have proved premature. The economic incentives supporting international trade remain enormous, and companies do not casually abandon suppliers, factories and infrastructure developed over decades. What they are doing instead is making the existing system more expensive to interrupt.

An oil producer builds another pipeline. A manufacturer qualifies another supplier. A company holds another month’s worth of components. A government accumulates another stockpile. A country subsidises another factory or shipyard that the international market could have supplied more cheaply. Each decision may be modest on its own, but together they amount to a broad transfer of capital from pure efficiency towards survivability.

Economists have long understood the trade-off. Diversifying suppliers, maintaining inventories and preserving spare capacity impose costs when the world is stable. If the probability of a serious interruption rises, however, the calculation changes. At some point the apparently inefficient alternative becomes economically rational because the cost of maintaining it is smaller than the expected cost of being caught without it.

The difficulty is that the answer differs enormously between industries. A clothing retailer can usually survive a delayed shipment. A hospital cannot easily survive the disappearance of an essential medicine. An automaker may tolerate the absence of one upholstery option but not the semiconductor controlling an engine-management system. A country can replace one source of oil with another only if there are ships, terminals and pipelines available to carry it.

The managerial problem of the coming years will therefore be less dramatic than a wholesale retreat from globalisation and more difficult to solve. Companies and governments will have to decide, component by component and route by route, where the insurance is worth paying for and where it is merely expensive duplication.

The bill

For forty years, globalisation made an extraordinary promise possible. A factory did not need an enormous warehouse because the supply chain itself could function as the warehouse. A country did not need to manufacture every important product because the international market could function as its factory. An oil producer did not require several export routes if tankers could reliably pass through international waters. A company did not need to maintain two suppliers when one could make the component more cheaply and deliver it exactly when required.

None of those ideas was foolish. They helped produce one of the great increases in productive efficiency of the modern era, lowering prices, releasing capital and allowing countries and companies to specialise on a scale that earlier generations could scarcely have imagined. What made the system possible, however, was not efficiency alone. It was reliability: the factory had to open, the semiconductor had to arrive, the container vessel had to sail, the canal had to remain passable, the tanker had to be insurable and the country controlling an important mineral had to continue exporting it.

Those assumptions have not disappeared, but they can no longer be treated as constants. The economy being built in response will therefore be less spare, less elegant and in some sectors more expensive than the one that preceded it. There will be more inventory sitting on shelves, more ships travelling longer distances, more pipelines operating below their theoretical capacity, more factories producing goods at somewhat higher cost and more governments maintaining reserves they hope never to use.

Some of this will be wasteful. Some will become protectionism dressed in the language of national security. Companies will simultaneously try to recover the efficiencies they are surrendering through automation, artificial intelligence, better forecasting and more sophisticated logistics. The point is not that the old model has been abandoned, but that reliability itself is being repriced.

The world is not dismantling globalisation. It is rebuilding around it the things globalisation taught businesses and governments they could live without: the second supplier, the spare transformer, the warehouse, the strategic reserve, the alternative pipeline, the extra tanker, the domestic factory and the shipyard that still knows how to build a ship.

For decades, executives and economists became exceptionally good at calculating the cost of having too much inventory, too many suppliers, too many factories and too much capacity standing idle. The unsettled world of the 2020s is forcing them to learn how to calculate something the old model had gradually allowed them to forget: the price of having too little.