As climate change accelerates, extreme weather events are becoming more frequent and severe, threatening the stability of global supply chains. According to a comprehensive study by Bruegel, the Brussels think-tank, the era of climate-proof globalisation is over.
The study analyses how floods, droughts, and other climate hazards disrupt manufacturing, agriculture, and trade infrastructure—ripple effects that risk escalating into systemic economic crises as the planet warms. “The trajectory is shifting,” warn authors Madalena Barata da Rocha, Heather Grabbe, and Niclas Poitiers. “As climate change progresses, hazards are projected to become both more frequent and more intense, raising the probability of simultaneous disruptions in multiple regions.”
The 2011 Thai floods—the country’s worst in 70 years—offer a stark case study. Torrential rains caused $46.5bn in losses, equivalent to 12.5 per cent of Thailand’s GDP, with 70 per cent of damage concentrated in manufacturing. Automotive and electronics production plummeted by 87.5 per cent and 65 per cent, respectively, triggering parts shortages for Honda and Toyota globally.
Water and weather tests
Yet global car production increased by 2.8 per cent in 2011, reaching 59.8 million units. “The high degree of diversification across supply chains allowed diversion to unaffected sources,” the authors note. However, they caution that such resilience has limits: “If floods start happening every year, the region’s capacity to recover will diminish.”
Water scarcity poses a parallel threat. Semiconductor manufacturing, concentrated in Taiwan (60 per cent of global output, including 90 per cent of advanced chips), requires vast amounts of purified water. A 2020–21 drought—Taiwan’s worst in 56 years—dropped reservoir levels below 5 per cent, forcing rationing.
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While authorities prioritised water for chipmakers, averting production halts, the episode “highlighted the vulnerability of critical infrastructure to water scarcity.” The authors warn that industries reliant on localised water supplies, from chemicals to steel, face similar risks as droughts intensify.
Global price shock
Agriculture faces acute climate risks, with gradual shifts in temperature and precipitation patterns compounding extreme weather. Small-scale farmers, lacking resources to adapt, are particularly vulnerable.
The study cites 2023 droughts in Brazil that spiked coffee prices, 2024 heatwaves in West Africa that disrupted cocoa supplies, and droughts in Indonesia and Japan that inflated local rice prices. While such shocks have so far been “geographically localised or short lived,” the authors caution that concurrent events could destabilise markets.
Despite stable global stocks, export bans by India, Vietnam, and others tripled prices in six months. “Uncoordinated policy responses transformed a regional imbalance into a global price shock,” the authors write.
Chokepoints under stress
Similar dynamics emerged in 2024, when Japan’s import protections led to a 28 per cent spike in local rice prices despite stable global markets. “Fear of scarcity and political pressure to secure domestic supplies can worsen the very risks they aim to contain,” the study warns.
Maritime routes, which carry 90 per cent of traded goods, are increasingly vulnerable. Droughts in 2023 forced the Panama Canal to cut cargo volumes by 10 per cent, rerouting ships to longer paths like the Suez Canal.
JPMorgan estimates these disruptions—combined with Red Sea piracy—added 0.7 percentage points to global core goods inflation. Inland waterways face similar strains: Germany’s Rhine River, handling 40 per cent of EU freight, saw droughts in 2022 disrupt coal shipments during the energy crisis. Low water levels cost the US $20bn in lost Mississippi River trade the same year.
Costs of resilience
Hydropower, a critical energy source, is also at risk. Europe’s output dropped by nearly 20 per cent in 2022 due to droughts, while the UK reported a 4 per cent decline in early 2025. “Such interruptions strain power grids reliant on renewables, creating cascading challenges for industry,” the authors note.
Firms are responding with stockpiling, supplier diversification, and redundant logistics—strategies that incur higher costs. After Japan’s 2011 earthquake, French firms offset an 8 per cent import drop by sourcing from China, but such flexibility is harder in developing nations. Contract farming, common in cocoa and coffee, falters as climate variability disrupts yields and delivery timelines. “Climate-related shocks undermine these arrangements, creating supply instability,” the authors observe.
Maritime companies, anticipating volatile shipping routes, may expand fleets beyond optimal levels. “These measures reduce efficiency but are necessary to absorb shocks,” the study notes. However, the authors warn that “geopolitical trends pushing supply chains into fewer, politically aligned countries could heighten vulnerability to localised disruptions.”
Balancing intervention, market signals
Governments must walk a tightrope between supporting industries and preserving market discipline. Bailouts for flood-prone factories or subsidised insurance can distort risk signals. Taiwan’s prioritisation of semiconductors during droughts, while averting production halts, risks “politically unsustainable” water allocation conflicts. Chile’s 7-billion-litre water permit for a Santiago data centre during droughts exemplifies similar tensions.
Each government prioritises domestic stability, but collective action suffers. — Bruegel
The authors advocate for policies that “incentivise diversification without dulling price signals.” Taiwan’s investments in water reclamation and desalination offer a model, though such projects raise environmental concerns. “Accurate pricing of climate risks is essential,” they argue. “Subsidies in high-risk areas disincentivise relocation or adaptation.”
Export restrictions during crises—a recurring theme from the 2007–08 rice crisis to 2024’s localised shortages—highlight a coordination failure. “Each government prioritises domestic stability, but collective action suffers,” the authors note. The study urges international agreements to curb protectionism, though concedes that “geopolitical fragmentation makes such coordination unlikely.”
A race against warming
Zurich Insurance Group estimates $2tn in weather-related economic losses over the past decade, with only 38 per cent insured in 2023. As temperatures rise—there is a 70 per cent chance the 1.5°C threshold will be breached within five years—the authors stress that “decisions this decade will shape the sector for generations.” While emission reductions remain the most cost-effective solution, adaptation is unavoidable.
The study calls for investments in resilient infrastructure, diversified supply chains, and policies that reinforce—rather than replace—market incentives. “Without coordinated action,” the authors conclude, “climate-driven disruptions will escalate from localised headaches to systemic crises.” The clock is ticking; the era of climate-proof globalisation is over.
