Despite currently navigating troubled waters, this is not the first time global maritime trade has been threatened by geopolitics, and probably won’t be the last. 

    On 19 November 2023, Yemeni Houthi rebels (Ansar Allah) seized the cargo ship Galaxy Leader. Events then escalated, with missile strikes on three bulk carriers on 3 December 2023 heralding further attacks across December–January. The US- led Operation Prosperity Guardian launched on 23 December, aimed at protecting commercial vessels from further attack, and US and UK airstrikes took place against Houthi targets in Yemen on 12 January 2024. More would follow.

    Commercial shipping in the Red Sea and the Bab-el-Mandeb Strait has suffered. January’s Kiel Trade Indicator said the volume of container traffic in the Red Sea in December last year had fallen by half, hitting levels almost 70 per cent below normal. Ships were rerouted from the Suez Canal around Africa’s Cape of Good Hope, adding seven to 20 days to the transport time for goods between Asia and Europe. According to shipping services company Clarksons, in the week to 28 January, average daily arrivals of dry bulk ships were down 45 per cent from early December 2023 levels and container ship arrivals down 91 per cent. Supply chain advisers Drewry said the cost of shipping a standard-sized container from Shanghai to Rotterdam had more than tripled between mid- December and mid-January and was approaching US$5000 (decreasing slightly to under US$4000 in early February). War risk insurance premiums for the area had also risen from 0.07 per cent in October 2023 to one per cent by mid-January.

    This is not the first time the world’s maritime trade has been threatened in recent years. In 2019, there were attacks on tankers near the Strait of Hormuz, described by the US Energy Information Administration as “the world’s most important oil chokepoint”. The Russian invasion of Ukraine in February 2022 was followed by major disruptions to dry bulk and tanker shipments in the Black Sea, with damaging consequences for the global grain trade and world food prices. And geopolitical tensions in the strategically important South China Sea and Taiwan Strait are now a recurring theme.

    Supply chain blues

    Pandemic-related disruptions to global shipping during 2021–22 were a major driver of the post- COVID inflation shock. Now, use of the Suez Canal (carrying about 12 per cent of global cargo transport and 30 per cent of container trade) has been compromised. Another critical chokepoint, the Panama Canal (accounting for about six per cent of global maritime trade) has struggled with low water levels due to severe drought attributable to a prolonged El Niño and possibly climate change. The driest October in the canal region since the earliest records 73 years ago has forced authorities to restrict transits to 22 vessels per day.

    All of which brings two books to mind. The Box, by Marc Levinson, is a paean to the “simple metal container” that transformed shipping costs and helped drive the modern era of globalisation. The End of the World is Just the Beginning: Mapping the Collapse of Globalization, by Peter Zeihan, argues that, from the world of “cheap and better and faster” — in part created by Levinson’s box — “we’re rapidly transitioning into a world that’s pricier and worse and slower”.

    Zeihan’s thesis is that globalisation’s future collapse is the inevitable outcome of the withdrawal of a global US security guarantee. Safe, cheap, long- haul seaborne cargo plays an indispensable role in stitching together the modern global economy — according to the OECD, the main transportation mode for global trade is ocean shipping, which accounts for about 90 per cent of traded goods. But this is “only possible because of a lingering American commitment to a security paradigm that suspends geopolitical competition”.

    In the absence of ongoing US willingness or ability to maintain that commitment, Zeihan argues no-one else has the military capacity to support global security and from that, global trade.

    There are parallels here with last November’s column on the remaking of international economic geography, which invoked the crumbling Pax Americana as one force now redrawing the global economic map. For what it’s worth, my base case is considerably less catastrophic than Zeihan’s forecast. Still, something important is unfolding and observers are taking note. In January, The Economist ran a special report on the new era of global sea power, arguing, “If the oceans are at the heart of the international order, they are also the landscape where challenges to that order are playing out”. In the same month, the FT and the Wall Street Journal both published pieces on the threat to global commerce posed by the apparent buckling of freedom of navigation.

    No need to panic just yet

    For all the geopolitical angst, most economic commentary to date has been sanguine, even given the example of the post-COVID great supply chain inflation. That’s because, for now, this shock is much smaller. Container shipping rates during a pandemic-disrupted 2021–22 hit highs of around US$20,000 — far above current rates. Moreover, the context is quite different. Then, consumer demand was rebounding post-lockdowns and macro policy was still in expansionary mode. Central banks have now hit the monetary brakes hard, leaving consumers much less bullish.

    Granted, there has already been economic fallout. January’s bout of PMI surveys showed manufacturing businesses across Europe reporting deteriorating supply conditions and longer delivery times. Some also noted higher input costs. Some car factories (Tesla, Volvo) have paused operations. While the impact to date has been modest, it could get worse. An extended period of disruption, or even worse, trouble at other chokepoints — such as the Strait of Hormuz — would threaten higher inflation and complicate future monetary policy.

    Australia’s direction of trade provides some insulation. In 2021–22, about 90 per cent of our maritime exports by tonnage went to East and South East Asia, less than three per cent to Europe and the Middle East. Almost 70 per cent of imports by volume were shipped from East and South East Asia vs about 13 per cent from Europe and the Middle East. But we’re not immune. The Judo Bank Australia Manufacturing PMI reported supplier delivery times in January were the worst since August 2022, with survey respondents citing Red Sea disruption alongside domestic port issues.

    Shipping accounts for 99 per cent of Australia’s international goods trade by volume (80 per cent by value). Australia is the world’s fifth-largest user of shipping services, reflecting our bulk commodity exports. An increasingly contested international shipping sector will impact us adversely.

    This article first appeared under the headline 'Worse things happen at sea’ in the March 2024 issue of Company Director magazine.

    AICD chief economist Mark Thirlwell GAICD has focused on the international political economy at the Bank of England, JPMorgan, Austrade and Export Finance Australia.

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