Choppy waters
Shipping, trade and geopolitics.
Welcome to this week’s Not in Dispatches, where we examine how geopolitics impacts shipping - and therefore all businesses that trade internationally.
Maritime transport accounts for over 80% of the world trade volume and is the backbone of the global economy. Since 1990, the volume of cargo transported by ships has more than doubled.
And arguably the greatest innovation of the 20th century - at least in economic terms - was not the internet but the humble shipping container, which facilitates the cross-border movement of goods with dependability, at low cost and at massive scale.
But while maritime trade is critical to the global economy, it is also especially vulnerable to the vagaries of geopolitics - most fundamentally because shipping is hamstrung by geography.
Up ship creek.
Commercial shipping relies on a handful of strategic trade routes to move goods efficiently. Along these routes, there are a series of narrow passages - often straits or canals - that carry high volumes of traffic because of their optimal location.
Bottlenecks at any of these maritime “choke points” - such as the Panama Canal (linking the Pacific and Atlantic oceans), the Suez Canal (connecting Europe to Asia without having to sail around Africa) or the Strait of Malacca (connecting China, India and Southeast Asia) - can accordingly cause enormous disruptions to global trade and the world economy.
Businesses’ dependence on the effective operation of these choke points was put into stark relief in March 2021 when, in high winds, the 224,000 ton Ever Given ran aground on a 45-degree angle and blocked all of that 205m width of the Suez Canal.
For almost a week, one of the most significant sea lanes in the world, comprising approximately 12% of global trade, was completely blocked. Over 300 vessels at either end of the canals were forced to sit at anchor, holding up nearly $10 Billion worth of trade.
Shifting winds.
The bigger risk to global trade comes not from high winds, but geopolitics.
The Suez Canal is, of course, no stranger to geopolitics. Originally built in 1869 for European commercial interests to connect with their colonies and operated by the French and British, the Suez Canal was shut down in 1956 after Egypt’s Nasser nationalised it.
Its owners saw this as the act of a petty tyrant intent on economic bullying, but the Egyptians saw it differently. In their view, it was in response to an American and British decision not to finance the construction of the Aswan Dam owing to Egypt’s growing ties with communist Czechoslovakia and the Soviet Union. The British and French subsequently joined the Israelis to fight a war with Egypt to try to regain control. Yet the Americans, wary of starting WWIII with the Soviets, did not join in as expected. The Suez canal was ultimately lost, and, with it, the bulk of British and French influence in the Middle East.
More recently, Russia’s attempt to blockade Ukrainian ships from leaving its Black Sea ports - both for military purposes and to cut off Ukrainian trade to deprive of of finances - has caused major supply chain disruptions, a dramatic increase in the global price of wheat, and significant food insecurity in vulnerable nations, such as Egypt, Ethiopia and Yemen. Turkey, in the early days of the war, took the exceptional step of closing the Bosporus and Dardanelles straits to Russian warships.
Iran a tight ship.
Over the last few years, tensions between the US and Iran have led to a growing number of attacks against vessels in the Gulf of Oman and off the coast of Yemen in the Strait of Hormuz. Six oil tankers were attacked in May 2019 and owing to the Israel-Gaza war, further attacks have occurred in recent weeks. This has in turn driven up marine insurance premiums and rendered all shippers - not just those with seized or damaged vessels - as collateral damage.
But ultimately, Iran and its proxies’ pirate-like attacks against Western ships are more a show of what it could do if it really wanted. By controlling the Strait of Hormuz, through which 30% of the world’s oil flows, Iran also has the ability to shut it down - making shippers and the millions of businesses and consumers vulnerable to testy relations between Iran and the West. And it also makes any escalation of the Israel-Gaza war involving Iran significant to the global economy.
South China Sea monsters.
An equally, possibly more, important maritime route subject to increasingly tense geopolitics is the South China Sea. As great power competition increases between the US and China, so does the threat to the security of global trade through sea lanes in Asia.
Over the past decade, China has recognised the importance of sea lanes to its own economy. It has grown its navy into the largest in the world by number of ships and has begun to challenge the rights and territory of its neighbours in the South China Sea. And while conflict breaking out in the South China Sea is unlikely, it is not impossible and could arise, for instance, from misjudgement by China, the Philippines or the United States over the Second Thomas Shoal.
Conflict between any major powers - whether over South China Sea or Taiwan or in the Middle East - would have significant ramifications for global trade, supply chains and the price and supply of oil.
North face.
While world’s maritime routes are vulnerable because of geography, they are also (quite appropriately, for waterways) fluid and changing.
China is consciously developing its ‘21st Century Maritime Silk Road’, the sea route part of its Belt and Road Initiative, including by leasing ownership of at least ten ports along its route from China, through South East Asia, South Asia, Africa and the Middle East.
While China’s efforts do not change geography, changing geography may also affect maritime trade. As the Arctic ice melts faster than governments can take effective action on climate change, the alternative to the Suez Canal for European-Asian trade through Russian (currently icy) waters will become more viable, both physically and economically.
And while perhaps decades off, the Northern Sea Route may reduce geopolitical risk for firms by reducing reliance on the Suez Canal but open up new risks from passage through the frigid waters of Russia.
Last week’s poll results.
Last week, we wrote a piece on Turkey and asked some questions about its domestic politics, economy and foreign policy. Here is what you thought:
The vast majority (74%) thought Turkey would adopt a new constitution granting more powers to the president by the end of Erdogan’s term in May 2027, compared to 21% who thought that would happen by the end of 2024 and only 5% who thought not before June 2027.
Readers were split very evenly on Turkey’s approach to Sweden’s NATO membership bid, with 24% thinking Turkey would grant it by the end of 2023, 24% saying by the end of Q1 2024, 29% by the end of Q2 2024 and 12% after the end of Q2 2024 - with only 12% saying never.
The majority (50%) thought Turkey’s inflation rate by the end of 2023 would be less than 50%, 25% said 50-60% and 25% said 70-80%.
As always, please join our polls this week and we’ll report back next weekend with the results.
Best,
Michael, Cameron, Damien, Yuen Yi, Andrea, and Kim.