The Great Transformation of Global Trade

Juan Vázquez Rojo

5 mins - 4 de Marzo de 2024, 07:00

Since 2020, supply chain disruptions have been a constant: the pandemic, the blockade of the Suez Canal, the war in Ukraine, or tensions in the Black Sea. Now, the problems in the Red Sea and the Panama Canal represent a new setback. These events, rather than isolated incidents, are a reflection of the great transformation of world trade.

Houthi attacks on ships in the Red Sea have complicated passage through the Bab-el-Mandeb Strait and the Suez Canal, key routes for 15% of global trade and 30% of container transport. Although they began by targeting vessels linked to Israel, these attacks have escalated into a larger conflict, with the intervention of a US-led military coalition. After failed attempts by Washington to mitigate the situation, including requests to China to put pressure on Iran to rein in the Houthis, the EU will deploy a naval mission to escort merchant vessels.

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The situation has forced more than 500 container ships – 10% of the global total – to divert via the Cape of Good Hope, with Red Sea shipping down by 42% and 67% of container ships. The cost of transporting a standard container from Shanghai to Rotterdam has more than tripled from $1,442 to $4,984. Manufacturers such as Tesla in Germany, Volvo in Belgium and Suzuki in Hungary have halted some production due to delays in the delivery of components.

This problem coincides with the drought in the Panama Canal, which accounts for 3% of world seaborne trade and 46% of container shipping from northeast Asia to the US East Coast. The drought has reduced the canal’s ability to handle traffic, reducing ship traffic. In response, some companies are paying higher rates to avoid delays, while others are resorting to alternative, longer and more expensive routes. In 2023, similar droughts caused bottlenecks in other key trade areas, such as the Mississippi River in the US and the Rhine in Europe.

In general, supply chain disruptions create shortages and delays in the delivery of products and components, leading to imbalances between supply and demand and impacting economic activity and inflation. For example, during the pandemic, supply chain disruptions contributed to a 1.2 percentage point increase in core inflation in the euro area and a 1.9% decline in GDP. In the current context, the situation is less severe, and it is estimated that a prolonged closure of the Red Sea could raise annual inflation by 0.1-0.7 percentage points by 2024. 

Beyond the short-term impact, the problems in the Red Sea and the Panama Canal, driven by geopolitical tensions and climate change, are examples of the transformation of global trade.

In the coming years, climate change will create a scenario of increased volatility and risk for supply chains as extreme weather events become more frequent and severe. Phenomena such as high temperatures and thawing permafrost are expected to affect transport infrastructure, damaging roads and railways and causing delays, as well as the need to adopt more costly alternative routes. In addition, reduced freshwater sources will limit river transport and droughts and floods will put pressure on agricultural and industrial production, increasing logistical problems in the production chain.

In this context, economic security has become a major concern for major powers as they readjust their supply and production chains through industrial policies and trade sanctions.

China has been a pioneer with initiatives such as “Made in China 2025” and Standards 2035, in addition to promoting the development of “clean” technologies such as electric vehicles, solar energy, and batteries, with the aim of achieving greater autonomy in the manufacture of essential components. For its part, the US has adopted a two-pronged approach: on the one hand, it has imposed sanctions on China, mainly focused on semiconductors, and on the other, it has launched measures such as the “Inflation Reduction Act” and the “Chips Act” to strengthen its own industry.

The EU, in its effort to strengthen strategic autonomy, has implemented programmes such as “Next Generation EU”, focused on sustainable economic recovery and digital transformation, and “REPowerEU”, aimed at boosting energy autonomy after severing ties with Russia. In addition, the EU is considering an economic security plan, which will include stricter export controls and the possibility of imposing tariffs on vehicles imported from China.

In the same vein, companies are adopting strategies to cope with geopolitical and climate risks. The trend towards supplier diversification and increased inventories reflects a strategic shift by companies away from the “Just in Time” model, characterised by minimising inventories to reduce costs, towards the “Just in Case” model, which favours stockpiling to ensure operational continuity in the event of unforeseen events. Moreover, in the EU, companies are pushing for “friend-shoring” and “near-shoring”, which involves relocating their operations to allied and/or neighbouring countries. 

These strategies highlight the increasing priority given to security and resilience in supply chains over traditional factors such as cost and efficiency. In addition, trade and technological tensions between world powers can be expected to intensify, with sanctions and blockades on the rise. The problem today is in Suez and Panama, but tomorrow it could be in another critical point, such as the Straits of Malacca, Taiwan, or Gibraltar. In short, in this new phase in which world trade has entered, uncertainty will be a constant.
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