Last week, the seemingly mundane world of global trade took center stage in a dramatic (and slightly comical) way to capture the world’s attention. A massive cargo ship, the Ever Given, ran aground and became stuck sideways in Egypt’s Suez Canal. This canal, which connects the Red Sea with the Mediterranean Sea, serves as one of the world’s most critical waterways and processes over 30% of the world’s shipping container traffic. On Monday, the ship finally broke free and traffic has begun to move again. But amidst all of the jokes and dank memes, this crisis highlights several major vulnerabilities in global trade and commerce. This week, we’ll take a look at the global shipping sector and how even the smallest changes can have big impacts for you.
But First, A Little History…
As noted historian Alfred Thayer Mahan observed, the course of world history largely rests on a nation’s ability to control the seas. For centuries, great political and financial powers navigated the high seas and gained substantial power from them. Modern trade routes between rising powers in Europe and markets in Asia have been critical in this regard, but the very long sea route around Africa made the journey especially difficult. The opening of the Suez Canal in Egypt in 1869 dramatically shortened this journey. Over the years, the Suez Canal has briefly closed several times as a result of political unrest in the region. One of the most memorable was the original Suez Canal Crisis of 1956, when Egypt attempted to seize the canal from the British and French who owned the canal at the time. This led to one of the most unexpected alliances at the time when Britain and France teamed up with Israel to take back the canal from the Egyptian military. The United States and the Soviet Union joined up to demand a ceasefire and worked through the United Nations to remove the British, French, and Israeli forces. This newest shutdown comes amid the global supply chain turmoil caused by the pandemic and trade tensions between the United States and China. So why is only a one week delay causing such widespread trade problems? Well, the answer lies in global capitalism’s greatest success and greatest weakness: efficiency.
The Global Supply Chain
Much of the global supply chain in international commerce rests upon the concept of “just in time” delivery. This means that nearly every aspect of a product’s life cycle depends on getting the exact amount of something that is needed at the exact right time. From resource extraction, to initial processing, to delivery at a store or household, every aspect has been streamlined with the assumption that no significant delays will occur along the way. When even one link in the chain gets delayed, it causes ripple effects throughout the entire supply chain and the global economy in general. This current crisis has cost tens of billions of dollars in lost revenue and efficiency across the world. Even though the Ever Given is free and moving once again, the backlog of ships needing to pass through will still cause delays and headaches for weeks (if not months) to come. This has the impact of driving up prices for all kinds of goods that rely upon shipping container traffic.
But this incident highlights another critical vulnerability in the world of international commerce and shipping. By all accounts, it appears the current blockage was a result of difficult weather, poor visibility, and possibly some human error. This disaster shows how easily one single ship, terrorist organization, or hostile government actor could intentionally cause international mayhem by jamming up critical seafaring infrastructure. Strategic waterways like Suez or Panama can be shut down with a single large ship. Other critical straits such as Gibraltar, Malacca, and Hormuz would require a large navy to effectively shutter them, but these tensions have driven geopolitics in places like the Middle East and east Asia for decades. This is one of the main reasons why the United States continues to engage in freedom of navigation operations in places like the South China Sea. For years, the Chinese government has been building artificial islands along critical parts of this waterway and could one day threaten to block all unfavorable traffic through the area. If this occurred, China could begin to shut out competing nations and companies from the region entirely, meaning American businesses would be unable to operate in the vastly growing Asian marketplace.
China’s “nine dash line” would give it substantial control over a large section of global shipping.
What Comes Next?
In the coming years, the route through the Suez Canal may not be the most efficient shipping lane between Europe and Asia anymore. Even when the canal operates at full capacity, climate change is opening up new and shorter potential routes around the Arctic Ocean. As polar sea ice melts and coverage decreases each year, more and more permanent sea lanes will begin to open up along Russia’s norther coastline. This could take weeks off of the travel time between Europe and Asia while giving greater control over global shipping to polar powers like Russia, the United States, and Canada. Since the route does not have narrow canals to traverse, it would also take much more than a wayward ship to close everything down.
Finally, this event has highlighted once again the extent to which much of global trade relies upon powerful nations like China. Ever since China entered the World Trade Organization (WTO) in 2001, global manufacturing has shifted large quantities of production to China where labor has been fairly inexpensive. This has resulted in several positive developments such as cheaper goods and the lifting of millions of people out of poverty. But the wholesale outsourcing of entire sectors of the global economy to China has also negatively impacted jobs here in the United States. And as we have seen following the pandemic outbreak, this also presents a significant national security issue because the Chinese government can control the production of critical electronics and medical supplies. Both the Trump and Biden administrations have moved to attempt to decouple some global supply chains from China and bring back the manufacturing of critical goods to the United States (or allied nations). The events in Egypt demonstrate how much the world depends on nations like China for continued economic stability. So this will likely increase the calls for separating critical supply chains from places in Asia.
The Bottom Line
Though remarkably resilient, global trade has some key vulnerabilities that the Ever Given has demonstrated. Our complex web of international trade depends on everything going exactly right at the exact right time, so it can be easily disrupted by bad weather, stuck ships, or naval coercion. The United States continues to enforce the idea that international waters should be open for the free flow of people, goods, and information. Now that the Suez Canal is open again, international focus should turn to reducing these vulnerabilities and ensuring that no single ship, rouge organization, or global power can stop the lifeblood of the world’s economy.