Drying up: Trade route challenges mount from every angle

If goods are in transit for longer, such as to travel around Africa rather than use the Suez Canal, it could easily cost huge sums. These translate as inflationary pressures.

Disruption has a significant impact. In October, the World Trade Organisation thought global trade would grow by 3.3% this year. Those figures may soon be revised.

It certainly had business and political leaders sweating at the World Economic Forum in Davos this year. The world's tentative recovery from the pandemic currently looks hostage to instability.

Read more: Wars and corridors: Davos tackles global trade challenges

Suez impact felt

Most prominent of the problems, attacks on merchant vessels passing into the Red Sea through the Bab-el-Mandeb Strait began in early December. This route accounts for around 15% of the world's shipping traffic.

Houthi rebels in Yemen say they want to show solidarity with Palestinians in Gaza, targeting ships bound for the Suez Canal using Iranian weapons until food and humanitarian aid are delivered.

In January, the US and UK responded militarily after their warnings went unheeded. However, this does not seem to have deterred the Houthis.

Ships are redirecting around Africa, adding cost and time. Voyages between Asia and Europe are now much longer, which, in turn, eats into shipping capacity.

Vincent Clerc, chief executive of Danish shipping giant Maersk, told Davos that months of supply chain disruption from the "brutal and dramatic" Houthi attacks may yet introduce inflationary pressures back into the global economy.

Repercussions are already being felt. Tesla and Volvo are among the companies who have had to temporarily halt production due to shortages of critical components. Retailers like Next and Ikea have warned of longer delivery times.

In December, global trade was down 1.3% from the Houthi attacks, according to the Kiel Institute for the World Economy, a German economic think-tank.

The number of containers passing through the Red Sea every day has plummeted by 60% from 500,000 in November to 200,000 now.

Kiel said this had hit the European Union, with a 2% drop in exports and a 3.1% drop in imports. The US also experienced a 1.5% fall in imports, while exports were 1% down.

Houthi piracy in one of the world's most important waterways threatens a route through which up to 15% of global trade passes, including oil exports.

Around 30% of the total world volume of container shipping uses it to pass through the Suez Canal and on to Europe.

In recent weeks, ocean freight rates have surged, reaching up to $10,000 per 40ft container, as six major container shipping companies now circumvent the Red Sea, causing delays of up to three weeks.

Options and alternatives

Alternative routes taken by merchants have effects that reach beyond the shipping industry.

Part of the potential wider inflationary effect comes from a surge in air freight volumes, as identified by Xeneta, a benchmarking platform for freight rates, leaving business facing higher transport costs.

Cargo bound for Europe is increasingly being flown in, after $200bn in cargo dodged the Red Sea. As time goes on, the cost of shipping cargo by air will continue rising.

Taking freight by air can drastically reduce delivery times, so the new routes could even reshape the dynamics of global supply chains if changes to transport preference outlast the current problems.

Markets factor in the turbulence and uncertainty. Crude oil prices rose by 3% recently, as tensions increased following Iran's seizure of an oil tanker in the Gulf of Oman.

The World Bank has highlighted the potential erosion of supply networks and an increased likelihood of inflation due to trade bottlenecks.

Things could yet get worse. The Gaza war may yet widen into a regional conflict. The Houthis attacks could start targeting oil tankers. Prices could jump.

Economists, including Mohamed El Erian at investment giant Allianz, warn that the longer supply chain disruptions persist, the stronger the stagflationary effects for the global economy.

Trouble in the east

In the run-up to Chinese New Year, companies rush to fulfil orders before holiday factory closures. This year, they may face additional challenges because tensions are rising in the South China Sea.

The Taiwan Strait appears to be where China and the United States face off, yet this is another vital trade route, especially for exporting hi-tech goods.

US Secretary of State Antony Blinken has emphasised the importance of trade flows here, pointing to the potential for global economic disruption if they are interrupted.

If China were to implement a blockade of Taiwan, the disruption to trade would be immense — easily more than $2tn, before factoring in secondary effects.

Not least of the worries is the world's demand for semiconductors, the chips that power everything from mobile phones to electric cars.

Taiwan's manufacturing industry supplies between 56-64% of the global semiconductor foundry market, with South Korea a distant second. The chips are so valuable that they account for around 15% of the island's GDP.

Analysts at the New York-based Rhodium Group say disruptions from a conflict in the Taiwan Strait "would be felt immediately and would be difficult to reverse… They would impact trade and investment on a global scale, leaving few countries untouched".

Trouble in the west

The Panama Canal is the world's second busiest man-made shipping lane. Although ships passing through it are neither being shot at nor risk being blockaded, there are still problems galore – this time, from the climate.

As highlighted in Davos by Tobias Meyer, chief executive of global logistics firm DHL, this crucial conduit for global trade has been hit by water shortages and drought driven by climate change and the El Niño weather phenomenon.

The lakes that feed the canal are drying up and the series of locks connecting the Atlantic to the Pacific are now almost too shallow to let the largest container ships through.

In normal times, the Panama Canal carries about 5% of global maritime trade, generating $2.5bn in revenue for the country, but these are not normal times.

Such are the problems that rival states in South and Central America are trying to come up with alternatives. Among the most viable is a land-based route across Mexico.

Containers would be unloaded from ships onto trains or lorries at one port and carried cross-country before being reloaded onto a ship on the other side.

Navigating choppy waters

The challenges are many and change is needed to secure global supply chains. Until then, big money is hedging its bets.

One big loser could be globalisation. On the increase are trends such as 'nearshoring' or 'reshoring', whereby production is localised and relocated to be brought nearer to home markets, reducing exposure to world shocks.

To some, this is simply mitigating risk. To others, it is beginning to look a lot like protectionism. Yet, as nations grapple with economic uncertainty, the allure of safeguarding domestic industry grows increasingly tempting.

Even China's Premier Li Qiang denounced "discriminatory measures for trade and investment" in a veiled reference to the US, shedding light on the intricate diplomatic dance of economic policies in an interconnected world.

The Red Sea, Taiwan, and Panama are critical nodes in the global trade network. Each has its own challenges and opportunities in these fraught times.

With the fragility of global trade exposed, there is a growing need to move beyond reactive measures to proactive measures to safeguard trade routes.

Global trade is not one monolithic entity but a complex ecosystem, susceptible to myriad influences, whether they be political, military, or climate related.

A comprehensive and collaborative approach is needed to ensure the resilience and adaptability of the global trade network. Until then, many more sleepless nights await.