In the 19th century, David Ricardo’s theory of international trade became a guiding principle of the global economy. Ricardo argued that even if one nation is more efficient in producing all goods than another, both could benefit by specializing in what they do best and by trading. Fast forward to today, global trade is now 74% of global GDP (up from 25% in 1970) and 80-90% of all our goods are shipped overseas.
However, in the past four years, the predictability of global trade routes has been disrupted by four different events. These four risks could significantly raise the costs of shipping goods (through higher insurance premiums, delays, re-routes and damage), which could reshape the levels of inflation and interest rates in 2024.
Firstly, the 2020 COVID-19 pandemic turned our attention to trade routes, with images of the oceans littered with idle container ships. This triggered Western governments to create policies for more self-sufficiency in energy and semiconductors (which we explored in a previous Horizon titled “How the changing world order could keep the cost of capital high for years”).
Secondly, the 2021 Suez Canal incident, in which a container ship was stuck for 6 days, forced ships to take other, longer and costlier routes, turning our attention to the increasingly colossal container ships that navigate our trade routes. Indeed, many ports and some routes cannot handle the biggest container ships anymore.
Thirdly, the 2022 war in Ukraine and the 2023 war in the Middle East turned our attention to the threat of military conflicts. The CEO of Maersk, one of the world’s largest shipping companies, has warned that the current situation in the Red Sea could disrupt global shipping for months. See the graph below.
Fourthly, in 2023, low water levels limited the capacity of the Panama Canal (24 ships a day, instead of the usual 38), turning our attention to how climate change is destabilizing trade routes. See the graph below.
All of these developments are raising the risk level of trade routes. Indeed, from the mid-1970s up until 2020, none of these risks was significant.
In the longer term, non-Western countries will increasingly shape the future. They will put more pressure on global trade routes, but also stand to benefit most. Take India, whose market is big enough to have a comparable impact on global shipping as China had in the previous decades.
Meanwhile, the shifting center of gravity of the global economy towards Asia means that the main beneficiaries in terms of ports and shipping will be there. Indeed, trade within Asia itself already makes up 58% of the region’s total trade. Its ports handle 62% of the world’s container traffic.
Finally, perhaps more interestingly, some specific pockets of countries could benefit from the growing disruption to trade routes. A research paper by David Guerrero and Jean-Paul Rodrigue, titled “The waves of containerization: shifts in global maritime transportation”, shows that the immense growth of container shipping, and the congestion of trade routes that came with it, has triggered the rise of niche ports that fill a specific role. An interesting example is Mexico. After decades of planning, it has finished building the Interoceanic Corridor, a railway that runs from north to south with ports at both ends, designed as an alternative to the Panama Canal.
To conclude, trade routes are more uncertain than at any point in time since World War II. Should India (and the rest of Asia) realize its full potential, challenges will intensify. All of this carries obvious implications for inflation and interest rate levels in the West. Meanwhile, the main beneficiaries in the near future could be specific pockets of some countries, such as Mexico, Israel or Thailand – all of which are aiming to circumvent existing trade routes.
