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Costly Convenience: the Complex Future of Global Shipping

It is hard to understate the overwhelming growth of globalisation over the past 50 years. Owning appliances labelled with "Made in China," t-shirts tagged with "Made in Bangladesh," shoes stamped with "Made in Vietnam," and eating pears freshly packed from halfway across the world has become just another part of our mundane, ordinary consumption habits.

The world's shipping facilities and connections functioned seemingly well until the COVID-19 pandemic. Since then, news of shipping delays, increased costs, and bottlenecks seem unending. First lockdowns, then travel restrictions, then a ship stuck on the Suez Canal, then Russia's invasion of Ukraine, then low water levels in the Panama Canal, and, most recently, attacks on ships in the Gulf of Aden; the shipping industry has been through rough seas. Simultaneously, policymakers and managers signal a pivot towards more resilient, albeit costlier, supply chains. With the foundations of the shipping industry shaken to their core, the future is uncertain. How will shipping adapt to the coming decade? Is the era of cheap products from overseas over? 

How Did We Get Here?

Maritime travel is (and historically always was) the cheapest and often quickest form of transport. However, today's level of international connectedness has never been the norm: worldwide shipping is a truly modern phenomenon. Geopolitical, economic, and technological conditions of the late 20th century made ideal conditions for the exponential growth of trade. This can be best understood through an application of the traditional Ricardian model, showing ocean trade's role in facilitating economies' gains from trading . According to David Ricardo's theory, countries specialise in sectors where they hold a comparative advantage (lower relative opportunity costs of production). 

The mid-20th century saw immense technological advancements facilitating oceanic trade. The development of a standard, easy-to-use container type for the whole world, along with advancements in GPS tracking, communications, shipbuilding, and, most recently, automation, have streamlined and cheapened oceanic transport. That is, the technology and standardisation of shipping have created an industry with massive economies of scale and, thus, very low unit costs. A pair of shoes, for instance, can be shipped from Shanghai to Los Angeles for less than USD 0.40. For a product that may retail at USD 40, maritime transport becomes essentially a non-cost. These low average costs have allowed countries to leverage the sectors where they hold a comparative advantage and supersize their trade output. 

The shipping industry also rode the wave of international geopolitical stability to expand its web of shipping lanes. Since World War II, the United States has been willing to protect the trade of allied (or at least subservient) nations in exchange for the continued supremacy of the USA and the Dollar. With its powerful navy, capable of projecting power worldwide, the USA provided growing export economies with the security they needed to invest heavily in their productive capacities,and, hence, expand their comparative advantage). 

The late 20th century witnessed a desire of Western corporations to outsource manufacturing to cheaper locations. This rise in demand for cheaper manufacturing was met with increasing supply of cheaper industrial output in other regions of the globe. Several Asian economies, exemplified by China, propelled their growth by propitiating the latter. The simultaneous rise in supply and demand for trade placed the shipping industry in the perfect position to maximise countries' gains from their comparative advantage. This arrangement benefited all parties: Western populations now had access to more and cheaper consumer goods, Asian countries saw unprecedented growth, and shipping companies saw a steadily rising bottom line. 

The oceanic shipping industry generates value by minimising the 'transaction costs' of trading. Whereas in the past, foreign-made garments and objects were signs of wealth, they are now commoditized necessities of the public. Through a never-ending quest for economies of scale, the shipping industry has facilitated the optimization of the terms of trade throughout the world. However, the thin margins and predictability on which oceanic trade rests have been continuously challenged in this new decade. 

Rough Seas Since Corona

The 2020s have supplied a constant flow of instability and crises in all shapes and sizes. Starting with COVID-19, followed by the war in Ukraine, a growing not-China sentiment, Houthi attacks in the Red Sea, and strained geographical bottlenecks, the shipping industry has been in the news more than normal (and more than it would like). The shipping market is derived from the structure and demands placed by global supply chains. As the latter starts to change, the former will need to adapt. 

The COVID-19 pandemic brought the combined issues of increased demand and shut-off supply chains to rock the container transport industry. People, forced to stay at home, ordered more consumer goods than ever before (especially since 2021). Coupled with expansionary monetary policy and ample fiscal stimuli, demand for shipping was at an all-time high. Widespread travel restrictions and China's prolonged and recurring lockdowns increased producers' and oceanic transporters' unit costs. 

The Russian invasion of Ukraine disrupted food and energy supply chains, thus also disrupting shipping flows between producers and consumers of food and energy. Most notably, European countries' (over)reliance on Russian energy was exposed. More broadly, developed economies quickly realised the danger of relying on single suppliers, especially those from erratic autocracies with large geopolitical ambitions. The shocks to food and energy flows exacerbated capacity limitations and greatly increased shipping costs. As such, 2022 was, for most, a year of soaring inflation and unreliable foreign shipments. 

Late 2023 saw another conflict-related shipping disruption: Houthi attacks on ships traversing the Bab-el Mandeb on their way to the Suez Canal. The attacks skyrocketed prices of maritime insurance and shipping rates between Asia and the oil-rich Persian Gulf to Europe and North America. Consequently, many ships have since taken to the much longer route around Africa, avoiding missile strikes but returning to nearly forgotten 19th-century trade routes. 

The 2020s have also seen additional strain on other geographical shipping bottlenecks. The Panama Canal, which had been functioning at full capacity for many years, faced near-existential threats from decreasing rainfall reducing the supply of water for its locks. Since January, the canal has allowed only 24 ships to traverse it daily, down from 36 ships months earlier. The restriction has led to delays and increased shipping costs. 

Looking Ahead

The shipping industry is not "creative"; its value comes from fulfilling the need for connection between productive and consuming locations. The oceanic shipping market is derived from the structure of the world's supply chains. As such, whatever the future holds for the world's shipping enterprises is inextricably linked to that of supply chains. Shipping companies respond to the direction of the world economy, not so much the other way around. The recent supply shocks and subsequent inflation have led companies and governments in consumer-driven developed economies to seriously consider "de-globalizing" their supply chains: choosing robustness over cheapness. Throughout Western governments, industrial policies focused on reaching more self-reliance (at least in key strategic sectors) have been popular since 2022. However, the infrastructure investments and pivoting of subsidy & tariff policies will likely take many years to effect major changes. 

Companies have similarly expressed intentions of pivoting their supply chains toward greater reliability. However, any changes so far have been slow and superficial. Despite a growing "not-China" rhetoric and its decreasing wage advantage over Southeast Asian manufacturers, it remains the powerhouse of the world's supply chains (and its robust shipping infrastructure only cements its position). Additionally, the added reliability publicised by Western multinationals has materialised as increasing inventory and simply finding an additional supplier (sourcing the product from two rather than one company). This could mean weaker economies of scale for importers and shipping companies as container flows become more dispersed. More broadly, manufacturing supply chains are shifting around in Asia, not, as is often romanticised, returning to Europe and North America. For the shipping industry, this means its global importance should continue. Shipping may not grow at the rapid pace of the 2000s, but it's also not going anywhere. Nonetheless, changing production regions in Asia could mean a (somewhat) costly adaptation period in the medium term. 

The tension between cheap versus reliable supply chains needs to not be a threat to the shipping industry, as exemplified by the strategies of the two largest container shipping companies: the Mediterranean Shipping Company (MSC) and Maersk. MSC has sought to outgun competitors with their capacity, keeping unit costs low at the expense of service quality. Maersk offers more expensive but better service with added flexibility and data-driven insights. The interplay between the two (and other shipping giants) is complex, however, the two firms could be well-positioned to each meet the future needs of exporters and importers. 

The Russian invasion of Ukraine was extremely disruptive to supply chains and, thus, oceanic transport. However, the outcome of the war (assuming no major escalation) is unlikely to change shipping flows any more than it has. In spite of thoroughly havoced maritime trade, the most significant disruptions are in the past. Russian relations and economic ties with Western countries are already (essentially) ruined and should not return to pre-2022 levels. Furthermore, Ukraine's productive capacities are not only aimed at the war effort but also severely impaired from the conflict for many years to come.

Just as the industry seemed to be getting back on its feet, Houthi strikes on the Red Sea severely destabilised Asia-Europe shipping. However, since November 2023, the USA and EU militaries have formed military coalitions aimed at restoring security for maritime commerce (USA and allies: Operation Prosperity Guardian, EU: Operation Aspides). It is unlikely Houthi strikes will survive continued foreign retaliation. Overall, market sentiment is that the worst of the crisis has passed, but it will take several months for a return to normalcy. Most likely, the current crisis will follow a trajectory similar to the Somali Pirate attacks of the 2010s, which were put down after international military action. 

The shipping industry is a slow-moving, asset-heavy, and thus conservative one. Currently, it plays a waiting game: looking for definitive long-term plans while also evading sequential short-term issues. Most likely, current short-term shocks will be resolved or worked around fully. Its long-term future will be determined by where production centres move to. This movement will not eliminate the need for oceanic trade, though its flows may change. Globalised trade is here to stay. Due to obvious geographic constraints, maritime trade will remain vulnerable to geopolitical instability, climate crises, and capacity constraints in the future. For the past 2-3 years, politicians and companies have expressed a desire for "robust," "resilient," "independent," and "efficient" supply chains, but when push comes to shove, cheap Shein clothes, year-round fresh peaches, product variety, and cheap EVs — everyone's bottom line — are winning out and here to stay.


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