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Hello from Brussels. Sorry to talk Brexit news: we generally try to administer it only in moderation as excessive consumption is strongly associated with feelings of exhaustion, listlessness and nausea. But we can’t help recording that, according to UK prime minister Boris Johnson, Thursday was going to be the last day he would be able to come to an agreement with the EU or Britain would totally walk away and there would be no deal, SO THERE. Certainly, the EU summit isn’t going to make any big concessions to the UK, so let’s see what Johnson does in response.
Tall Tales is about how the economically insignificant but symbolically important subject in the Brexit talks, fisheries, reveals some rather fact-free attitudes on both sides. Also on a maritime theme, the main piece is how the overhyping of the new ice-free Arctic shipping channels tells us something interesting about globalisation. Our chart of the day looks at China’s medical exports.
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Getting to EU on a slow boat from China
(It’s from a song.) Even planetary destruction through global warming apparently has its upside, and the opening of new trade routes through the melting of the Arctic pack ice is one of them.
Trade Secrets’ old sparring partner, conventional wisdom, has it that the Arctic is becoming one of the new theatres of geopolitical struggle for the big powers (mainly the US, Russia and China), marked by scrambles for mineral wealth and strategic influence. The trade part of this in the first instance is the Northern Sea Route, skirting the Russian coast. Melting ice is opening the passage and could potentially cut 10 days off the sea voyage from China to Europe, enabling container ships to avoid the bottlenecks of the Strait of Malacca and Suez Canal.
Beijing regards this as part of the Belt and Road Initiative, and is looking at investing in transport and digital infrastructure to consolidate its position there. Naturally, the project has acquired a cool name: the Polar Silk Road.
On closer examination, such as an admirable recent report from the Friends of Europe think-tank, this all seems a bit overdone. It’s not just that taking container ships through the Arctic seas is more uncertain, dangerous and environmentally controversial than many companies can countenance. It’s also, interestingly, that the development of globalisation is rendering fast single-stop long-distance trade routes less relevant.
For sure, there are gains to be made in the Arctic, particularly for Russia, in exploiting and transporting new mineral resources. But it’s a bit of a stretch to think the opening up of the ice-free passage is going to make a big difference to container shipping. For their part, big western companies have already ruled out using the route for the foreseeable, citing environmental concerns (the “black carbon” emissions from ships affect the snow quality and therefore the atmosphere). Maersk, the world’s biggest shipping company, did a trial run with a container vessel in 2018, but said it wasn’t environmentally or commercially sustainable. There’s also a reputational risk from safety, given the vicious polar storms and high seas: it’s a very long way from search-and-rescue services if anything goes wrong.
The Chinese company Cosco has few such qualms, and says it intends to exploit the route. But while it might be shorter than going via the Malacca strait and the Suez Canal, it will also require expensive icebreaking and ice-class vessels and will be subject to delays. If China is going to use the route, the Friends of Europe report concludes, it will be mainly as a diversification exercise to reduce the risk of relying on other sea lanes, not particularly to save costs.
So what’s this got to do with changing globalisation? Well, one of the reasons China won’t make much money out of the Arctic route is that container goods trade these days isn’t just about a poor country making stuff and shipping it a long way to a rich country. It’s more complex than comparative advantage and containers full of toys.
The development of globalisation is rendering fast single-stop long-distance trade routes less relevant © Lauryn Ishak/Bloomberg
As low-income countries (including China itself) in Asia turn into middle-income, and middle-income countries become rich, they become destinations for consumer goods, not just a place to pick up cheap inputs. Container ships coming from China don’t just chug all the way to Rotterdam without stopping. They do a lot of shorter-haul business, dropping off and picking up part-finished and finished goods around Asia, particularly in trans-shipment hubs such as Singapore.
China’s “labour cost arbitrage” model of competing on price to do basic manufacture has long been running out of space. Chinese incomes have risen and its exports become more sophisticated and time-sensitive. Increasingly, its companies use airfreight or the small but growing rail service to reach European markets.
As Financial Times colleagues have described, container shipping has survived surprisingly well during the pandemic. But in relative terms there is a secular shift away from transpacific and Asia-Europe transport towards intraregional routes, with the huge container ships that have traditionally dominated long-distance trade being supplanted by smaller and nimbler vessels. The problem with the Arctic route is not just that the crossing is dangerous, timings uncertain and the shipping emissions an environmental disaster: it’s that there’s nowhere interesting to stop on the way.
No doubt there will be more ships ploughing through the Arctic waters on the Northern Sea Route in coming years than there are today. But it’s unlikely to be a pivotal moment for global goods transport. The nature of trade has changed too much for that.
Charted waters
The pandemic and the fiscal stimulus injected into economies around the world have been good for China’s exports, which have benefited from demand for the likes of work-at-home products and consumer electronics. Figures earlier this week showed exports from China rising at their fastest rate this year. Demand for medical supplies, though, is not quite as strong as it was after hitting a peak in June, suggesting an element of domestic stockpiling.
Tall Tales of Trade
Harrods department store is almost certainly worth more to the UK economy than its entire fishing and fish-farming industry © Mikecphoto/Dreamstime.
One of our favourite calculations of recent years was our eminent FT colleague Chris Giles’s estimate that the Harrods department store was almost certainly worth more to the UK economy than its entire fishing and fish-farming industry. Letting Brexit talks founder on the rocks of fishing rights would be like amputating your leg because you have an itchy toe. And yet here we are. Issues of actual economic significance to Britain’s service-based economy such as legal and accounting qualifications have basically been ignored while the negotiators argue about herring quotas.
Both sides have to do a bit of getting a grip here. The UK, lost in misty fantasies of being a proud island nation . . . something . . . our brave trawler lads . . . something . . . the Radio Four Shipping Forecast . . . something . . . needs to grasp that, while Brits might land a lot of seafood, they sell most of it to the EU and without a trade deal they’ll end up without a market. The EU sea-fishing nations, particularly France, should probably recognise that a largish island nation with the longest coastline in the EU is leaving the Common Fisheries Policy and there will probably be fewer fish to go round. It’s a real haddock for negotiators, for sure.
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