Why Red Sea attacks won’t derail globalisation (Probably)

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Another year of trade and globalisation slides down the slipway and into the water. On this occasion the voyage starts with quite serious headwinds and choppy waves, thanks to the Houthi rebels’ attacks on cargo ships in the Red Sea that have restricted movements through the Suez Canal. Today’s newsletter asks how worried should we be about the Red Sea in particular and geopolitics in general. Charted waters is on the effects of China taking a pop at European brandy, and there’s a bumper links section as we catch up with lots of stuff that’s been going on since I last wrote.

A pricier passage to Europe

One day a shock from geopolitical or natural causes will arrive and do serious damage to the global trading system. Is the blockage of the Suez Canal by Houthi militant attacks the one? Probably not.

I set a high bar for worrying about the death of globalisation. I’ve said this before, but if you’ve lived through the wolf-crying predictions of catastrophe during the 9/11 attacks in 2001, the Sars and avian flu outbreaks of the 2000s, the global food crisis of 2007-08, the Icelandic ash cloud of 2010, the Covid-19 pandemic, the Ever Given container ship getting stuck in the Suez Canal in 2021 and even Russia’s attack on Ukraine, you’re generally quite sceptical that a supply disruption will do lasting damage.

The Houthi rebels’ attacks on shipping, unless they escalate very seriously or touch off a series of similar militant attacks around the world, seem likely to fall into the relatively benign category. (Climate change affecting the Panama Canal is more worrying.) Yes, freight and insurance rates have risen sharply and ships previously destined for the Suez Canal are being rerouted around Africa. But as these Oxford Economics charts show, rates are nowhere near the levels that the post-Covid surge in consumer demand achieved in 2021 and 2022, and supply chains more generally have enough slack to absorb the extra strain.

Indeed, as it happens the attacks have come at a time when the global shipping industry, and indeed the world economy, is reasonably well placed to cope. Regarding the macro effects, inflation is generally coming down everywhere — a trend that would probably quite comfortably ride a one-off price level increase — and oil prices are pretty well-contained.

As for the shipping industry, freight carriers have excess capacity given that the post-Covid demand surge has dissipated and new ships are being launched. Interestingly, the share prices of the big shipping companies have risen rather than fallen after the attacks (sure, freight rates have risen, but so have their costs from longer trips). That might tell you something worrying about concentration in the shipping industry, or it might just be that filling otherwise empty ships is good for earnings.

A more substantive concern is if the attacks kick off a series of assaults on shipping elsewhere, and that may depend on the robustness of the US-led international response to the Houthis. The academic Alexander Clarkson points out that the Houthis and other nationalist and sectarian movements have shown they don’t care about the effects of their actions on the global economy. This is true enough, but then for the moment it doesn’t seem that the global economy is worrying too much about the Houthis in return.

For geopolitical risk, one election Trumps them all

This brings us to a broader look at the year ahead. I examined specific issues in my last newsletter of 2023, but what of the general sense of geopolitics and especially the US-China rivalry interfering with trade? As my colleague Alec Russell has comprehensively detailed here, about half the adult population of the planet will have a chance to vote over the next twelve months. That includes the world’s three biggest democratic nations (assuming we still classify them as such) — India, the US and Indonesia — together with elections to the European parliament.

Interesting thing though: although there’s a worrying trend towards illiberalism, it’s hard to see any of these elections producing much immediate change as far as geopolitics and globalisation goes. That excepts — and to be fair it’s a massive exception written in letters of fire twelve miles high — the US. 

India’s Prime Minister Narendra Modi, who is highly likely to be re-elected, has run a trade policy that’s destructive on a multilateral level, somewhat constructive bilaterally and a mixed bag unilaterally. Even if he lost, India’s position probably wouldn’t shift much.

Indonesia is part of the large group of transactional middle-income countries who maintain diplomatic and trading relations with both the US and China, also a stance unlikely to change. In the EU, there’s a good chance of a swing towards the hard right in the European parliament. But though there have been persistent fears of the populist right taking the EU in a protectionist and nationalist direction, it hasn’t happened yet at either an EU or national level. 

The overwhelming political threat is from the US. For Donald Trump, as we saw in his first term, trade is foreign policy, and that foreign policy seems likely to be belligerent and matched by an assault on political freedom at home. It’s a savage irony that the nation that did more than any other to create the postwar trading order is now the biggest threat to it. And yet here we are.

Charted waters

China has hit back at the EU (surprise!) for starting an investigation into subsidies to electric vehicle imports by threatening antidumping duties on European brandy.

This is pretty squarely targeted at France, regarded as being mainly behind the EU’s antisubsidy probe, though it was actually initiated by the European Commission itself. The stock price of Rémy Cointreau fell accordingly.

Trade links

Nikkei reports that restrictions on the use of China-made components has reduced the number of electric vehicle models eligible for US tax credits to just eight. Others calculate it differently as 13. It’s not many, anyway.

Relatedly, Henry Sanderson in Foreign Affairs notes a problem with “de-risking” from China — that transitioning quickly and cheaply to clean energy means buying Chinese technology.

Also relatedly, the Chinese car company BYD has overtaken Tesla as the world’s number one producer of electric vehicles, and a Volkswagen joint venture with a state-owned Chinese manufacturer has started producing EVs for export to Europe.

The research organisation Global Trade Alert has launched a monitoring service for industrial policy together with the IMF: a joint paper on the subject is here.

Politico reports that Mercosur officials are contemplating a “one last chance” summit to try to get the trade deal with the EU over the ratification line. (It won’t be the last chance though: it never is.)

The Indian Express suggests serious game-changing discussions are going on in the Indian government about dropping its fierce objections to cutting tariffs in bilateral trade deals.

Javier Milei, Argentina’s new president and a strong critic of China, has pulled the country out of plans to join the Brics grouping, underlining that Brics is increasingly a gang led by Beijing than a meeting of middle-income equals.

A terrific FT long read describes how the Australian cartoon “Bluey” conquered the world, including interesting detail on the media industry.

Switzerland has abolished all its industrial tariffs, a strategy more usually followed by city-states or city-enclaves such as Singapore and Macau, or by small island nations.

Trade Secrets is edited by Jonathan Moules