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Time was when the bottlenecks in global trade were limited in number and obvious to all. In 1904, the British Royal Navy admiral Sir John Fisher declared: “Five keys lock up the world! Singapore, the Cape, Alexandria, Gibraltar, Dover. These five keys belong to England.”
You can see his point, though it didn’t last. Britain’s loss of control in 1956 over the Suez Canal, for which Alexandria had been the main local port, served as a marker for the end of its empire.
In today’s more flexible trading system, it’s striking how global goods commerce finds a way round even if one of those doors is locked. These days the real chokepoints of globalisation are more varied in function and location, from the ocean floor to space orbit, and their resilience more uncertain.
It’s now three months since the Houthi militants started bombing cargo ships in the Red Sea in earnest. It’s too early to say the attacks are already slipping into a new normal, but certainly there’s no obvious end to them. Yet, although there has been significant disruption to the shipping industry, it’s not been enough to derail global economic growth nor prevent worldwide disinflation.
There’s a nice story, for example, in the difficulties tea, coffee and cocoa currently have in getting to Europe. But this matters a lot more to producers at the start of the journey than to consumers at the end of it. Those three commodities together make up a minuscule 0.26 per cent of the UK’s consumer price basket, and annual British food and drink inflation dropped to 7 per cent in January, its lowest rate since April 2022.
Freight rates have already started falling back from their recent spikes, which peaked well short of the levels they reached during the Covid pandemic. Container ships have been diverted round the Cape of Good Hope, at extra cost and journey times, but there hasn’t been a big reduction in overall freight volumes.
Supply-chain pressures, according to the New York Federal Reserve’s measure, are at historically moderate levels. The trade indicator produced by the Kiel Institute think-tank showed freight rates for cargo to Europe and the volume of goods arriving at North Sea ports stabilising in February. Nature, or at least the global goods industry, is healing.
Nor is there a sense of big shifts in long-run patterns of trade or production. One of the big stories in globalisation at the moment is China’s competitive advantage in exporting electric vehicles, the first waves of which are breaking on the shores of the EU economy. The BYD Explorer No 1, the cargo ship containing the first big consignment of EVs from the eponymous Chinese manufacturer, lost 10 days by having to divert round the Cape but still arrived in Bremerhaven two weeks ago with its 5,000 cars safely aboard.
Certainly, if the situation persists there will be some reconfiguration of supply chains. Some production, particularly of bulky or lower-tech items, may shift from Asia to Turkey or central and eastern Europe to supply the EU market. But many of the fundamental advantages of cost and productivity will endure. Car manufacturing in Europe is not about to get a substantial reprieve from Chinese competition even if Suez shuts indefinitely.
Multinational companies live or die on their ability to assess risk. They had a test run of the Suez Canal being blocked when the Ever Given container ship got stuck there for a week in 2021. It’s not surprising that the shipping industry and international traders have learnt to absorb shocks without noticeable effects on world trade and inflation.
But while the Houthi attacks may be coming close to a known known, there are also plenty of known unknowns — commercial chokepoints involving technology at which Admiral Fisher would have boggled. Undersea data cables, electricity interconnectors and gas and power pipelines, air transport corridors and hub airports, GPS space satellites: damage to any of these might seriously hamper the communication on which globalisation depends.
The probabilities of damage here are unclear. We’re in the realm of uncertainty rather than risk. Still, some of those systems have endured repeated damage without catastrophe. Undersea cables are routinely broken by accident (or, on one occasion, pulled up by Vietnamese fishermen looking for scrap metal), but data is automatically switched to others. There are rivals, or at least supplements, to GPS such as the EU’s Galileo. Air cargo has survived pilot and air traffic control strikes and an Icelandic ash cloud that closed north Atlantic airspace in 2010.
Short of systemic challenges such as climate change and major global conflict, the global economy has proved remarkably resilient in the face of shocks. If the Houthis were expecting to hold globalisation to ransom through their Red Sea attacks, they’re failing. There are few indispensable keys to the corridors of global trade, and control of the Suez Canal does not appear to be one of them.
alan.beattie@ft.com
Source: Economy - ft.com
