Unlock the Publisher’s Digest for free
Roula Khalaf, editor of the FT, selects her favorite stories in this weekly newsletter.
There was a time when bottlenecks in global trade were limited in number and obvious to all. In 1904, British Royal Navy Admiral Sir John Fisher declared: “Five keys lock the world! Singapore, the Cape, Alexandria, Gibraltar, Dover. These five keys belong to England.”
You can see his point, even if it didn’t last. Britain’s loss of control in 1956 of the Suez Canal, of which Alexandria had been the main local port, marked the end of its empire.
In today’s more flexible trading system, it’s amazing how global trade in goods can find a way out even if one of those doors is locked. Nowadays, globalization’s true chokepoints are more varied in function and location, from the ocean floor to space orbit, and their resilience is more uncertain.
It has now been three months since Houthi militants began seriously bombing merchant ships in the Red Sea. It’s too early to say that the attacks are already entering a new normal, but there is certainly no obvious end. However, while there has been significant disruption in the shipping industry, this has not been enough to derail global economic growth or prevent global disinflation.
There’s a great story, for example, about the difficulties tea, coffee and cocoa currently have in reaching Europe. But this matters much more to producers at the beginning of the journey than to consumers at the end. These three products together make up a tiny 0.26% of the UK’s consumer price basket, and annual UK food and drink inflation fell to 7% in January, the lowest rate since April 2022.
Freight rates have already started to decline from recent peaks, peaking well below levels achieved during the Covid pandemic. Container ships were diverted around the Cape of Good Hope, resulting in additional travel costs and time, but there was no major reduction in overall cargo volume.
Supply chain pressures, as measured by the New York Federal Reserve, are at historically moderate levels. The trade indicator produced by the Kiel Institute think-tank showed that freight rates to Europe and the volume of goods arriving at North Sea ports stabilized in February. Nature, or at least the global commodity industry, is healing.
Nor is there any sense of major changes in long-term patterns of trade or production. One of the big stories of globalization right now is China’s competitive advantage in the export of electric vehicles, the first waves of which are crashing onto the shores of the EU economy. The BYD Explorer No 1, the cargo ship containing the first large shipment of electric vehicles from the Chinese manufacturer of the same name, lost 10 days due to the detour around the Cape, but still arrived in Bremerhaven two weeks ago with its 5,000 cars edge.
Of course, if the situation persists, there will be a reconfiguration of supply chains. Some production, particularly of bulky or low-tech items, could move from Asia to Turkey or central and eastern Europe to supply the EU market. But many of the key cost and productivity benefits will persist. Car manufacturing in Europe will not get substantial respite from Chinese competition, even if Suez shuts down indefinitely.
Multinational corporations live or die by their ability to assess risk. They took a test of the blocked Suez Canal when the Ever Given container ship got stuck there for a week in 2021. Not surprisingly, the shipping industry and international traders have learned to absorb shocks without noticeable effects on global trade and ‘inflation.
But while the Houthi attacks may be approaching something known, there are also many known unknowns: trade bottlenecks involving technology that Admiral Fisher would have faltered at. Undersea data cables, electrical and gas pipeline interconnectors, air transport corridors and airport hubs, GPS space satellites – damage to any of these could seriously hamper the communication on which globalization depends.
The chances of harm here are unclear. We are in the realm of uncertainty rather than risk. However, some of these systems have suffered repeated damage without catastrophes. Undersea cables are regularly broken by accident (or, on one occasion, pulled up by Vietnamese fishermen looking for scrap metal), but the data is automatically transferred to others. There are rivals, or at least supplements, to GPS such as the EU’s Galileo. Air cargo has survived attacks by pilots and air traffic controllers and the Icelandic ash cloud that closed North Atlantic airspace in 2010.
Aside from systemic challenges such as climate change and major global conflicts, the global economy has proven remarkably resilient to shocks. If the Houthis expected to hold globalization hostage through their Red Sea attacks, they are failing. There are few keys to access global trade corridors, and control of the Suez Canal does not appear to be one of them.
alan.beattie@ft.com