Container shipping is in the crosshairs of a superpower tussle that could divide the world and reshape trading networks. Countries that have benefited from China+ trade diversification, such as India and Vietnam, might need to get off the fence soon.
It is not being paranoid to say that the world is currently in the middle of an almighty superpower grudge-match that threatens to redraw the network of international trade. The level of mistrust and suspicion between the two largest economies, the US and China, is boiling over and forcing other countries to pick a side.
There hasn’t been much attempt to conceal the mutual loathing in Washington or Beijing; it is in plain sight for all to see. Pick any one of the more recent spats, from Chinese “spy” balloons being shot down to the aggressive grilling of TikTok’s CEO in the US Congress.
The feud has been simmering for a long time, but it has intensified in recent years with the ongoing trade war that started in 2018, and more recently it has been brought to boiling point by Russia’s invasion of Ukraine.
Vladimir Putin’s war has confronted the world order, but rather than cut off ties and denounce him, he has become something of a poster boy for (mostly) authoritarian states with deep anti-West leanings. Perverse as it might seem to those of us living in democracies, but Putin is widely regarded (by more people than we would like to admit) as a hero taking on the Western bullies and hypocrites.
He is therefore a useful puppet to China. Putin can help widen the geopolitical schism and bring more countries over to its side.
It is a delicate balancing act that requires China to be seen as impartial. The country also needs to retain good trading relations with the “anti-Putin” bloc.
Therefore, the supply of weapons or ammunition to Moscow is out for the time being, but China is stretching things by ignoring Western sanctions through the purchase, in growing quantity, of cheap Russian oil and gas, thereby funding Putin’s war machine.
Where the US has failed to unite, China wants to show it can do a better job as the world’s leader. It has had some notable victories of late, including the remarkable speed in which it was able to secure a reconciliation agreement between Saudi Arabia and Iran.
Its 12-point peace plan for the Russia-Ukraine war, formulated after Chinese President Xi Jinping sat down with Putin in Moscow in March, is unlikely to be as successful. Whether China cares or not is another matter, the primary objective is to be viewed as the world’s honest broker that can shape the future.
In February, on the eve of the one-year anniversary of the invasion, to retain its air of neutrality China abstained from a United Nations General Assembly vote calling on Russia to immediately end the war. Another 31 countries abstained, while seven others (including Russia) voted against the motion (see Table 1).
They were overwhelmingly outnumbered by the 141 countries who did vote in favour (13 other UN member states were absent), but the two groups of pro-Russian and abstainers were made up of more than just the obvious rogue states like North Korea. Fellow abstainers included India and Vietnam, two countries that have most benefited from China+ trade diversification. India is another country that has gone big on Russia’s energy products.
Not including the absent countries, the member states that didn’t vote against Russia’s war in the UN vote combine for a 26.8% share of World GDP and 54% of the world’s population, based on 2022 estimates from Oxford Economics.
Those 39 countries averaged only 3.44 on the Economist Intelligence Unit’s 2022 Democracy Index measure, placing them firmly in the “Authoritarian” bracket. Only five countries – India, South Africa, Sri Lanka, Mongolia and Namibia – resided in the next “Flawed democracy” tier, which incidentally is where the US has placed since 2015.
What does all of this have to do with container shipping?
Well, as the grease that facilitates world trade and commerce, global ocean carriers have to navigate seamlessly around trade disputes. Lines enabled the march of globalisation with huge investment in capacity and infrastructure; any change in the status quo will cause immense disruption and potential impairment of asset values.
Lines are caught in the crosshairs of this latest superpower battle and are left guessing, along with the rest of us, where it might lead.
Since the pandemic started there has been incredible attention paid to how to best build resilience into supply chains to protect against future disruption. Countless surveys have asked companies if they plan to relocate manufacturing to neighbouring countries closer to the home market (nearshoring), or bring it back home (reshoring), or continue offshoring, but with a wider variety of trading partners, or a combination of all of them.
Now, a new trade buzzword has entered the lexicon – friend-shoring, which basically means prioritising trade with highly trusted countries that share common values.
This is the pathway that the US government seems to be pushing. “Rather than being highly reliant on countries where we have geopolitical tensions and can’t count on ongoing, reliable supplies, we need to really diversify our group of suppliers,” said Janet Yellen, US Treasury Secretary last year.
“Friend-shoring means… that we have a group of countries that have strong adherence to a set of norms and values… and we need to deepen our ties with those partners and to work together to make sure that we can supply our needs of critical materials,” she added.
Friend-shoring is not really a new concept as countries have always tended to trade more with partners that share commonalities, whether it be language, culture, or other historical ties.
Likewise, high-volume trade with near neighbours is hardly new.
What shipping lines really need to know, in order to plan for the future, is just how big a role each of these different concepts will play?
There is nothing yet in customs statistics to prove one way or another that deglobalisation in its many forms (either friend-shoring, nearshoring or reshoring) is happening to any significant degree, but there is clear evidence of more diverse offshoring, the so-called China +1 movement.
Container trade statistics for US imports, provided by Trade Data Monitor, make it abundantly clear how Americans are weening themselves off ‘Made in China’ products and opening up to a broader set of countries. China’s value share in dollars of US imports has shrunk by nearly nine percentage points from before the start of the trade war, from 40% in 2017 to 31% in 2022 (see Figure 1 and Table 2).
However, the likes of Japan, Germany, France and the UK, who you might think would all pass Janet Yellen’s friendship test, have seen their share of US container imports dwindle too.
The countries that have really moved up the ladder were Vietnam (which has nearly doubled its share since 2017 to 8% in 2022), India (which improved its share by 1.4 points) and Thailand (up one point).
Clearly, neither Mexico or Canada feature highly on any table of container shipping trade into the US as most cargoes are moved overland across borders, but there isn’t sign of any great nearshoring shift with US inbound trade for total commodities (see Table 3).
Again, although we can see that China remains the US’ biggest source of total commodities, its dominance is coming under threat with a loss of five percentage points since 2017. Unless there is a dramatic thawing in US-China relations, it is unlikely to keep that particular crown for too long.
Fundamentally, while countries obviously do have favoured trading partners, historically most have been able to see past any differences. Frankly, Western economies that have reduced their own manufacturing capacity this century cannot afford to be so judgemental if they want to keep critical commodities flowing in. As the EIU’s index shows, the world is getting less democratic, not more (see Figure 2).
International trade takes a broadly dispassionate and pragmatic view where “upstanding” countries must hold their nose when it comes to certain trading partners’ peccadillos. It’s why you can see a broad mix of political regime’s among the US’ leading trading partners, for now at least.
It is a similar story elsewhere. China’s top 20 inbound trading partners (all commodities) in 2022 had an average EIU democracy index reading of 6.81, not a million miles behind the US’ equivalent of 7.20 (see Table 4).
However, if that is all about to change, and friend-shoring becomes the standard trading model, ocean carriers will need to start thinking creatively about how they can continue to serve both sides of the divide.
It will also put countries such as Vietnam and India in a very awkward predicament. They are understandably trying to play both sides at the moment, but there will come a time when China or the US will decide for themselves if they are one of theirs, or not.
To what extent will the US or Europe trust other countries or blocs that sit on the fence on big global issues such as Russia’s invasion, or continue to plough money into its coffers?
For its part, the US has not helped its cause with the incessant xenophobic rhetoric that has surrounded legislation designed to protect American exporters from “foreign” shipping companies. It is no way to win hearts or minds abroad. Any more lurches towards protectionist legislation that upsets close allies such as the European Union won’t do much good for the US either.
Drewry cannot pretend to have any special insight on to how this superpower battle will be resolved, but we have asked some of our shipper clients on their sourcing intentions and motivations, to try to see how heavily the current geopolitical instability weighs on their decision making (see Figure 3).
It is not a scientific test by any means, but the results imply that talk of a wave of manufacturing relocation is overblown.
Of the 66 respondents only 15, or 23%, said that their company has changed its main country of manufacture in the past five years (5 respondents), or are considering doing so within the next five years (10).
When those 15 respondents were asked to rank the reasons for either moving, or considering doing so, the most important was wanting to diversify in order to minimise the risk of logistics disruption, which scored an average response of 1.9 (1 being the most important reason, 5 the lowest). That was followed by worries over trade disputes (2.7) and rising labour costs (3.1). Ethical (3.5) and environmental (3.8) concerns ranked lowest.
Interestingly, the only shipper respondent that moves more than 100,000 teu per year (mainly from China to the UK) and said they were considering changing the main country of manufacture within five years, did rank ethical concerns as the number one reason.
To repeat, this probably means nothing, but that isolated result might be because bigger BCOs with greater public visibility are having to think more deeply about where their products come from.
With any luck both the US and China will take heed from the brilliant ‘Two Tribes’ hit by 1980’s English pop band Frankie Goes to Hollywood, who sang: “When two tribes go to war, a point is all that you can score”.
Neither is likely to get what they want, i.e. complete world domination, so it would be better for everyone if they could settle their differences and realise that even if they don’t have to like one another, it will be more profitable for both in the long run if they can find some medium ground that doesn’t swallow everyone else into the fray. Don’t count on it.
Our view
Ultimately, Drewry is yet to be convinced that deglobalisation is much more than academic and media hype. For sure, there will be more diverse offshoring, but the choice of where to spread the cargoes will be motivated by traditional factors, such as labour costs, manufacturing and logistics capability.
Moral and cultural commonalities will continue to play a role in companies sourcing decision making, but whether friend-shoring becomes anything more than a trendy buzzword will depend on how nasty the superpower arm wrestling gets.
