Collective on Foreign Affairs
10th July 2022
PROLOGUE
1 INTRODUCTION
A question often raised as to whether globalisation has gone too far as the global supply chains have buckled. We also question the sustainability of the pattern of production, especially in the Asian region where the manufacturing process is increasingly dispersed across countries, with parts and components often crossing trans-borders several times before the final good is assembled. Specifically, we also wonder whether it might be possible to cut geopolitical rivals out of supply chains altogether, targeting China on the cross-hair.
At a time of epidemiological-economic crises, many national countries accelerated the monetary flow – and the resulting wave of liquidity – leading to substantial increases in household wealth in many advanced economies. Whereas, the low income economies face natural disasters, conflicts, and external debt distress compounding poverty of the poors, (World Bank 2022).
That insurgency in the demand from the developed countries – according to the U S. Bureau of Census, Americans spent nearly $1 trillion more in goods in 2021 compared to pre-pandemic times – has translated into a boom in demand for goods and services that has placed great strain on logistics and supply chains around the world. However, the destitutes in the Global South – up to 32 million people 47 countries – were pushed into extreme poverty in 2020 due to falling income levels, widespread employment losses and widening fiscal deficits, (UNCTAD 2020).
There is an argument that geopolitical benefits can accrued to a more diversified set of destinations for transnational corporate investment. The other premise is that firms are diversifying their supply chains as wages rise in China and her labour-intensive manufacturing moves elsewhere, especially to Vietnam and Indonesia.
We have also noted the Japan’s reduction in reliance on China by constructing more resilient and secure supply chains. The Japanese economy appears to be achieving this goal; her China’s share of imports of parts to Japan declined from 29.5 per cent in 2015 to 26.1 per cent in 2021, (Yasuyuki Todo, Japan’s post-COVID-19 approach to supply chains, eastasiaforum, 3rd July 2022).
Then, we have the premature de-industrialisation case in Malaysia which was dethroned to an outlaying state in economic development; compounded by ethnocapitalism stranglehold on a laggard economy that may not see growth for years to come, (Sudhave 2020).
2. THE GEOECONOMIC OF PORTS AND SHIPS
We shall examine two regions – North America and Southeast Asia – to discern the weaknesses of the infrastructure deployment, and its associated labour and financialization capitalism attributes in the former continent and the fluid dynamics of deep waterways’ supply chains in the latter Asia-Pacific basin.
In May 2022 only 11 percent of shipments from Asia arrived in North America on time, down from 59 percent in May 2020, according to Joseph Grosso, In Deep Water: Shipping in the Global Economy, counterpunch July 1st. 2022 where the inclusive data in that article are extracted, and reproduced, herein.
By the end of 2021 the cost of shipping from Asia to the west coast of the U.S. had risen almost 330 percent within a year. According to the Freightos Baltic Index, as of June 22nd the average global price to ship a 40-foot container was $7261, down from a peak of over $11,000 in September 2021, but still five times higher than before the pandemic. The United Nations Conference on Trade and Development (UNCTAD 2021) estimated that higher shipping rates during the lockdown had contributed to the U.S. inflation rate by 1.5 percent.
Over the past generationt, it is no secret that the U.S. has lost millions of manufacturing jobs – about 7.5 million since 1980. While automation has been a big factor in the decline, so has outsourcing and subcontracting. From 1970 to 2010 the number of manufacturing jobs in East Asia more than tripled from 31 million to 97 million. In the decade from 1997 to 2007 value of East Asian exports increased from $269 billion to nearly $1.5 trillion. The emergence of China as the world’s factory played a vital role in the change. Foreign direct investment into China increased from $57 million in 1980 to $114.7 billion in 2010. Imports from China reached $506 billion in 2021 (with $151 billion in exports headed the other way, a trade deficit of $355 billion). Imports from Vietnam have also exploded over the past two decades. In 2020, Vietnam was the 6th largest supplier of U.S. imports, up 21.2 percent from just 2019, and 436 percent from 2010. In a way, Vietnam has been the winner of the U.S. trade war with China. The U.S. trade deficit with Vietnam exploded nearly threefold to $90 billion since 2018 (this is a little known fact that a good amount of the exports from Vietnam originated from Chinese-owned factories in that country).
It is interesting to look at the horizon and see nothing exemplifies the supply chain crisis quite like the sight of cargo ships backed up by the dozens outside the Ports of Los Angeles and Long Beach. Containerships transport 90 percent of global trade, and from these two ports handle about 40 percent of U.S. imports. A ship from China may take 15-20 day journey to an American port. The process of turning a ship around from China to the U.S. typically takes around 60 days. The process is supposed to be timed for maximum efficiency, that is, with the procedure being one ship in, one out.
The pandemic fouled up the system. At top moment of chaos, there could be over 100 ships waiting to dock. The turnover time increased to 100 days. Eventually the new procedure was that the ports had to work 24/7 and some ships were diverted to other ports. Ships waiting outside the LA ports fell by half by the beginning of 2022. As of May nearly 20 percent of container vessels globally were still waiting outside congested ports, including hundreds in China.
Under such challenging conditions, the price hike on a trip from Asia to the U.S. would likely cost 20 times more expensive than a trip going the other way. Unsurprisingly, there were reports of ships returning to Asia with many of their containers empty. The shippers have been rejecting U.S. agricultural exports. It is more profitable to simply return to Asia and refill there rather than wait for food to be loaded and carried back.
November 2021, the Wall Street Journal ran an article titled ‘For Investors in Shipping, Payoff at last.’ where it stated ‘Global supply-chain bottlenecks are creating headaches for retailers, delays for consumers- and big gains for financial firms that invested in container ships before the pandemic upended the logistics business.’
On March 23, 2021, the 20,124 TEU containership Ever Given ran aground in the Suez Cancel (TEU stands for Twenty-Foot Equivalent Unit, meaning the number of standardized 20-feet containers a ship can carry). The shortest shipping route between Europe and Asia, up to 15 percent of global trade passes through the Suez Canal, including a million barrels of oil a day and roughly 8 percent of the supply of liquefied natural gas. On a given day that means about 50 ships. With Ever Given wedged in the canal for a week, hundreds of ships were backed up in a 60-mile queue waiting to get through. All in all, an estimated $9.6 billion a day worth of trade was held up.
On March 15 2022, another ship owned by Evergreen Marine Corp – Ever Forward – went aground in Chesapeake Bay, taking a month before the ship was freed.
3. GEOECONOMICS OF DEEP WATERWAYS
Since 2019, however, China and Singapore to resume military exercises, cooperate on defence education.
Analysts say the developments are a ‘natural progression’ of warming defence ties between China and the city state.
Across the Asia-Pacific basin, a new dimension :
China is heavily dependent on hydrocarbon imports, (Brookings: China’s Changing Oil Strategy and its Foreign Policy Implications). Apart from its main supplier and partner, Russia, other significant sellers are located in the Middle East or Africa. Consequently, more than 70% of the PRC’s petroleum and LNG exports is shipped through the Strait of Malacca, which makes it a crucial route from the standpoint of the China’s energy security policy, (Thomas Shugart, Malacca Dilemma: Growing Chinese Military) However, its importance is not limited to the transport of raw materials. According to calculations by the Center for Strategic and International Studies (CSIS), about 20% of global maritime trade and 60% of China’s trade flows are moved through the Strait and the South China Sea, making it the most important sea line of communication for the China trade, (Sanjana Krishnan, The Malacca Dilemma).
The Strait of Malacca is the shortest sea route between the Middle East and East Asia, helping to reduce the time and cost of transportation among Asia, the Middle East and Europe. Its strategic location makes it a vital waterway for hydrocarbon, container and bulk cargo shipment. According to the US Energy Information Agency (EIA), in 2016, approximately 16 million barrels of crude oil and 3.2 million barrels of liquefied natural gas (LNG) were transported daily through the Strait. This is the second largest volume in the world after the Strait of Hormuz, connecting the Persian Gulf and the Indian Ocean, (EIA, 2019: World Oil Transit Chokepoints).
The closest alternative is the Sunda Strait whose narrowness and shallowness make it unsuitable as a passageway for large, modern ships, ( Manasvi Shanker Sharma, Examining the ‘Malacca Dilemma’). The alternatives such as the Lombok and Makassar Straits are much longer routes that would incur additional shipping costs estimated to be from around $84 to $220 billion per year, according to RSIS.
As such, the Chinese government has taken a number of steps to reduce the country’s over-reliance on the Strait of Malacca. These include the Kazakhstan-China Pipeline which connects the country to the oil-rich Caspian region and the Myanmar-Yunnan Pipelines which siphons oil and gas from the Bay of Bengal to the Kunming region of China, avoiding the Malacca Strait for Burmese oil imports – short of constructing the Kra Peninsula Canal linking the Indian Ocean-Andaman Sea with the South China Sea with Pros, Cons and
Potential Game Changers, (ISEAS-YUSOF, 2019).
4. CARTELS ANTI-TRUST LAW AND MONOPOLY-CAPITAL FINANCIALISATION CAPITALISM
In a piece in Substack, Matt Stroller stated that for most of the 20th. century U.S. shipping law was based on the Shipping Act of 1916. The act granted shipping companies an exemption from anti-trust laws. They were allowed to form alliances with each other – still continuing as cartels – where they would jointly set routes and prices.
However there was a condition that all prices had to be public, service had to be offered on equal terms, and companies were not permitted to undermine competitors by offering volume discounts or under-the-table rebates. In addition to the Act, there were subsidies for shipbuilding and the Merchant Marine Act of 1920 (known as the Jones Act) which requires all ships carrying goods between two U.S. ports to be American-built, -owned, -crewed, and-flagged. The idea was to protect smaller companies and businesses against predatory moves of larger companies by giving bargaining power (hence the public prices). National security concerns wanted to keep American shipping strong. Stable prices take the edge off a boom-and-bust industry.
The system was tossed aside by the Ocean Shipping Reform Act of 1998. The U.S. was left the worst of all worlds: the anti-trust exemption was kept and the transparency was scrapped.
Inevitably, concentration in the industry concurred. Up to 60 of the 1000 largest ocean carriers have vanished since the early 2000s.
Financialisation capitalism by banks which were only too eager to provide funding for the megaship arms-race. Shipping companies are good lending targets as valuable ships can simply be repossessed in the event of a default or in a sanction warfare.
However, with the economic crash of 2008, the economic downturn meant there was not anything enough freight to fill the growing ship capacity. With shipping prices at rock bottom the remaining large carriers formed alliances. The Top 10 shipping companies had 40 percent of the market in 1998. Today it is over 80 percent. All ten companies are part of one of the three company alliances that dominate the industry- 2M, Oceans Alliance, and The Alliance. The megaships also keep up a nice barrier to entry. New companies have a hard time breaking in with such upfront costs as a megaship. Infrastruture (railroads, ships, social media networks) tend to require a huge amount of investment to build, but not much to operate. This makes it inefficient for many companies to build competing networks. As a result it is often owned by the state of too-big-to-fail monopolies.
On the face of raising inflation, POTUS ranted about ‘foreigned owned’ shipping companies who raised their prices by ‘as much as 100 pecent.’ He chimed ‘Every now and then something you learned makes you viscerally angry.’ On June 16th, he signed the Ocean Shipping Reform Act of 2022 where it empowers the Federal Maritime Commission to limit ocean carriers that refuse American ships and limit port fees. It is questionable how a hegemony’s “international rule of law” can be truly enforced.
Then, there is another fearure in the shipping world: the flags of convenience whereby for a fee, ship owners can simply register their ships with a willing country. Countries without a nationality or residency requirement for ship registration are described as having open registry.
This is paper globalisation
The excessive goal, and exploitation, in capitalism, rears its head – taking advantages in location and labour arbitrages: places with less regulations to do business and with low wages. Thus in 1960 the U.S. flag merchant fleet had almost 3000 ships. By 2019 the number was 182. Almost three-quarters of the worl’d fleet is now flagged under a country different from the ship owners. For a long time the places with the largest registries have been Panama, Liberia, and the Marshall Islands.
In Ninety Percent of Everything, Rose George elaborates:
‘There are few industries as definitely opaque as shipping. Even offshore bankers have no developed a system as intricately elusive as the flag of convenience, under which ships can fly the flag of a state that has nothing to do with its owner, crew, or route.’
While the International Maritime Organization, a UN agency, has passed plenty of regulations since its inception, and the International Labor Organization (ILO) has adopted stadards for seafarers – the Maritime Labor Convention was ratified in 2006 by 80 countries and came into effect in 2013, the ocean has a tendancy to dissolve such paper.
With the COVID pandemic in September 2020, as many as 300,000 workers were stranded on ships, and a Bloomberg report had found dozens of labour violations: with many seafarers had not been paid for months, thereby, meeting the ILO’s definition of forced labor.
Shipping lines and staffing agencies (as in other industries such as meatpacking, shippers often outsource hiring to agencies), determine when and how workers return home, even holding their passports. In an industry rife with middlemen, including networks of owners, operators, and employment agencies, it is difficult to hold monopoly-capital parties accountable.
By no means is shipping the only cog of the supply chain that is exploitative for workers. In the U.S., as an instance, when goods are unloaded from shipping containers they are moved onto truckers These trucks move around 70 percent of U. S. domestic goods, over ten billion tons of freight a year. Truck drivers’ wages have dropped tremendously over the past four decades. If the adjusted average wage of a truck driver was US$110,000 in 1980, by 2019 the trucker merely earned US$45,000 a year- a decline of 60 percent.
These goods are often driven to warehouses. The turnover rate at Amazon warehouses can reach 150 percent a year. Buy commodities certified ‘Fair Trade’ as one may, however, just do not assume such a concept applies to the workers that bring them to you. After all, Mr. Bezo makes $8.56m per hour or $142,667 per minute.
5. GLOBAL SUPPLY CHAINS RESILIENCY
Post-pandemic, central banks are struggling to leash inflation without starving off an economic recovery, and their task has been made more difficult by supply constraints that are pushing up prices. The Russia–Ukraine near-border conflict has only made a difficult situation worse – especially under sanctions – with energy, fertilizer and food prices remaining high. Often, correlated situations like these would impact the world’s poorest hardest, and has demonstrated by the fall of the Sri Lankan prime minister, and the collapse of its economy.
On the other hand, there is more reality in the context of Southeast Asia where trade was about 30 per cent above pre-pandemic levels by 2022 despite China’s continued lockdowns. Factually, from China, routes to Southeast Asia increased by nearly 30, covering Vietnam, Thailand, Malaysia and other countries, (see also Qingjiang Kong and Weihuan Zhou, Supply chains catch a breath as China lifts zero-COVID in eastasiaforum, 9th July 2022).
A Ningbo-based international trade service company focusing on China-US trade told the Global Times that it had seen a significant rise in demand for customs clearance since mid-June, which they said should be attributed to declining shipping freight rates. A shipping agent based in Shanghai also told the Global Times that spot rates on some routes from China to Europe and the US have fallen recently, with rates for the US west coast dropping to $7,000 per standard container at the end of June from around $13,000 before the Spring Festival in early February, 2022.
“Container rates from China to the US have been above $10,000 for 10 months. The average price of a 40-foot container from China to US west coast ports increased from $1,500 in early 2020 to more than $20,000 in September 2021. The rate began to decline to $15,000 starting 2022,” the agent explained.
Though China has smoothened the supply chain, foreign trade for the second half of the year would still depend on demand from China’s trade partners, but China’s dual economy strategic undertaking is robust, and shall be extensively – and expansively – dynamic in outcomes.
In a case-study of China, Lauren Johnston, Associate Professor, China Studies Centre, The University of Sydney, expressed that despite the prolonged lockdown in Shanghai, China’s dual economy has progressed favourably.
Beijing has even been busy announcing some new hukou-related educational and civil administrative reforms. These may ultimately and in contrast come to underpin a far more mobile Chinese labour force, a more competitive business environment within China, and even more mobility of Chinese citizens globally.
In this way, far from being incongruent with China’s economic development or globalisation, via the parallel hukou-related reforms that took place alongside the distraction of COVID19 lockdowns of early 2022, these may prove to have served to underpin not only China’s ‘high-quality development’ and ‘common prosperity’ agendas, but even engender the fluidity – and the interconnectivity in geoeconomics – of the Belt and Road Initiative.
EPILOQUE
When reshoring is engineered through discriminatory taxes or targeted subsidies, global welfare is reduced by a loss of efficiency due to a misallocation of resources.
Firestorms 