Suez, Ever Given and supply-chain risks
English original of article published in Italian in today's La Stampa
Every military planner is aware of the key strategic locations at sea: the Malacca Straits between Malaysia and Indonesia, the Straits of Gibraltar, the Strait of Hormuz between Iran and Oman, the Panama Canal and, certainly, the Suez Canal. But until last Tuesday, when the vast Japanese-owned and Taiwanese-operated container ship Ever Given ran aground and blocked the Suez Canal, few economists or business executives will have thought much about such key sea routes. The world has been given a lesson in supply chain management.
The Suez Canal is the main route for container ships and oil tankers passing between Europe and Asia. About 12% of global merchandise trade passes through the canal each year, carried in 19,000 vessels. This actually makes it only the second most critical trading route, since fully 40% of global goods trade passes through the Straits of Malacca each year, in about 100,000 vessels, thanks to the importance of China and its neighbours in world merchandise trade.
Nevertheless, the direct macro-economic impact of the blocking of the Suez Canal will not be large, in global terms. For a world economy that has been suffering its way through a pandemic, the cost to global trade estimated by the German insurer Allianz of $6 billion to $10 billion per week will hardly be noticeable when the annual GDP accounts for 2021 are added up. Yet for the businesses whose goods have been held up on the estimated 400 ships queuing up to get through the canal, the impact will be a lot larger.
Some of those businesses will feel the impact in terms of increased costs and delays as their ships take the longer, alternative routes around South Africa’s Cape of Good Hope or else through Russia’s Northern Sea Route across the Arctic. But others will lose sales altogether to competitors or will find their factories face shortages of key supplies for several costly weeks.
The business lesson is a simple one: diversify your supply chains. Buy your goods and components from several suppliers, preferably in different geographical locations, so that when an interruption happens your flow of goods does not cease altogether. Car manufacturers were taught this lesson almost exactly ten years ago when the vast and tragic earthquake and tsunami in Japan blocked the supply of some key components that were made by firms in the affected region.
The early crises of the pandemic one year ago when health systems found themselves critically short of masks, gowns and other personal protective equipment taught this lesson once again. International politics also make such supply chain issues a major commercial concern: if a country that dominates the supply of a critical material or component turns politically hostile, businesses risk becoming held hostage. China did this to Japan in 2010 when it suspended exports of the rare earths whose production it then virtually monopolised.
The difficulty is that diversification can be expensive. The real, long-term economic cost of a blockage such as that of the Suez Canal could be the need for companies, and hence their customers, to carry a permanently higher cost of supply. A single accident for just one week, like that of Ever Given, is not enough to force such a change. But when companies see the Suez blockage in the context of other recent supply-chain problems, this may be enough to force some rethinking.
In reality, politics is the biggest such supply-chain danger, and it is growing. The world economy can count itself fortunate that between the fall of the Berlin Wall in 1989 and today, the superpowers have essentially been at peace. But that benign situation ceased four years ago when Donald Trump began a trade war against China but probably would have ended soon anyway as political tensions between China and the West have risen. The risk that a political row between China and a western country – really, any western country – could block your company’s imports or exports for an unknowable amount of time has risen, sharply.
The Suez Canal blockage is costly for some companies, but won’t hurt the world economy very much. In truth, however, it is the latest wake-up call about investing in and protecting supply chains. The cost of diversification and resilience, like the cost of insurance, has become an essential business expense.