- May 31, 2022
- Posted by: Anish
- Category: Feed
Russia’s invasion of Ukraine and China’s Covid Zero lockdowns are disrupting supply chains, pounding growth, and pushing inflation to half a century high.
What if that’s just an initial hit? War and epidemic won’t last forever. However, the underlying problem – a world increasingly divided along geopolitical fault lines — only looks set to get worse.
Reversal of globalization – It points to a significantly poorer and less productive planet, with trade back at levels before China joined the World Trade Organization. An additional blow: inflation would likely be higher and more volatile.
So far in 2022, commodities – where scarcity drives prices higher – have been among the big winners, along with companies that produce or trade them. Shares in defense firms have outperformed too, as global tensions soar.
Fragmentation is going to stay,” says Robert Koopman, the WTO’s chief economist. He expects a “reorganized globalization” that will come with a cost: “We won’t be able to use low-cost, marginal-cost production as extensively as we did.”
For three decades, a defining feature of the world economy has been its ability to churn out ever more goods at ever-lower prices. The entry of more than a billion workers from China and the former Soviet bloc into the global labour market, coupled with falling trade barriers and hyper-efficient logistics, produced an age of abundance for many. Tariffs multiplied during the US-China trade war. The pandemic brought lockdowns. And now, sanctions and export controls are upending the supply of commodities and goods.
All of these risks leaving advanced economies facing a problem they thought they’d vanquished long ago: that of scarcity. Emerging nations could see more acute threats to energy and food security, like the ones already causing turmoil in countries from Sri Lanka to Peru.
At the same time, from China to Brazil, ocean freight rate used to hover around USD$4,000 to USD$6,000 for a 40 feet container. During the last two years, shipping rates shot up to USD14,000 to USD15,000, reflecting a 300%-400% hike in ocean freight rate across all major trade routes — China to North America, China to European countries, China to South America.
Across the world, while large companies have been able to weather the storm with their deep pockets and strong relations with shipping companies, small exporters whose requirements are only two to six containers a month are pushed to the wall. For them, it is a difficult choice to make — whether to ship and incur high export costs or not ship and lose business in their export markets.
On the other side, global shipping experts are concerned about a sort of oligopoly developing in the world shipping market. The last few years have seen major consolidation, with a slew of mergers and acquisitions happening — Cosco and OOCL, CMA-CGM and APL, Hapag-Lloyd and United Arab Shipping Company, Maersk and Hamburg Süd, and Nippon Yusen Kabushiki Kaisha and Mitsui Osaka Shosen Kaisha.
About $6 trillion of goods — equivalent to 7% of global GDP — are traded between democratic and autocratic countries. All countries would have to shift resources toward activities they’re less good at. A chunk of the productivity that’s associated with trade would be lost. In the long term, a rollback of globalization to late-1990s levels would leave the world 3.5% poorer than if trade stabilizes at its current share of output, and 15% poorer relative to a scenario of global ties strengthening.
About 7% of existing trade relationships would shift between blocks. In concrete terms, that might mean supply-chain and factories making goods for US/Europe markets moving from China to, say, India (reshoring) or Mexico (nearshoring).
Karavan with its access to the high profile closed knit network of Industry leaders, Country experts, State officials, and the right expertise/ research capabilities in India, Mexico, Brazil, Chile, Argentina, Peru, Colombia, and other LatAm countries would provide unparalleled service to help businesses with strategic perspective and identify the critical success factors on global sourcing management (Supply Chains).