Maritime Trade: Riding the Waves of Commerce and Weathering the Storms of Disruption

Mustafa Yagci, Mohammad Nazeem Noordali

07 May, 2024

Introduction

Throughout history, expansive oceans have served as viable trade routes, facilitating the interconnectedness and exchange of cultures among nations through the movement of goods and intellectual interchanges. The revolutionary introduction of containerized shipping in 1956 laid the groundwork for the profound integration of global economies, culminating in the phenomenon we now describe as globalization. By 2020, maritime trade had risen to an estimated value of USD12.3 trillion, representing approximately 70% of global trade. Containerized shipping dominated this sector, accounting for 66% of maritime trade volume, largely driven by the increasing prevalence of high-value commercial goods shipped in standardized containers.

In today’s world, maritime transport serves as the lifeblood of international trade and the global economy, with over 80% of the global volume of goods traded by sea in 2021. This reliance on maritime trade is particularly pronounced for most developing countries, for whom seaborne-transported goods and services represent an even higher share of their trade activity. The heightened visibility of disruptions to maritime trade since the COVID-19 pandemic has underscored its critical role in the global economy and its profound impact on Emerging Market and Developing Economies (EMDEs).


Major Chokepoints in Maritime Trade

Chokepoints are defined as key intersection points within transportation arteries that facilitate the movement of substantial trade volumes. Specific locations, owing to their geographic, geopolitical, and trade significance, become strategic chokepoints within the global maritime network. Maritime networks encompass core routes, supporting major trade flows between key markets, and secondary routes, primarily connecting smaller markets.

Primary chokepoints possess limited cost-effective alternatives, and thus the disruption of such significantly impacts the global trade. Accordingly, the Straits of Malacca, Hormuz, Bab Al-Mandeb, and Panama and Suez Canals are some of the primary chokepoints in maritime trade. Meanwhile, secondary chokepoints, such as the Straits of Taiwan, Korea, Sunda and Magellan Passage are support routes with readily available, albeit less efficient, alternative pathways for maritime trade. Figure 1 illustrates the primary and secondary chokepoints and the major maritime shipping routes for the global economy.

Source: https://porteconomicsmanagement.org/pemp/contents/part1/interoceanic-passages/main-maritime-shipping-routes/

The straits in Asia, such as the Straits of Taiwan, Korea, and Malacca, have the highest share of global trade and a higher average annual number of transit calls compared to the other chokepoints (Table 1). Bordering these straits are some of the world’s fastest-growing economies, particularly in East Asia. China, Japan, South Korea, and many Southeast Asian nations are major consumers and producers of goods, leading to a constant flow of imports and exports through these waterways. Estimated data in the table also shows that petroleum, minerals, and agriculture are the top three traded commodities in these chokepoints, indicating that the flow of these essential commodities heavily relies on the unobstructed passage through strategic chokepoints. This underscores the crucial role of chokepoints in ensuring global food and energy security.

Table 1: Maritime Trade Chokepoints

Busiest Chokepoints and Routes Top Three Traded Industries Annual Number of Transit Calls (Avg.)
Taiwan Strait (South China Sea) Petroleum, Mining, Agriculture 125,174
Korea Strait (East China Sea) Petroleum, Mining, Agriculture 77,092
Malacca Strait Mining, Petroleum, Agriculture 57,824
Dover Strait Petroleum, Mining, Agriculture 55,845
Gibraltar Strait Petroleum, Mining, Agriculture 43,119
Bosporus Strait Petroleum, Mining, Agriculture 32,668
Strait of Hormuz Mining, Petroleum, Agriculture 29,831
Bab el-Mandeb Strait Petroleum, Mining, Agriculture 19,348
Suez Canal Petroleum, Mining, Agriculture 19,097

Note: The assessment of top traded industries is based on estimated cargo volume passing through the chokepoint, drawing on non-official data sources. The Petroleum category refers to Petroleum, Chemical and Non-Metallic Mineral Products, and the Mining category refers to Mining and Quarrying.


Chokepoint Disruptions and Impact on Global Trade

The causes of maritime trade disruptions are diverse and interconnected. Economic and financial crises can significantly impact maritime trade by reducing consumer and business demand for goods, causing port congestion and bankruptcies in the shipping industry. Meanwhile, geopolitical tensions and armed conflicts restrict access to key shipping lanes and piracy and maritime attacks remain a worrying threat, particularly in certain regions. Additionally, extreme weather events and natural disasters can disrupt port operations and damage infrastructure, causing significant economic losses. Drought conditions have caused water levels in the Panama Canal to recede, prompting the Panama Canal Authority to implement restrictions on vessel traffic to conserve water. Container ships constitute the predominant category of canal users, accounting for the highest number of crossings and the greatest net tonnage. Dry bulk carriers and gas and chemical carriers are other significant segments utilizing the canal, followed by the car carrier segment.

The COVID-19 pandemic has profoundly impacted maritime trade and container freight rates, creating a complex and volatile situation. During the early phase of the pandemic, lockdowns and port closures disrupted global supply chains, causing temporary halts in production and movement of goods. Port closures and reduced workforce availability further exacerbated these disruptions. Increased demand for home goods and e-commerce purchases due to lockdown restrictions shifted container traffic away from other sectors like automotive and apparel and altered the movement of goods in sea routes. As a result, empty containers became stranded in the wrong locations due to disrupted trade patterns, creating shortages in key hubs like the United States.

Increased volumes and operational challenges during the COVID-19 crisis led to unprecedented congestion at major ports, further delaying shipments and driving up costs. Freight rates skyrocketed in this period amidst the container shortages and increasing demand. In addition to the negative impact of the pandemic, the grounding of the “Ever Given”, a 20,150 twenty-foot equivalent unit (TEU) container ship, resulted in a temporary blockage of the Suez Canal in March 2021, causing a significant disruption to maritime trade. This incident further exacerbated existing constraints on ship and port capacity, leading to a rise in freight rates. Ships bound for Europe faced delays with some forced to re-route around the Cape of Good Hope, significantly increasing their voyage distances by up to 7,000 miles.

Figure 2 demonstrates the growth rates of maritime trade since 2000. Sharp declines in 2009 and 2020 are reflections of the global financial crisis and the COVID-19 pandemic, respectively. The decline in 2022 can be interpreted as the reflection of the East European crisis and normalizing consumer demand for goods after the COVID-19 pandemic.

Figure 2: Seaborne trade growth, tons and ton-miles, percentage annual change, 2000 – 2022

Source: https://unctad.org/publication/review-maritime-transport-2023

Upon examining the freight rate fluctuations since the COVID-19 pandemic, data shows that container freight rates hit historic peaks in the first half of 2022 due to the persistent supply chain crisis. However, it succumbed to economic pressures in the latter half, eventually regressing to pre-pandemic levels by 2023. Dry bulk freight rates followed a similar volatile path, experiencing a decline in the second half as Chinese demand for commodities softened. Shanghai Containerized Freight Index (SCFI) monthly spot rates since June 2018 depict a significant jump in container freight rates starting from June 2020, which started to decline after February 2022 (Figure 3). After the disruptions in the Red Sea, SCFI started to increase again but showed signs of normalizing in February and March 2024.

Figure 3: Shanghai Containerized Freight Index (SCFI) monthly spot rates, June 2018–June 2023

Sources: https://unctad.org/publication/review-maritime-transport-2023 and https://en.sse.net.cn/indices/scfinew.jsp.

Another dimension of the disruptions in maritime trade is the changes in average distances traveled. Figure 4 highlights that the average distance traveled for different types of maritime transportation has increased between 1999 and 2022, especially for grains and oil. The observed increase in oil cargo travel distances reflects significant structural changes within the energy sector. These changes encompass both production and distribution patterns, as well as imbalances in global supply and demand. The shale revolution in the United States, along with the lifting of the crude oil export ban in 2015, has spurred a rise in oil cargo shipments from the U.S. to Asia. This trend coincides with Asia’s growing refining capacity, which has in turn increased demand for crude oil sourced from the Atlantic basin. Furthermore, evolving dynamics within Asia, particularly China’s growing demand for refined products and its own refined product exports, have further reshaped the direction of oil flows and the distances traveled.

Similarly, dry bulk trade has witnessed a surge in shipment distances driven by China’s immense consumption of iron ore, coal, grains, and steel production-related minor bulks. Notably, a significant portion of these commodities are sourced from geographically distant locations like Argentina, Brazil, and the United States, contributing to the observed increase in travel distances.

The escalating significance of containerized shipping within a globalized economic landscape has been accompanied by a notable decrease in the average distance traveled per container. This reduction can be attributed to a confluence of technological advancements in container ships, port infrastructure, logistics, and tracking systems, as well as optimized supply chain management practices.

Figure 4: Average distance traveled, nautical miles, 1999–2022.

Source: https://unctad.org/rmt2022

Recent disruptions of maritime trade on the Red Sea have major implications for global trade in oil and liquefied natural gas (LNG) markets since the Red Sea hosts two major chokepoints (i.e., the Strait of Bab eel-Mandeb and the Suez Canal) and the Arab Petroleum Pipelines Company (SUMED) pipeline in Egypt (Figure 5). The Suez Canal, for instance, facilitated the movement of an estimated 12% to 15% of the world’s trade volume in 2023. In addition, these routes facilitated the transport of approximately 12% of total seaborne-traded oil in the world and 8% of global liquefied natural gas (LNG) trade during the first half of 2023. Figure 6 illustrates how the Suez Canal traffic in terms of daily transits has declined since the end of December 2023, having the biggest impact on containerships.

Figure 5: Arabian Peninsula maritime chokepoints

Source: EIA.GOV


Figure 6: Suez Canal, daily transits, 28-day rolling average, 2016–23 January 2024, Index, Average=100

Source: UNCTAD


While the Suez Canal navigates recent disruptions, the Panama Canal faces a different challenge in the form of a critical drought. The canal’s diminished water levels have significantly impacted its operations, leading to a concerning 36% reduction in its total transits compared to the same period last year.

As a result of these disruptions, container shipping costs are experiencing a dramatic surge, higher insurance premiums are further inflating transit costs, and ships reroute to longer distances by bypassing the Suez and Panama Canals but are compelled to accelerate their speed, which leads to greater fuel consumption per mile, and thus higher carbon emissions. These factors ultimately lead to higher inflation rates, higher food and energy prices, and negative environmental consequences from higher emissions. Low-income and developing countries, where ensuring food and energy security is of paramount importance, are the most vulnerable to these shocks.


Implications for Emerging Market and Developing Economies (EMDEs)

Over 80% of global trade by volume occurs through maritime routes, and for many EMDEs, this dependence is even higher. Landlocked nations rely on seaborne transport to access international markets, while coastal countries leverage maritime trade to export valuable resources and manufactured goods.

Despite its crucial role, maritime trade in the EMDEs faces several challenges. These include infrastructure limitations since many EMDEs lack modern port facilities, efficient logistics systems, and skilled maritime professionals. Second, the complex and cumbersome regulations can hinder the smooth flow of goods and increase trade costs in the region. Third, piracy and maritime attacks pose a threat to the safety of shipping lanes and the efficient flow of traded goods in the region’s trading network. Fourth, increased maritime traffic can lead to pollution and environmental degradation, requiring sustainable practices. Exacerbating the environmental impact of maritime transport is its significant carbon footprint, contributing approximately 3% of global emissions – equivalent to the aviation sector. Since a substantial portion of these emissions occur on the open seas, outside national jurisdictions, international and regional collaboration is essential to achieve industry decarbonization.

Considering these challenges, proactive measures are crucial to mitigate the risks and ensure the smooth flow of maritime trade. EMDEs can focus on several key initiatives:

  • Investing in Diversification: Developing alternative trade routes and diversifying transportation options can reduce overdependence on critical chokepoints. Investing in regional rail and road networks can offer alternative pathways for goods.
  • Strengthening Infrastructure: Upgrading port facilities, improving logistics systems, and adopting technological advancements can enhance operational efficiency and resilience in the face of disruptions.
  • Promoting Trade Facilitation: Streamlining customs procedures, harmonizing regulations, and implementing trade facilitation agreements can reduce delays and unnecessary costs associated with cross-border trade.
  • Enhancing Security and Cooperation: Collaborative efforts with regional and international partners can address piracy and maritime attacks while strengthening coastal security measures can deter further threats.

Conclusion

Maritime trade, the cornerstone of global interconnectedness, faces a pivotal moment. Recent disruptions have laid bare vulnerabilities, necessitating proactive measures from EMDEs. Investing in economic diversification, sustainable and resilient infrastructure, streamlined trade processes, and risk mitigation tools can guarantee an uninterrupted flow of goods, propel economic development, and bolster resilience to trading shocks.

As geopolitics increasingly intersects with the global economy and international trade, safeguarding the stability of vital shipping lanes necessitates proactive multilateral cooperation. Building robust partnerships at the regional and international levels offers a strategic response to mitigate evolving risks and ensure the uninterrupted flow of goods that underpins global economic prosperity.


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