Aerial view of shipping containers and cranes at Qingdao port on May 30, 2022 in Qingdao, Shandong province of China.
Han Jiajun | Visual China Group | Getty Images
First, it was the pandemic. Then came the war between Russia and Ukraine. With two major global crises in a row, there could be some permanent changes in supply chains and trade, experts warn.
The war in Ukraine in particular has prompted countries to reconsider the need for more reliable trading partners.
“If the Covid-19 pandemic has highlighted the need to shorten supply chains, the war in Ukraine underscores the importance of having reliable trading partners,” said Peter Martin, research director at resource research firm Wood Mackenzie.
Energy prices have soared this year as Russia’s attack on Ukraine destabilized markets and Western nations imposed sanctions on Moscow.
This week the European Union agreed to ban 90% of Russian oil imports by the end of this year. Moscow had also previously threatened to cut supplies in retaliation. That has prompted a Russian official to say the country will find other importers – oil purchases from China and India have already skyrocketed this year.
The European Union gets about 40% of its natural gas from Russian pipelines, and about a quarter of that flows through Ukraine.
Important grain exports such as wheat are affected.
Millions of tons of wheat from Ukraine, one of the world’s largest wheat exporters, are stuck in the country and can’t get to the countries that need it. That’s because Russia’s military is blockading the Black Sea, where important Ukrainian ports are located.
According to Andrius Tursa, consultant for Central and Eastern Europe at the consulting firm Teneo Intelligence, before the war around 90% of Ukraine’s Black Sea ports were dedicated to their grain exports.
Referring to the war and the pandemic, Martin added: “These forces could lead to a sustainable rebalancing of world trade. The global economy is becoming more regionalized – shorter supply chains with ‘reliable’ partners.”
1. Trading Blocks
Martin said it is “not the end” of globalization, but global trade may reorganize itself into two or more “distinct blocs.”
The first bloc, according to Martin, would consist of the European Union, the US and their allies – who have imposed sanctions on Russia and agree to isolate Russia. Such allies could include Britain and Japan.
Another group could be countries that will try to span both sides.
“There will be a bloc of nations like China and India that will maintain trade with both the sanctioning allies and Russia – they could get more energy and resources from Russia but need to maintain good relations with the major economies in the first bloc, which accounts for a significant proportion of their export demand,” said Martin.
2. Trade routes
“Trade routes by land and sea and the volumes that pass through them will be affected,” Martin also said.
Since the war began, shippers have avoided the Black Sea, where Russia’s military activities have blocked merchant shipping. This has caused congestion in other ports in Europe as shippers have had to change routes.
Russia will likely be the biggest loser because, while it can direct some trade relations, it is locked out of a large part of the global economy.
Peter Martin
Research Director, Wood Mackenzie
“Russia’s military activities in the Black Sea, its constant attacks on Ukrainian ports and heavy mining in the waters around the ports make commercial shipping impossible,” Tursa wrote in a May 25 note.
There are “no easy ways” to open up Ukraine’s ports, he said, adding that “various proposals for opening up Ukraine’s access to the Black Sea are being discussed, but none are easy or likely.”
Ukraine is now trying to develop alternative land and river routes to export food to other countries.
“Although the capacity of alternative routes is expected to gradually increase, such exports will likely be more complex and costly compared to the sea route. Russia’s missile attacks on Ukraine’s railway infrastructure could further complicate logistics,” Tursa said.
Winner and Loser
Any diversion due to changes in global trade, Martin said, would result in some economies like Southeast Asia, Latin America and Africa benefiting.
“Exports are being … diverted, which requires finding new markets for goods and services and setting up logistics to adapt to the new trade flows,” he said.
“Russia will probably be the biggest loser because while it can direct some trade relations, it is locked out of a large part of the global economy,” Martin said.
Read more about China from CNBC Pro
Lockdowns in China, the world’s manufacturing hub, have also added to the turmoil in the shipping and trade industries.
“Clearly, what we expect in the coming times is less reliance on the major east-west China-Europe and China-US trade routes five stops in China,” said Christian Roeloffs, founder and CEO of container booking company Container xChange.
Routes could change, benefiting some Southeast Asian countries like Vietnam, where more companies are already manufacturing their goods.
On the other hand, places like Singapore — where ships commonly pass by en route to the US — could lose out, he added, explaining that Singapore may be bypassed as shippers travel direct to the US from burgeoning manufacturing hubs Vietnam and Cambodia on the west coast.
“Some companies are beginning to manufacture closer to home to limit delivery delays due to plant closures, reduced labor supply and other factors,” said Jason McMann, head of geopolitical risk analysis at Morning Consult.
They could also move towards holding larger inventories “as a cushion against future disruptions” rather than having shorter supply chains, he added.