Stuck in the Suez, a warning to the world

A 400-meter long ship in a waterway only 300 meters wide is an accident waiting to happen. It happened last week when the Ever Given, one of the world’s largest container ships, got wedged in the Suez Canal.

Traffic through the waterway, one of the world’s most important trade arteries, was blocked for almost a week, with mounting costs to the international economy. What was first thought of as some kind of cosmic joke has instead become a symbol of the dangers of interdependence and the fragility of the global economy.

The Ever Given, a 224,000-ton ship en route to the Netherlands from China, got stuck last Tuesday when a dust storm hit during its passage through the 192-km canal. The containers stacked across the ship’s surface reportedly acted like a giant sail, catching the wind and overwhelming control of the rudder as the vessel reportedly lost power. The ship was turned and wedged into the sand on both sides of the canal, blocking traffic in both directions. The ship was afloat and moving again Monday evening and traffic had resumed Tuesday morning.

Opened in 1869 after a decade of construction, the Suez Canal connects the Mediterranean and Red Seas and is one of the world’s most important trade routes. The shortest shipping route between Europe and Asia, just under 19,000 ships used the waterway in 2019. Normally, 50 ships pass through the canal each day, about 12% of global trade value; it is estimated that 1 million barrels of oil and 8% of liquefied natural gas traverse the waterway daily as well. Economists reckon that $10 billion of trade is being held up each day it’s blocked.

Closure is not unprecedented. The canal has been blocked five times: three times by accidents and twice because of regional politics. The accidents were usually cleared in hours; when politics was responsible, the closures lasted months or years. Those lengthy shutdowns occurred when the international economy was considerably less globalized than it is today.

A weeklong shutdown produces heartburn but it is not a fatal wound to the economy. About 320 ships were waiting at either end of the waterway to pass through by the time the Ever Given was refloated. Some ships rerouted around the Cape of Good Hope in South Africa, a journey that will add several days to the trip — and higher prices — and could take vessels through pirate-infested waters.

Yet even if the backlog is cleared quickly, there is the prospect of another accident. The Ever Green is a big ship but it is only one in a class; even larger vessels are under construction and will be plying the trade routes in a couple of years. These enormous ships are also too large for many ports.

Those harbors are either going to have to undergo costly efforts to increase their depth to accommodate the super ships or turn away business. That latter risks still greater concentration of trade and the creation of even more constricting bottlenecks in the global economy. Global warming and rising sea levels by definition threaten ports.

Those chokepoints have become more visible in recent months. The vulnerability of supply chains for personal protective equipment (PPE) dominated the news last year and prompted government intervention to ensure PPE availability. Less attention has been given to the growing shortage of shipping containers.

Standard-size shipping containers are an essential feature of international trade and efficient use requires constant circulation. The pandemic and the uneven recoveries have resulted in mountains of containers where they aren’t needed and shortages where they are. Shipping rates are skyrocketing as a result.

According to one report, the cost of shipping a container from Asia to northern Europe has more than quadrupled, rising from $2,000 in November to more than $9,000. At one point, the price hit $12,000. With an estimated 90% of global retail trade traveling by container, higher consumer prices are almost certain — when goods arrive. Reportedly, McDonald’s in Hong Kong couldn’t make hash browns because of shortages, and its ice cream sundaes were served without peanuts as well.

Shipping bottlenecks only matter when there are goods to ship. The vicious storms that whipped Texas last month, sparking blackouts and water shortages, also revealed the vulnerability of supply chains for chemicals critical to the manufacturing of products ranging from automobiles to houses. Some 80% of Texas’ chemical output was shut down, disrupting most U.S. production of the world’s three most widely used plastic polymers.

Automakers have endured a quadruple whammy. First, they suffered earlier in the year from shortages of semiconductors, the result of exploding demand as the Chinese economy reopened and manufacturing of consumer electronics resumed. Those shortages were intensified after a mid-March fire at a Renesas Electronics chipmaking facility, a company with a 20% share of the global market share of the microcomputers that are used in vehicles.

Then, they were forced to alter production schedules because of the Texas petrochemical mess. The Suez Canal closure is a fourth problem: Mitsubishi Motors ships some 150,000 vehicles to Europe from Asia each year, and Nissan ships a considerable number that way, too.

Globalization demands instantaneous and virtually free communications, the free movement of capital, and reliable production and transportation networks. Recent events have highlighted the fragility of those last two pillars, although that is, for some, old news.

Japanese companies got a hard lesson in supply chain vulnerabilities after the March 11, 2011 earthquake and tsunami, which took out plants that accounted for 25% of global silicon wafer production, along with companies that produced critical materials for liquid display panel production, printed circuit boards and other IC components.

The various vulnerabilities prompted the Biden administration to undertake a review of critical supply chains to reduce U.S. dependence on potentially problematic suppliers of goods ranging from rare earths to semiconductors. The order covers sectors ranging from information technology to food production. U.S. officials insist that the review does not target any particular country, but is instead “looking at the risks posed by dependence on competitor nations,” said one unnamed U.S. official.

At the virtual Quad meeting earlier this month, supply chains were an agenda item and Japan, Australia and India established the Supply Chain Resilience Initiative last year to reduce their dependence on potential rivals. That effort is expected to expand to include Southeast Asian nations, key locations for Japanese production networks. Little attention is given to China’s efforts to rid itself of those vulnerabilities, but Made in China 2025 and a host of other equally grand initiatives are efforts to insulate the country from supply chain breakdowns.

Identifying those vulnerabilities is a good idea for any government — or any company, for that matter. Unfortunately, it is harder than expected. Most major manufacturers or suppliers have a good grip on their supply chains, but visibility or understanding of their suppliers’ networks is another matter. It’s estimated that more than half of all companies don’t have information on their supply chain beyond immediate vendors. And all it takes is one weak node to take down a network.

Fixing those problems is easier said than done. First, there is a matter of definition: Vulnerability may well be in the eye of the beholder. Some production networks were dispersed to reduce vulnerabilities, for example, minimizing the risk of disruptions that were geographically centered (like a natural disaster or a disease outbreak). Reshoring or moving operations could introduce new risks, especially given the infrastructure bottlenecks already mentioned.

Second, relocating operations can be expensive. Semiconductor foundries cost billions of dollars and those in China cost one-third to one-half less than those in the United States (credit Chinese government incentives). In addition, the growth of production hubs has created expertise in related operations that can lower costs and spur other important innovations. Moving operations could result in the loss of that knowledge.

Ultimately, executives and policy makers must rethink their devotion to just-in time delivery and the savings that it has produced. Those savings have dictated an increasingly large share of decisions — but the real price of those priorities is just becoming known. “Just in case” is the new mantra. Complex systems theorists long insisted that breakdowns were inevitable, even if the specific cause — a supercarrier wedged sideways in a canal may — may have been unknowable, or worse, laughable.

Brad Glosserman is deputy director of and visiting professor at the Center for Rule-Making Strategies at Tama University as well as senior advisor (nonresident) at Pacific Forum. Author of “Peak Japan: The End of Great Ambitions” (Georgetown University Press, 2019), he is currently writing a book about the new national security economy.