While the stranding of the megaship, the Ever Given, has been a prominent topic in the recent news, the importance of the Suez Canal for global trade is an issue that is much less recognised. The blockage of the 193 km long waterway by the container ship will have material implications for international shipping that may last far longer than the actual hindrance itself. These ramifications extend from supply chain disruptions and animal welfare concerns all the way to enormous costs for repairs, as well as potential legal and regulatory repercussions.
Why is the Suez Canal Significant?
The Suez Canal occupies a strategic location between the Mediterranean and the Red Sea. Its significance lies mainly in its use as a trade route that is the shortest sea route between the Atlantic Ocean and the Indian Ocean. In 2018, more than 18,000 ships passed through the canal, carrying cargo such as cereals, fertilizers, crude petroleum and coal. As a result of its usefulness as a maritime trade route and the associated economic benefits, the Suez Canal has been the subject of various international (geo)political disputes. It was the subject of concern for the Convention of Constantinople from 1888, when Great Britain and France declared that the Suez Canal should be open for use to all countries in war and peace times. Furthermore, arguments surrounding the usage of the canal resulted in the Suez Crisis of 1967, when Egypt successfully attempted to nationalise the Suez Canal. It is worth noting that like the Suez Canal, the stranding of the Ever Given is ultimately a transnational affair. The mega ship is owned by a Japanese company, Shoei Kisen Kaisha; it is operated by a Taiwanese firm under the Panamanian flag, staffed by a crew comprised of mainly Indian citizens.
According to the Review of Maritime Transport by the United Nations Conference on Trade and Development (UNCTAD), world maritime trade is expected to achieve a 3.4% annual growth rate on average between 2019 and 2024. Even with the global increases in air traffic over the last decades, in excess of 80% of world merchandise trade (measured by volume) is transported on maritime routes. However, growth in trade by sea routes decreased in 2018, with UNCTAD citing reasons such as geopolitical tension and the trade war between China and the USA. Nonetheless, the Suez Canal is identified as one of four important “trade chokepoints” by Deutsche Welle, a German News Broadcaster. Alongside the Panama Canal, the Strait of Hormuz and the Malacca Strait, the Suez Canal is viewed as an important trade route prone to congestion and paramount to economic recovery when the COVID-19 pandemic draws to a close.
So, what actually happened?
On March 23rd, a 200,000-tonne container ship, the Ever Given, was lodged sideways across the waterway, effectively blocking the Suez Canal. Consequently, other vessels were left trapped on either side of the ship. Although the Ever Given has since been freed, it was no easy feat. With a mighty effort consisting of tugboats, large-capacity dredgers and diggers on the ground, the ship finally came unstuck after removing 30,000 cubic metres of sand over six days. Although this may seem like a short period of time, this blockage resulted in a litany of detrimental ramifications.
How exactly is this situation a nightmare?
As previously introduced, the Suez Canal is a significant trade route connecting the Middle East and Europe. Responsible for approximately 12% of global trade, around one million barrels of oil and 8% of liquified natural gas pass through the canal every day. Osama Rabie, chairman of the Suez Canal Authority, estimated that the canal’s revenues lost between £10 million to £11 million every day from the blockage. This issue also has wider negative impacts on global trade in the long term; Allianz stated that as a result, annual trade growth could reduce by 0.2 to 0.4 percentage points.
Furthermore, not only did the Ever Given’s blockage prevent the delivery of its own 20,000 shipping containers, but it also delayed over 400 other ships from passing through the canal. Evidently, this would naturally retard the normal course of commerce – all the way from suppliers to producers. A delay in material delivery to manufacturers acts as a supply shock, causing an economic shortage. When this occurs, some consumers are willing to pay more, leading to a price increase while there is an overall decrease in demand. This process minimises the shortage but results in a new higher equilibrium price and lower equilibrium quantity.
One of the largest issues with this blockage was its potential to lead to rising inflation, particularly in the natural gas and oil industries. Rystad Energy stated that if the blockage were to last for two weeks, around one million tonnes of liquid natural gas would have been delayed for delivery to Europe. Similarly, Reuters also reported that the delay in crude oil shipments could cause prices to increase by a whopping 4% internationally.
Who, if anyone, is liable?
Thankfully, the Ever Given was (relatively) swiftly dealt with, a far cry from the month-long delay tentatively suggested. Yet having just been freed, the Ever Given could be stuck once again. The Egyptian Government expects $1bn in compensation for the delays in the Suez Canal, and legal liability to be laid at the feet of the owners of the gargantuan container ship.
Yet who is to blame and liable may not so clear-cut. As stated before, the Ever Given may be owned by a Japanese company, yet it’s managed by German operators all on behalf of a Taiwanese conglomerate (Evergreen), all the while that the crew onboard of the incident were Indian.
What happens as we move forward?
While the temporary blockade caused by the Ever Given can be described as a freak event, it shows how through disruption of global trade the natural course of commerce can be brought to its knees. So, by logical extension, how would this impact be felt if the Suez Canal were to be blocked again? What about the Panama Canal?
As an industry whose global suppliers and producers heavily rely on for the transportation of goods, the public chaos felt from this disruption of trade in the future highlights the effort needed to ensure clear-cut organisational systems and policy in this industry, drawing attention to the question, should government intervene to shepherd global trade in the future?
Even more concerningly, the risk of future disruptions to global trade could potentially exacerbate a retreat from globalisation, pushing more states to consider relying less on international and decentralised supply chains, and more on domestic producers. The environmental impact of international container ships, as more countries are becoming aware of the need to tackle climate change and decrease their greenhouse gas emissions, could also prove to be a catalyst against globalisation.
So, what could, or should, the future of global shipping look like?
It would not be bold to suggest some more legal clarity regarding liable parties be established, however this generates a myriad of questions such as should the owner of the Ever Given really be liable for the over $1bn Egypt is demanding? Furthermore, what would this suggest about the future of the Suez Canal? Egypt’s stance indicates a potential shift to politicise trade routes in the future, exerting more direct control over ships passing through the Canal. This has already been seen, with Egypt being unwilling to release the ship until compensation is paid; directly breaching the 1888 Convention of Constantinople, within which Article I guarantees passage to all ships.
Given the damage caused by this blockage to the international market, other countries’ governments have been capitalising on this opportunity by marketing the need for more trade routes. For example, Russia has been promoting an alternative Arctic trade route. While interesting in theory, in practice the use of this route threatens the already-warming temperatures of the Arctic, causing Northern regions like Siberia to be vulnerable to flooding and wildfires. Perhaps an artic solution may create just as many problems as it is trying to solve. Moreover, some vessels have opted to completely avoid the Suez Canal, increasing travel times by 8 days. The global shipping industry is already responsible for 1 billion tonnes of greenhouse case emissions, and with the additional travel time, its environmental footprint will undoubtedly worsen.
Only time will tell the full extent of the fallout from the Ever Given. However, we should rest assured that its impact on shipping will be marked and long-lasting.
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The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.
