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FILE PHOTO: Docked cargo ships are loaded with shipping containers at Port Elizabeth, New Jersey, U.S., July 12, 2023.
Port strike could be huge headache
Workers and port authorities on the East and Gulf Coasts of the United States are headed for a potential strike on Oct. 1, which poses a huge threat to American businesses, and a political problem for the government of Joe Biden.
Businesses have already been scrambling with alternative routes to avoid pre-Christmas supply chain problems as 47,000 eastern dockworkers press their employers for bigger wage packages. A similar showdown on the West Coast ended with a contract last year after workers staged slowdowns but no strike. Now eastern workers are seeking similar gains.
Any work stoppage could cost the US economy up to $5 billion a day, creating an enormous headache for Biden and Democratic nominee Kamala Harris during the crucial last weeks of the presidential campaign. It would put Biden in a difficult position, since he would be loath to either order workers back to the job, which would anger unions, or let the economy go into a headspin, which would anger everyone else.A view of the Dali cargo vessel which crashed into the Francis Scott Key Bridge causing it to collapse in Baltimore, Maryland, U.S., March 26, 2024.
It’s not just Baltimore with a bridge problem
Six people are still missing after a cargo ship collided with the Francis Scott Key Bridge in Baltimore on Tuesday morning, crumbling the 1.6 mile long bridge in a matter of seconds.
Its aftermath will make waves far beyond Baltimore. Here’s how.
Supersized shipping. The 964 foot container ship, MV Dali, was being steered by a pilot specialized in the port when it lost power and hit one of the bridge’s main pylons.
The collapse draws attention to a pressing problem in the US supply chain: cargo ships – central to the modern economy – have gotten exponentially bigger as US bridges are aging.
When the Francis Scott Key Bridge was built between 1972 and 1977 the average container ship carried between 500-800 twenty-foot shipping containers – known as TEUs in the shipping business. But advances in engineering allowed ships to balloon to an average of 4,000 TEUs by 1985. Since then, carriers have continuously scaled up capacity, and Dali, manufactured in 2015, had a capacity of 10,000 TEUs. According to bridge experts, no bridge pylon could survive being hit by a vessel of this size.
The continuous growth has pitted ports against each other to attract bigger vessels. The expansion of the Panama Canal in 2016 upped the stakes, with ports along the East Coast racing to dredge their harbors to accommodate the larger ships now traveling through the canal.
The Port of Baltimore expanded to accommodate supersized ships in 2013. Since, it has grown into the 9th-busiest port for receiving foreign cargo.
Aging bridges. Meanwhile, the Francis Scott Key bridge has remained largely unchanged since the 1970s.
Although Maryland’s Governor Wes Moore said the bridge was “fully up to code,” the bridge scored a six out of nine safety rating on its last federal inspection in 2022. The bridge was downgraded because of concern about its reinforcement columns, though experts said Dali’s size and the way it hit the pylon made collapse inevitable.
The Francis Scott Key Bridge is not alone. Of the 617,000 bridges across the United States, 42% are at least 50 years old. About 300,000 were given the same “fair” safety grade given to Key Bridge, while another 42,000 were in “poor” condition. Nationwide, 178 million trips are taken across structurally deficient bridges every day.
This is a global problem. Tuesday’s crash was the second time this month that a container ship hit a major road bridge. On Feb. 22 in Guangzhou, a port in southern China, a much smaller vessel carrying stacks of containers hit the base of a two-lane bridge, causing vehicles to fall. From 1960 to 2015, there were 35 major bridge collapses worldwide due to ship or barge collisions. 18 of those collapses happened in the United States.
The political fallout. The Biden administration has said that the federal government will pay the entire cost of reconstructing the Port of Baltimore.
President Joe Biden’s generosity is likely to fend off Republican accusations that the collapse occurred because his administration has not spent enough on infrastructure -- an issue that could become more important in the 2024 election in the aftermath of this tragedy, as well as the collapse of an interstate overpass in Philadelphia last summer.
It is unclear how much reconstruction will cost, but to actually get the country’s bridges up to snuff, the American Road & Transportation Builders Association estimates Biden would have to spend $171 billion. At the current rate of investment, it will take nearly 75 years to repair them all.
Of Biden’s $1.2 trillion Infrastructure Investment and Jobs Act, just $110 billion went to roads and bridges. This spending helped more than 43,000 bridges improve their ratings under the Biden administration. But because entropy is inescapable in a country as large as the US, during the same time, nearly 70,000 bridges deteriorated.
Mark Carney sees more problems than solutions emerge from Davos
Davos is a good place to recognize problems but not such a good place to solve them, according to Lord Mark Malloch Brown, a British politician and diplomat who was in the Swiss Alps this month. “A new generation of modest, listening and empathetic leaders is needed – the antithesis of Davos Man,” he tweeted.
The World Economic Forum has steered so far to the north of public opinion that it is now being used as a punchline – the New York Times noted that “the Davos Consensus” is now a counter-indicator of what is likely to happen. “Trump is already the president at Davos — which is a good thing because the Davos consensus is usually wrong,” said Alex Soros, son of George and chair of the Open Society Foundation, on a panel at this year’s forum.
Yet, there is a reason why 3,000 of the world’s most powerful people make the mid-winter trek to Switzerland every year and line up in the cold to pass through security outside the Grandhotel Belvédere: It’s valuable to understand what the global elite is thinking and to recognize the many problems the world is facing.
GZERO Media caught up with Mark Carney, former governor of the Bank of England and Bank of Canada, who now serves as chair of Brookfield Asset Management and Bloomberg Inc. (as well as acting as a UN special envoy on climate change), to hear what he picked up in Davos.
Economic optimism
On the global economy, the general feeling was of a resilient US economy contrasting with a stagnant Europe, particularly as Germany goes through a historical industrial restructuring moving away from a model built on cheap gas from Russia and exports to China.
The general outlook for China was bearish, with the downside of its ongoing real estate adjustment outweighing the boost from China’s growing competitiveness in electric vehicles and clean energy and its efforts to rebuild exports at a time when supply chains are being “de-risked.”
Premier Li Qiang told Davos that China’s economy is open for business, but Reuters reported that investors who attended a closed-door lunch with him remained skeptical about China’s charm offensive.
This points to more stimulus, Carney said. Indeed, Bloomberg reported last week that the Chinese government is considering a rescue package for slumping stock markets (the CSI 300 was down 11.4% last year, its third year of negative growth, while Hong Kong’s Hang Sen was down 14% in 2023).
On monetary policy, Carney said the expectation among many attendees was that interest rates have peaked but that there was only limited appreciation that the pace of reductions may be slower than the market has been pricing. During Davos, market expectations were that the Fed would begin cutting in March and then cut again another four or five times this year. But Carney believes the Fed will probably wait until June to begin cutting, followed by another one or two cuts this year. “However, if that’s because the US economy is stronger than expected, it would be net positive,” he said.
Global crises
Geopolitics weighed heavily in the Swiss Alps. While US-China relations appear to have stabilized in the short term, the Middle East conflict was widening alarmingly. Reuters reported that there were no practical advances on a Palestinian state, or even a cease-fire, at Davos.
The head of the Palestinian Investment Fund estimated that $15 billion would be needed just to rebuild houses in Gaza. Arab states said they would not fund reconstruction until there was a lasting peace, by which they meant a Palestinian state.
Yemeni and Iranian officials told Davos audiences the attacks in the Red Sea would not stop until Israel ended the war in Gaza. The CEO of oil giant Saudi Aramco warned that the world might see a shortage of oil tankers if the attacks continue, forcing shippers to choose longer alternative routes.
Bankers warned that increased shipping costs and the possibility of an oil price rise could prove inflationary. And attendees took note of the comments of Saudi Arabia’s Prince Turki al Faisal that “the present leadership of Hamas, the PLO, and of Israel should be excluded from any participation in any future political role.”
Good AI vs. Bad AI
AI was everywhere, with businesses focused on how to implement it, first in basic administration and more profoundly in re-engineering the production, sales, and marketing. The core question of whether workers will benefit — and when — was more hotly debated. Some, including the IMF, saw widespread disruption to jobs (up to 40% according to the Fund). The techno-optimists pointed to the ability of AI to re-skill workers rapidly and past experiences with major technological changes that belied the ‘lump of labor fallacy.”
Carney felt that AI would begin to have major impacts on productivity and growth by the end of the decade and that, history teaches, it would take a comprehensive response of business, government, and academia to ensure that workers share in the benefits.
Climate change
Coming less than two months after what was regarded as a business-heavy, successful COP28 in Dubai and with AI dominating much of the discussion, the climate change debate was relatively muted. But Carney said it would be a mistake to consider that the transition has been relegated down the agenda.
He said that it is now so core to the fundamental business model of most companies that it has become embedded as a driver of competitiveness.
Carney noted that five years ago, $500 billion was invested in the transition; last year, that number was $1.8 trillion, nearly double what was invested in oil and gas. The challenge is that this number needs to more than double again to about $4 trillion by the end of the decade.
He said that the transitions toward clean energy and AI actually work in tandem since, while AI is relatively capital-light, it requires a lot of data and computing power, which in turn requires clean energy. And AI solutions will help with optimizing grids, heating and cooling systems, and even supply chains.
It was noticeable that the backlash against Environmental, Social, and Corporate Governance, or ESG, meant it was rarely mentioned in Davos. Attendees like Canadian Deputy Prime Minister Chrystia Freeland were more focused on the new buzzwords – “supply chain resilience” – trying to convince investors that Canada has the critical minerals and clean energy they need, as businesses try to diversify sources away from China.
Sustainability is now about “resiliency building” that contributes to profitability, not just altruism.
Milei’s message
Javier Milei, the new Argentinian president, burst onto the main stage at Davos like an arsonist with a blowtorch, lambasting the proponents of state intervention and concluding with the rallying cry: “Long live freedom, damn it.” He said the Western world is facing a significant threat because its leaders have been co-opted by a worldview that leads to socialism and economic deprivation.
“We are here to tell you that collectivist experiments are never solutions to the problems that affect citizens. Trust me, no one is better than Argentina to provide testimony on this,” Milei said.
At the time of Milei’s inauguration, annual inflation stood at 143%, the currency had plunged, and four out of 10 Argentines were living in poverty. He has promised radical reforms, including deregulation and devaluation of the currency, and there was no evidence that he was prepared to dilute his agenda in his speech.
He was scathing about “neo-Marxists” who have “co-opted the common sense of the Western world” when it comes to the climate change agenda and said he considered all talk of “market failure” to be an oxymoron.
Carney has considerable experience in navigating market failures, having been in the Cash Room meeting in the US Treasury as Bank of Canada governor during the financial crisis, alongside other G7 finance ministers and central bankers, when the decision was reached to backstop the banking system with liquidity to prevent a repeat of the Great Depression.
“All ideologies are prone to extremism, and capitalism loses its sense of moderation when the belief in the power of the market enters the realm of faith,” he wrote in his book, “Values.” “There are no libertarians in a financial crisis.”
But he said he found Milei’s speech to be entertainingly provocative. “It was good theatre and raised some important issues,” he said, particularly his praise for entrepreneurs and his assertion that state control does not depend solely on owning the means of production but can include regulation. Carney noted, however, that Milei appeared oblivious that he was speaking to some of the world’s most successful entrepreneurs (such as Bill Gates), few of whose actions echo the “Atlas Shrugged” school of poverty elimination.
Carney concluded that, “where you stand depends on where you sit,” and that Milei’s vehemence was undoubtedly influenced by a long history of high levels of state intervention and indebtedness in Argentina.
After his speech, Milei sat down with International Monetary Fund Managing Director Kristalina Georgieva to discuss Argentina’s debt problems. He remained defiant: “Free enterprise capitalism is the only tool we have to end hunger and poverty,” he said.
Milei will have to face down entrenched opposition from those who rely upon rents from the state apparatus if he is to rid his country of the unwanted tag of the “Argentina paradox,” the world’s most glaring example of a developed economy that went backward.
The Galaxy Leader cargo ship is escorted by Houthi boats in the Red Sea/
Red Sea headwinds: Will they hurt global trade?
In Davos, Yuvraj Narayan, the deputy CEO of Emirati logistics company DP World, warned that the cost of goods heading to Europe from Asia will be significantly higher because of the Houthi attacks on shipping in the Red Sea. With inflation finally starting to ease, the prospect of consumers once again feeling the pinch is unwelcome. But will they?
There are certainly signs that the disruption is persuading shippers to add thousands of miles to their journeys by heading around the Cape of Good Hope, rather than braving the Red Sea and Suez Canal, a detour that adds up to at least seven days from Asia to Europe and an extra million dollars in fuel.
Container traffic was down almost 70% on the Red Sea route in December, according to the Kiel Institute for the World Economy. The knock-on effect saw EU exports fall 2% and imports drop 3.1% in December, while global trade was down 1.3% overall. Also, standard shipping containers have more than tripled in price as they start to become in short supply.
The pain is being felt by manufacturers waiting for parts and countries like Egypt, which earns billions a year in transit fees, but many multinationals have their shipping costs covered by existing contracts and have not felt the pain. But if the crisis is contained in the first half of this year, many economists don’t see lasting consequences for global trade, given the relatively small portion of the price of expensive consumer goods or energy that are made up from shipping costs.
“The situation today is not comparable to the environment during the Evergiven accident in the Suez Canal and the coronavirus pandemic, when lockdowns led to a drastic reduction in the supply of goods, and demand in Europe exploded at the same time,” said Julian Hinz, director of Trade Policy Research Centre at Kiel. “Apart from slightly longer delivery times for products from the Far East and increased freight costs … no negative consequences for global trade are to be expected.”
The saving grace is that the oil price remains relatively benign, despite the war in Gaza and the Houthis’ actions. The price has rumbled around the high $70s for the past year and even dipped slightly after Oct. 7.
The real concern for most economists is if the conflict escalates into a shooting war with Iran, which would send oil prices rocketing. Iranian Foreign Minister Hossein Amir-Abdollahian was also in Davos and reassured the global elite that attacks by “the Axis of Resistance,” including the Houthis, would stop if the war in Gaza ended. “The security of the Red Sea is tied to developments in Gaza, and everyone will suffer if Israel’s crimes in Gaza do not stop,” he said, sending a signal of how business is done in Tehran these days.
China has deployed a huge flotilla of "fishing" vessels to intimidate the Philippines in the South China Sea. It's a major escalation of Beijing using its "little blue men" militia to do the navy's dirty work in these contested waters.
China makes a big move in the South China Sea
The Philippines on Monday demanded China withdraw a massive fishing fleet — presumably commanded by the Chinese navy — from waters that Manila has exclusive economic rights over in the South China Sea. Beijing, unsurprisingly, denied any involvement. But there's more to the latest milestone in China's increasingly aggressive strategy to assert its claims in one of the world's most disputed waterways.
"Little blue men." One of China's preferred tactics to win control of the South China Sea without a fight is by deploying its armed maritime militia to do the dirty work for its navy under the guise of "fishing." Their members have been dubbed China's "little blue men" because their role is similar to that of Vladimir Putin's famous "little green men," the Russian soldiers without official insignias who invaded eastern Ukraine on behalf of Moscow in 2014.
Having members of the Chinese navy masquerade as fisherfolk in the South China Sea is nothing new. What's different this time is the sheer scale of the flotilla: a whopping 220 vessels, no match for the ill-equipped Philippine navy and coast guard, not to mention the local fishing boats who have long complained of China chasing them out of their own waters.
China is winning in the South China Sea. For decades, China has claimed indisputable maritime rights to almost the entire South China Sea, the main commercial and navigation gateway to East Asia. About one-third of global shipping passes through these waters, which are also believed to be immensely rich in fisheries and (largely untapped) hydrocarbons. That's why the Chinese will do whatever it takes to control these waters, parts of which are also claimed by Brunei, Malaysia, the Philippines, Taiwan, and Vietnam.
As China's power has risen in recent years, so too has Beijing's determination to assert its dominance over the South China Sea. All attempts by other claimants and the US navy to challenge its provocative actions — such as building military facilities on artificial islands, disrupting freedom of navigation operations, and depleting local fish stocks — have all failed to deter China.
The US, the only individual nation with the military muscle to pose a threat to China, is no longer a major player in the dispute. Last summer, Washington recognized a 2016 international ruling — in response to a lawsuit filed by the Philippines — that struck down China's sovereignty claims (Beijing rejects the verdict). But both sides know that Americans have little appetite to go to war with China, let alone over a body of water halfway around the world.
Duterte and China. The latest incident with China in the South China Sea has put Philippine President Rodrigo Duterte in a bind. The otherwise tough-talking leader is notorious for his soft-spoken deference towards China, arguing that the Philippines is too weak to risk a confrontation with such a mighty rival.
Many Filipinos who view China with growing distrust oppose Duterte's perceived kowtowing to Beijing in exchange for Chinese investment to fix the country's dilapidated infrastructure. The promise of that much-needed cash explains his reluctance to raise the 2016 ruling with Beijing, and consent to jointly explore for oil and gas in disputed areas.
But this time Duterte has at least two reasons to show he's not Xi Jinping's puppet. Although his personal approval ratings remain high, the government has faced strong criticism for its dismal pandemic response, and for delaying the country's vaccine rollout by prioritizing Chinese-made COVID vaccines over others. Also, relations with China will likely become a major campaign issue in the May 2022 election (where Duterte himself could be on the ballot as a candidate for vice president to skirt the presidential one-term limit).
What happens next? The ailing Philippine economy is so dependent on Chinese trade that it seems unlikely Duterte will take any significant action to counter Beijing's latest swipe, no matter the political risk. And with Washington having more pressing issues to sort out with Beijing these days, China's "little blue men" are set to rule the waves in the South China Sea.OVER THE TOP: ARCTIC SHIPPING LANES
Last month, the Venta Maersk (pictured above) became the first international container ship to complete the journey from Asia to Europe through the Arctic Circle. Until now, this journey could be made only via the Indian Ocean and through the Suez Canal, or around the Cape of Good Hope and up Africa's west coast.
But an accelerated melting of the polar ice cap means that a stretch of Arctic waters known as the Northern Sea Route (NSR) has now become navigable for several months a year. The NSR has a lot going for it: the trip is 30-50 percent shorter than the traditional routes between Asia and Europe, and it has 100 percent fewer pirates.
The Venta, loaded with electronics and frozen food, left South Korea in August, made a stop in Vladivostok, sailed through the Bering Strait between Alaska and Russia, moved along Russia's north coast, and with the help of a nuclear icebreaker, passed into the Norwegian Sea. It docked in St. Petersburg last Friday.
As the ice melts further and the journey becomes more common, the balance of power in global trade could shift substantially. The biggest winner might well be the Kremlin. A sizable portion of the Northern Sea Route runs through Russia's territorial waters, allowing Moscow to set conditions for passage, grant and deny access, and impose duties along the route. The strategic and economic benefits are obvious.
More broadly, the melting ice cap will make it possible to extract vast quantities of the oil, gas, and minerals thought to lie beneath the Arctic seabed. That will only intensify the competition for territorial claims among Arctic powers—the United States, Russia, Canada, and the Scandinavians. Thus far, Russia has made the biggest claim by arguing that its continental shelf extends deep into the Arctic Circle. And making geopolitical matters more interesting, as we wrote back in April, China will want a piece of the action too.
For now, the need for accompanying icebreakers means costs are high, and the journey remains unpredictable and dangerous. One authoritative study says the route won't be economically viable for significant ship traffic until 2035. (Particularly in the world of long-term investment in transport, that's not as far off as it sounds. We're now closer to 2035 than to 2001.)