Ruling the Waves: How Politics Can Impact International Shipping

Today’s business environment is extremely fluid. The best-laid plans of logistics and shipping companies can often be derailed by unforeseeable external developments. Here are instances of how politics can influence international shipping:

Protectionism

A protectionist policy restricts trade between countries by taxing imported products, thereby pushing consumers to buy domestically. A good example is the current spate of uncertainties and speculations surrounding President Trump’s plans to impose taxes on international trade, and its impact on international shipping.

During his campaign, the president proposed a 35% tariff on Mexican imports and 45% on Chinese imports. He spoke about withdrawing from the Trans-Pacific Partnership Agreement to boost domestic production and thereby protect American jobs. The elephant in the room is the caveat for re-negotiations with treaty countries such as Mexico and Canada to make the terms more favourable to the U.S.

With 90% of the world’s trade carried via ocean, the passage of these proposals could result in disruptions as well as price increases which may ultimately alter demand for business.

Wars and Conflicts

A current worry among global shippers now is U.S.-China tension over conflict in South China Sea. Another worry is the Middle East, with tension of war in Syria, Iraq and Iran. Such tensions could interrupt trade deals with partners around the world and, ultimately, even obstruct shipping. Uncertainty about how President Trump will tackle these situations adds to the ambiguity.

Taxation and Interest rates

It’s not just import-export policies or political positions that have a bearing on trade and commerce. A cut in government programs or higher taxes can potentially result in less money in the market and lower demand. Rising interest rates may have a similar impact, as fewer customers may be inclined to use their credit cards, reducing demand and, by extension, the overall volume of international shipping.

Regulations

Regulations can have a direct impact on the shipping industry. For instance, regulations on greenhouse gas emissions can impact the cost of the trucks needed for shipping fleets. Ocean freight is the least regulated among all logistics modes, but by no means immune from it.

Environmental concerns are at an all-time high with air pollution and destruction of marine ecology being the two most pressing areas. A number of emissions control technologies and operational strategies are in use or currently being evaluated, but ultimately local level regulations call the shots. In most cases, such local level regulations are influenced by political considerations.

The overall regulations depend largely on the economic and political outlook of the party in power. A government that is inclined to pursue neo-liberal policies, for instance, could pass more legislations favoring industries and big businesses, while a government inspired by socialism could push policies favoring small businesses.

Impact of Globalization

Globalization is here to stay. Today, agro-products harvested in one continent are often shipped to another continent for processing and to yet another for assembly before being delivered back to a market in the other end of the world. For example, cotton grown in North America is sent to the fabric mills in Africa and then to the apparel factories in Asia for processing. This is done to leverage the low labor and overhead costs before returning the finished goods back to Europe and North America for retail sales.

Political factors have a big influence on the movement of such goods. For instance, political disturbances such as civil unrest in the African country may disrupt the value chain, forcing diversion of goods for processing elsewhere, or even processing at the source, doing away with the need for shipping. Political activism that exposes child labor or slave labor may have a similar impact, forcing processing at sources in closer proximity and potentially eliminating the need for ocean shipping.

Until the 1950s, most crude oil was refined at the source and transported to markets in a number of small tankers. However, economies of scale soon made oil companies realize the economic benefits of shipping larger amounts of crude from distant locations to refineries located closer to product markets, giving rise to super-tankers.

Other Political Factors

The global movement of goods through the ocean, inland waterways, railways and roadways constitutes an important element in the freight transportation system. An effective freight transportation system ensures seamless connectivity and multiple shipping options to the senders of the cargo.

Many international shipping options involve balancing trade-offs to facilitate trade. While economic factors such as cost, time and reliability of delivery play a key role, political factors are often underestimated.

While low-cost options may be preferred generally, for sensitive cargo, where time is money, quick delivery may override other considerations. Threat of pirates in high seas, chances of bottlenecks in ports, trade union activism, inflated cost of loading and unloading cargo, corruption in third-world countries, civil or other disturbances hinder reliable movement of cargo. These can all be clubbed as political factors that can distort the shipping industry and influence the choice of transportation.

While politics may seem detached from economic considerations, the reality is that no shipper or business can afford to ignore political factors which often shape the external environment of the business.

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