The Effect of Politics on Global Trade
As tensions heighten across the world with conflicts spanning across West Asia, Europe, and South America, it is important to analyze how those conflicts affect the flow of trade worldwide.
What does the conflict landscape look like right now?
Right now, civil conflict is rising year over year. With conflicts expanding in Ethiopia, Ukraine, and Gaza, the Peace Research Institute of Oslo reports that conflict-related deaths have risen to its highest level in the past thirty years. In a more convoluted sense, multiple countries are facing more than one conflict at a time, making geopolitical relations even more complicated.
How has that holistically impacted trade?
As tensions rise up across the world, global growth has also darkened. With higher trade tensions directly impacted growth outlooks and foreign policy, banks have been changing their monetary strategies in order to combat slowing progress.
More importantly, there has been a shift in investment flows, now more tightly connected to geopolitical lines than they ever were before. That is exemplified with the world’s major players: the International Monetary Fund reports that during a flare up of tensions between the US and China, US imports to China dropped 8%, and the US share of Chinese exports dropped 4%.
With the world essentially divided into a US trade bloc, a China trade bloc, and a nonaligned trade bloc, it is easy to see how trade is incredibly politicized. In fact, right after the Russian invasion of Ukraine, trade between those blocs declined between 12-20%. Though trade has been increasingly controlled by political factions in recent years, a full decoupling is likely never possible due to the increased intertwining of economies in a post-COVID world.
West Asia’s effect on shipping
Over the past six months, the Houthi rebel group of Yemen have launched more than 60 attacks on specific shipping vessels, killing 4 sailors, seizing one ship, and sinking two during their campaign. With that, comes retaliation: according to the Houthi rebels themselves, a US-led airstrike campaign on May 30th killed at least 16 and wounded another 42. The Houthis have centered their attacks on ships linked to Israel, the US, or Britain due to their stances in the war, yet many of the vessels attacked have virtually no connection to the conflict.
Aside from further exacerbating conflict within the region, Houthi attacks on vessels have severely messed up the global flow of trade. Since November of 2023, when the Houthis initially started targeting ships, the cost of shipping has increased by over 300% on aggregate. For example, the cost of moving a 40-foot shipping container between China and Europe used to cost roughly $1,200; now, that same distance costs nearly $7,000.
Though supply chain disruptions have been the main cause of price stress for importers, container shortages and increased fuel prices only make the problem worse. Due to an imbalance in container availability, a severe mismatch in supply and demand has forced shipping companies to charge premium rates for container space alone, severely driving up overall shipping costs. Increased fuel prices, driven by geopolitical tensions, have also significantly driven up the cost of shipping, especially given that fuel expenses account for a substantial portion of overall cost.
Conclusion
Though the trade situation of the world looks dire as is, it can always get worse. That’s why, many argue that the best solution to this problem is through diplomacy, instead of continued retaliation. From a world leader’s point-of-view, it may seem tempting to retaliate against a group hindering your economic growth, but coming to the table and talking is the only way to ensure that current problems don’t get exacerbated in the long run. Therefore, the only way that we will see any progress made is if leaders and heads-of-state participating in these situations choose cooperation over conflict.
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