Global Trade at Geopolitical Crossroads

2017 was a difficult year for the shipping industry in various respects including geopolitical developments, which raised many eyebrows across the board. Rising protectionism and an anti-globalization sentiment have emerged as major concerns of the market players.

The year opened with the inauguration of a new American president, Donald Trump, who is championing the “America First” ideology. In Europe, the United Kingdom decided to pull out from the European Union, while in Germany, France and the Netherlands, right-wing and anti-EU parties secured major support from voters in national elections. Furthermore, tensions between the Western powers and North Korea continued to heighten over Pyongyang’s nuclear program.

However, the global trade seems to have endured numerous challenges and there have been signs of gradual recovery.

As the industry enters a new year, World Maritime News spoke with John Sitilides, Geopolitical Strategist at Trilogy Advisors in Washington D.C., on geopolitical challenges that lie ahead. Sitilides is a diplomacy consultant to the U.S. Department of State and a keynote speaker on global risk management and American politics.

Speaking of the impact of growing popularity of protectionist policies on global trade primarily led by the Trump Administration, and Trump’s refusal to sign any regional or multi-party trade agreement, Sitilides said that Trump’s election and the Brexit vote reflect the growing national impulses of citizens in advanced economies around the world.

“They are concerned about the wealth imbalances brought about by globalization, and increasingly furious about political corruption and evasion of justice by their own elites. They expect their political leaders to advance sovereign interests above multilateral agreements that may benefit political and financial leaders at the expense of the broader citizenry,” Sitilides explains.

President Trump has stated his intention to correct trade imbalances caused by “unscrupulous practices against the U.S. by countries or companies cheating on trade deals, or supporting unfair tariffs, subsidies and trade barriers.”

The Trump “America First” agenda is designed to repudiate what he sees as the complacency of prior administrations regarding the gradual deterioration of America’s competitive and strategic position, Sitilides continues.

“He has made clear he will oppose trade deals that compel the U.S. to adhere to rules and agreements to which other countries adhere selectively, or where foreign markets are closed while the U.S. markets remain free and open, to the effect of “In a rules-based global order, everyone should follow the rules.

“With special emphasis on China, President Trump will likely pursue in 2018 an agenda that communicates that American interests will not go unchallenged without inviting a bold response, such as rescinding China’s status as a market economy in the World Trade Organization, given the onerous restrictions China imposes on foreign investors and companies,” Sitilides added.

With respect to the shipping industry, the U.S. President has decided not to repeal the Jones Act, a policy widely supported by the U.S. shipping industry.

This comes at a time when the U.S. economy records a healthy 3 percent growth pace for the first time in more than a decade, with increased shipping between U.S. ports, as well as increased imports and exports.

In addition, Trump has voiced his intention to open most of the continental shelf of the United States along the Atlantic, Pacific and Arctic Oceans to drilling. The move is likely to provide additional opportunities for U.S. shipping in an increasingly competitive global environment, Sitilides continues.

WMN: Since the U.S. also pulled out from the Paris Agreement and did not participate in the latest declaration signed in Paris on cutting emissions from shipping, could these be signs of the country’s lagging behind its global counterparts in the sector?

Sitilides: The United Nations estimates that if every signatory to the Paris Agreement fulfilled every carbon reduction commitment through 2030, total emissions would be reduced by 1/100th of what is needed to keep temperature rises below 2 C – a negligible change at an exorbitant cost of up to USD 2 trillion every year for the next 12 years. The cost to the U.S. economy alone would have exceeded USD 150 billion annually.

According to the BP Statistical Review of World Energy, annual U.S. carbon emissions since 2005 have declined by 758 metric tons, just about the same as all the countries of the European Union combined. In the same period, China’s carbon emissions grew by 3 billion metric tons, and those of India by 1 billion metric tons.

The decline in U.S. carbon emissions had nothing to do with the Paris Agreement or any similar unenforceable international agreement. It had everything to do with the revolution in horizontal drilling and hydraulic fracturing, and related technological breakthroughs that have delivered vast natural gas reserves onto the U.S. and global markets. In America’s own energy markets, cheaper natural gas has replaced coal in many consumer and power-generating functions, further reducing emissions.

WMN: Moving ahead, the U.S. seems to be taking on a smaller role in reshaping global trade. China, on the other hand, is taking over as a major driving force of global trade development. How do you see the situation developing? Is China winning the geopolitical game?

Sitilides: The U.S. remains the dominant actor shaping global trade, with China close behind in volume, but far behind in terms of political influence and diplomatic stature that is critical to international commercial arrangements.

Chinese President Xi Jinping delivered a siren song of open trade and liberalization at the World Economic Forum earlier in 2017, yet the Chinese government still engages in outright protectionism across a range of sectors and functions of which every trading partner and its political leadership are fully aware. Beijing purports to promote trade liberalization, but closes off major domestic sectors to international investment, requires government participation in media companies, and requires handover of IP rights for technology companies seeking access to domestic Chinese markets.

Its infrastructure and related investments to build major projects abroad usually require an imported Chinese labor force, rather than local or national. Financial support is exploited to coerce pro-China votes at the United Nations and other multilateral institutions.

From Washington’s perspective, trade is one of the pillars of President Trump’s new national security strategy. Washington intends to renegotiate weak trade deals, promote new arrangements that can help protect American workers, and secure the “national security innovation base” that protects U.S. technology and other intellectual property.

Diplomatic tensions

Touching upon the numerous security threats and diplomatic tensions among key world powers such as the U.S. and North Korea and the Arab world and Iran, Sitilides said that the geopolitical risk of regional conflict between Iran and its neighbors will intensify in 2018, as the Trump Administration will steadily tighten available sanctions around Tehran, and more strictly enforce the terms of the 2015 nuclear deal.

“North Korea is also an issue that had been dealt with, in retrospect very poorly, by every U.S. administration dating back to President Clinton,” he added.

According to Sitilides, Trump seems determined to persuade both Beijing and Moscow that they have a critical leverage to exert on the North Korean leader and the military that keeps him in power, or risk a potential conflict with devastating consequences not only on North Korea but throughout the Pacific region.

WMN: As we enter the new year, what geopolitical trends are likely to impact trade in 2018?

Sitilides: Geopolitical risk is powerfully impacting the critical decisions of corporate executives and investment managers more than at any other point in recent history. That’s because the global landscape has become among the unstable in recent memory, given the inexorable yet revisionist rise of China, the resurgent ambitions of Russia, the deadly regional and global aggression carried out by police states Iran and North Korea, and the metastatic nature of radical Islamist terrorism across northern Africa, south Asia and into the South China Sea.

A major survey shows that more than 44 percent of institutional investors rank geopolitical uncertainty as their greatest current concern, prompting them to more intensively refocus their business models on political risk management. Given strategic choices in China, Russia, Europe, the Middle East and India, among great centers of regional and world power, this geopolitically unstable risk environment is projected to endure well into the next decade, with the possibility of serious further deterioration, regardless of the outcome of the 2020 Presidential election.

In addition, Sitilides stressed that a focus should be put on the upheaval of global energy markets because of the shale revolution.

“The United States is becoming an energy powerhouse, expected to increase crude oil production by another 10 percent in 2018, and surpassing both Russia and Saudi Arabia as the world’s leading crude oil producer for the first time in four decades. It’s just one more reason shipping industry executives need the surest insights and well-informed guidance to better understand and mitigate disruptive risk, and build a sharper competitive edge to withstand geopolitical crosswinds,” he pointed out.

WMN: What could be the impact of these political developments on global trade patterns? Are there any discernable shifts we should be aware of?

Sitilides: The choices world’s most powerful leaders make, especially in those capitals actively violating and seeking to overturn international norms and institutions, pose significant geopolitical risks by threatening conflict on or near strategic chokepoints that will bottleneck or close vital shipping lanes. That spans the South China Sea, the Straits of Hormuz, the Malacca Straits, the Indian Ocean, the Gulf of Aden (Bab Al-Mandeb), the Suez Canal, even the Arctic region and the Panama Canal in the years ahead.

Against this global landscape, we now factor in a U.S. administration that continues to surprise and confound allies and foes worldwide, impacting shipping and a broader range of U.S. and global industries across the spectrum of sectors. As a result, the international security environment focused on trade, import/export services, and supply chain management involving shipping through critical chokepoints will remain fluid, dynamic, uncertain and in relentless flux for the foreseeable future.

Interview conducted by Jasmina Ovcina Mandra, Editor, World Maritime News