Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

Suez Shows Civilization Is More Vulnerable Than We Think

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- Vulnerabilities in global trade

The recent closure of the Suez Canal highlights the inherent flaw in the global supply chains. Choking of one of the many such points leads to disruption in the global trade.

Points of vulnerability

  • Suez Canal was blocked this week by a container ship named Ever Given when a gust of wind moved the ship out of the course and grounded it.
  • Egypt has expanded parts of the canal to enable two-way traffic and accommodate larger carriers.
  • The Ever Given ship went off course and got stuck in a part of the waterway that’s still narrow.
  • But it’s also a reminder that even an advanced civilization like ours has points of acute vulnerability. 

Avoiding single points of failures

  • Systems designers strive to avoid these single points of failure, so that transport, energy and communication networks are able to withstand attacks or unexpected calamities.
  • Technological advances and globalization were also supposed to make us less susceptible to this type of problem.
  • The internet, for example, was conceived as a decentralized system that’s pretty difficult to break, as was Bitcoin.
  • But global infrastructure, defined broadly, still has a surprising number of pinch points.
  • These can be difficult to remedy, as creating back-up options is expensive and counteracts economies of scale.
  • In some cases, the problem is even getting worse:
  • Industries are becoming more concentrated due to corporate takeovers.
  • Big chunks of our lives are now mediated by a just handful of technology companies.
  • The governments are now more cognizant of the political and economic power held by those who control choke points.

How canal can disrupt the global trade

  • The Panama Canal, the Suez Canal and the Strait of Hormuz are places where container ships and oil tankers are forced to navigate narrow passages.
  • The alternative is a long detour or more expensive air freight.
  • For decades these waterways have been recognized as areas of huge strategic importance and as being susceptible to military or terror attacks.
  • Various back-up routes have been mooted but most haven’t materialized.

Vulnerabilities in economic sphere

  • In seeking to rid itself of one pinch point — pipelines that traverse Ukraine provides gas to Europ — Germany has created another: the twin Nord Stream gas pipelines that connect Russia and Germany under the Baltic Sea.
  • The U.S. worries these will weaken eastern Europe and increase Germany’s dependence on Russia.
  • In the realm of finance, trillions of dollars of financial instruments are tied to the London interbank offered rate.
  • This rate was easy to manipulate until they were exposed in the years following the 2008 financial crisis.
  • Libor is now being replaced.
  • Similarly, Europe has long relied on the Swift payments system and the U.S. dollar, but that dependence came into question in 2018 as it disagreed with the U.S. over Iran sanctions.
  • In technology, people have warned for years that the U.S. needs a back-up for the Global Positioning System.
  • The system can be spoofed or otherwise disrupted.
  • Semiconductors are where the clearest pinch points are emerging.
  • A global computer chip shortage during Covid has forced auto manufacturers to tear up production plans.
  • Very few companies are able to produce the most advanced chips, due to the technical challenges and vast cost of constructing foundries.
  • The most important of these, Taiwan Semiconductor Manufacturing Co., is based on an island that’s under constant threat of invasion by Beijing.
  • ASML Holding NV of the Netherlands has a monopoly on the machines needed to fabricate the best chips.
  • Now China’s inability to buy the most cutting edge gear from ASML is holding back its own semiconductor ambitions.

Way forward

  • None of these choke-point problems are easy to resolve.
  • Not only are there geopolitical ambitions at work here but there are also usually trade-offs between building greater resilience and efficiency.
  • But because redundancy offers protection and is therefore a public good, there’s an argument that governments should play a role in providing it.
  • Antitrust polies can be used to challenge monopolies and foster more competition.

Consider the question “What are the threat emanating from the various forms of choke points to the global trade? Suggest the ways to deal with it.”

Conclusion

Having a back-up is a good idea. We learn that when the roof falls in, or when a ship called the Ever Given snarls up the Suez Canal.

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