Coming Around Again

Malcolm Latarche
Malcolm Latarche
ShipInsight

20 February 2017


The saying, the wheel has come full circle is quite apt for the situation the world finds itself in at this moment for in many respects parallels can be drawn with the situation and attitudes of the 1970s and 1980s.

All through history shipping has needed to adapt its operations to the realities of changing geopolitical situations. Sometimes that has resulted in rapid growth and technical innovation and at others a need for retrenchment or a rethink of strategies. In every case there have been casualties and survivors and the current crisis – for that is what many see it as – is no different in this respect.

Looking back at the 1970s and 1980s, shipping had been forced to come to terms with a spike in fuel costs, global recession, seismic political changes and a flood of new regulation. There was also a heated political debate around globalisation and the merits or otherwise of free trade.

The oil price hikes of the 1970s were tackled by a rapid increase in ship size not unlike what has happened in the bulk and container sectors more recently. The popularity of ultra-large crude carriers was not to last and quite a number of them turned out to be white elephants that made only a handful of voyages before being sent to the scrap yards at ridiculously young ages.

The recessions of 30-40 years ago was mostly a result of the oil crisis but the time was also the beginning of globalisation with production starting to shift from the developed western world towards the Far East. The Asian Tiger economies of Singapore, Taiwan, Hong Kong and South Korea boomed throughout the period but were soon to hit the buffers in the mid-1990s dragged down by non-performing corporate loans and company failures.

Coming to terms with new regulation was a fact of shipping life in the 1970s and 1980s with the SOLAS convention if 1974 and the 1988 version which introduced GMDSS and the age of mandatory satellite communications. On the environmental front, MARPOL was first developed in 1973 and amended in 1978 before coming in effect in 1983. Initially only pollution by oil, noxious substances and garbage were regulated with the Annexes covering harmful substances in packages, sewage and emissions to air still in the future with the latter proving a particular problem at the present time.

On the political scene, the UK had held a referendum on leaving the EEC – the forerunner of the EU and primarily concerned only with trade and not social engineering – although unlike 2016’s embracing of Brexit, the result was in favour of remaining. The UK had a woman prime minister and a major political bloc looked to be on the verge of collapse. Then it was the USSR today it is the EU.

The US had elected a Republican, Ronald Reagan, as President; a non-career politician (although he had been governor of California) who was initially referred to frequently as a cowboy partly as a reference to his acting past but also to his attitude which was seen as naïve and impetuous. Many see similarities with the current President which may well be a good omen for Donald Trump as Reagan’s legacy is generally seen as positive.

The possible rollback of globalisation is seen as a major threat to world trade and shipping. Several observers saw Brexit as the beginning of a reversal of globalisation with disaffected populations in Europe taking the lead in forcing governments to change tack. Just days after the vote, Huang Yiping, a member of China’s central bank monetary policy committee, said Brexit could mark a “reversal of globalisation”, which would be “very bad” for the world.

Globalisation has had a big effect on shipping over the years with production of goods of many types and particularly heavy industry having shifted from Europe and the US to Asia altering trade routes and creating inbalances in liner trades. While corporations have profited from cheaper labour, displaced workers in the west have not received the promised trickle down benefits and this has led to great dissatisfaction among populations. There are many who believe – including the President Donald Trump - that the time has come to repatriate some production and industries.

Globalisation was a term not often heard in the 1970s but by the 1980s the economic consequences were becoming a topic of much debate. According to an IMF report of some two decades later, the use of the term in the 1980s related to technological advances that made it easier and quicker to complete international transactions—both trade and financial flows. However, some economists and politicians of the time showed a better understanding of what the consequences of globalisation were likely to be especially as it was becoming inextricably linked to free trade and the removal of tariffs.

One of those on the losing side of the argument in the 1980s was the economist John Culbertson who in the September 1986 issue of Harvard Business Review wrote “Today the evidence should be clear to anyone who wants to look at it: our blind allegiance to free trade threatens our national standard of living and our economic future. By sacrificing our home market on the altar of free trade, we are condemning ourselves and our children to a future of fewer competitive businesses, fewer good jobs, less opportunity, and a lower standard of living. These unacceptable outcomes threaten us in ways that are all related to our practice of free trade. As we practice it, free trade has profoundly destructive results for the United States and other Western nations”.

What has transpired in the intervening years is that all over Europe and the US where consumerism has driven the growth in world trade, manufacturing has been shifted to Asia and the promised returns of globalisation in trickle down wealth to ex-employees have not happened. Instead, executive salaries have soared to stratospheric levels and dividends to bond holders have likewise increased. While some countries can point to employment statistics as evidence of the success of globalisation, the disposable income of many of the population are well below former levels. In addition, much of the supposed improvement in employment levels is due to hiding unemployment behind extended education age and self-employed statistics.

Culbertson may have not foreseen that at well as competition from foreign manufacturers, domestic organisations would abandon home manufacturing and switch production to lower cost labour areas. He died in 2001, so never lived to see how 30 years after he wrote those words that the electorates of the western world would respond positively to those that shared similar views.

Shipping has done well from the growing trade in the same period but any realist would admit that the rate of growth in the last five to ten years had slowed considerably even before Brexit and Trump’s election. The slowdown has flummoxed some economists and commentators who see rising GDP around the globe but diminishing trade volumes.

In the digital age, the disconnect should not be so surprising. An awful lot of products today are not physical artefacts but computer code that can be streamed, downloaded and distributed with nothing more than a connection to the internet. In addition, the service sector is also a bigger contributor to a nation’s wealth than manufacturing or primary industries in most countries. As an indicator of the value of economic activity in a country GDP may suffice but, being just a total figure, it masks the distribution of wealth across the population. JAM, Theresa May’s new acronym for the ‘just about managing’ probably covers a large part of the population and as their discretionary spending is limited this will be reflected in trade.

Shipping executives and analysts should care little about GDP and values of trade because the industry exists solely to carry volumes of cargoes and it is clear that in many areas it is volume that is decreasing. That is not helped by financial institutions investing in ships as assets because if a ship is built based on a project return and the intended return does not materialise, the physical presence of the ship drives down profitability for all. It is not something that can easily be converted into something else in the way that a factory production line can switch from televisions to computers with only minor modification.

If looked at more carefully, the pushback against globalisation and a return to a more protectionist attitude, may well promise more for shipping than the alternative. Trump’s well signalled intention to tax imports that could easily be produced in the US by US firms instead of in plants owned by those firms but located outside of the US had produced commitments by US automakers even before he took office.

There have been more employment positions created since and a promise to revitalise the US coal mining sector and to rescind some of

President Obama’s restrictions on energy exploitation on Federal land and in US waters will likely create more. An infrastructure renewal programme will both add jobs and push demand for raw and construction materials which may involve some imports.

A promised benign corporate tax regime will also aid US and foreign corporations to expand in the US. All of this bodes well for shipping across many sectors. Tankers, bulkers and offshore from energy related policies and the liner sector as well since the average US citizen is an avid buyer of consumer goods when their personal finances allow.

In Europe, the UK after Brexit is concluded is hoping for an opening up of trade. Like the US it has a hill to climb in re-establishing its manufacturing sector which has declined over the last 30 years but a promising start has begun with some of the dire predictions made prior to the referendum now appearing to look overblown as some economic indicators turn positive.

This year, three major European economies will be facing elections, the outcome of which will almost certainly impact on the future existence and direction of the EU. Both France and the Netherlands are experience a populist surge and in Germany, Angela Merkel’s position as Chancellor is looking shaky. Populism has been painted as a right-wing political movement but it is in reality nothing of the sort. Looking after one’s own without being expansionist is what most reasonable people would say is the true role of government and politics.

For shipping, a different role for the EU structure that exists once Brexit and other political upheavals have settled down could bring benefits for shipping. There appears to be a growing acceptance among the EU elite that the organisation is no longer fit for purpose and that it must change. But, as long as some seek a more federal EU and others a looser trading arrangement and little more, what the eventual outcome will be is anybody’s guess.

As far as shipping is concerned, the EU has been both good and bad. It has provided funds for many useful development projects but it also seeks a controlling role that is not universally accepted as being beneficial to shipping companies. In fact, some of the EU’s actions affecting shipping have often driven a wedge between the shipowners’ associations of the different member states. This has included the Sulphur Directive, imposition of regulations in advance of IMO timelines, ship recycling, a relentless pursuit of shipping to be included in emission trading schemes, MRV, and even e-navigation which could be commandeered to change the very nature of the contractual arrangements between shipowner, charterer, shipper and receiver.

There is very little merit in the argument that a single policy for 28 nations, some of which have a rich shipping heritage, is the best course to take. Arguably some of the EU member states for which shipping is a major economic contributor would prefer to chart their own course when developing rules and regulations at the IMO. This is perhaps demonstrated by the fact that as long as international codes and conventions require ratification by individual states, there is no correlation with the EU’s position on ship recycling and the number of member states that have ratified the Hong Kong Convention.

There is no doubt that the events of 2016 and this year will make for turbulent times and while some of the down side has already been experienced there is sure to be more to come. It is under such circumstances that those with foresight will come to the fore and others will sink without trace. Presently the chosen survival strategy seems to be to consolidate but there will come a time when the next cycle for shipping will begin and so the wheel will turn again – until the next time. W