The explosive growth in global shipping during the past decades was underpinned by the stark acceleration in globalization and global trade that occurred since the 1980s. That story was based on a simple pattern: manufacturing was moving from the West to the East, especially to China, which had just opened its economy in the late 1970s, in order to serve the rich markets in North America and Europe at more competitive prices.
This huge shift in industrial production brought industrialization to the East and low inflation to the West; but it also created the busiest shipping routes in the world, from China to Europe and the USA.
Of the top 10 busiest container ports in the world, 7 are in China, one in Singapore (2nd place), one in South Korea (6th place), and one in Dubai (10th place). This tells a lot about the main direction of shipping routes.
Shipping volumes slumping
Yet, in the port of Hong Kong, which ranks number 7 and perhaps more than anything else exemplifies the robustness of the trade between China and the West, there are thousands of container ships standing idle on the sea.

Shipping volumes from Hong Kong contracted 12% year-to-date; of course, the main culprit is the Covid-19 crisis that essentially shut down entire economies worldwide, and, for the first time in their history, in all the developed countries in the West. Without the end markets needed to consume the merchandise produced in China, especially consumer goods, it is not surprising that trade flows have shrunk.
However, that could signal that something is going to change in the long term, i.e. that production might reverse back to West.
Narrowing wage differentials
First, the wage differential between emerging economies and developed markets is shrinking; we are not talking the former Asian tigers, the manufacturing hubs of the 1970s, but also of Malaysia, Thailand, and of course China. Some production is shifting to Vietnam, but that country is growing so fast it will catch up with its neighbors soon.
Robotics and automation
Second, even where labor cost differentials persist, the revolution in robotics and automation will mean that production costs overall will remain under control. Potentially, they could even be lower in more advanced economies that replace workers with robots, such as Japan. On the other side, it will be more important to serve customers quickly, as the e-commerce revolution is showing, which will command that production be closer to consumption than what has been in the past.
Political risks and national security
Third, the Coronavirus crisis is exposing a long-dated political risk. Governments scrambling to ramp up production of medical supplies or consumer staples find out that these essential products are produced far away from their national borders, where governments have no power. Adding this to the risk of escalating China-US tensions, it is likely that governments will want to bring more and more production onshore for national security reasons.
Fallout on the shipping industry
How much will this affect the global shipping industry? Maersk expect a contraction this year of almost 6% between East and West routes, but the downbeat figure is still related to the Covid-19 crisis. Whether that number will be the first of a negative trend or just a short-term slump remains to be seen.
Globartis Research
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