Larry Fink, the CEO of the world’s largest asset manager, recently wrote in his letter to shareholders that globalisation as we know it is over. The war in Ukraine, he argues, marks a turning point in the world economy—though the momentum of globalisation had been slowing for many years.
Fink’s pronouncement caused a stir among the international capitalist class. The Financial Times featured an editorial opining that ‘global capital has, for the past 40 years or so, flown too far ahead of national economies, creating stresses and inequalities within many nations.’ FT journalists, of course, have been some of the greatest cheerleaders of this process, which made the conclusion all the more striking.
But before we decide whether globalisation is over, it’s worth considering what it actually amounts to. In a sense, it isn’t anything new—more than two thousand years ago the Silk Road connected East and West. But under capitalism, and particularly its neoliberal variety of the latter part of the twentieth century, globalisation came to mean something quite specific.
The world economy is a complex system composed of a multitude of intertwined but distinct networks—networks of people, goods, money, or even ones and zeros. These networks are characterised by constant movement. People move, goods move, money moves and data moves—and they always have. Under capitalism, however, this movement takes a new form. Movement becomes the prerequisite for growth, which is in turn the prerequisite for the stability of capitalist social relations. The system, in other words, cannot survive without movement.
Capital has to circulate to generate value, just as blood has to circulate around the human body to deliver oxygen to our organs. If there is a blockage, the whole system breaks down—often rapidly and without warning—whether that blockage is a build-up of plaque in a human artery, or a ship stuck in the Suez Canal.
The Covid-19 pandemic provided a vivid demonstration of what a stagnant global economy looks like. The world economy contracted by 3.3 percent in 2020—the largest recorded contraction in global GDP since the Second World War. Much of this decline was driven by falling trade volumes, which fell farther and faster than at any point since 1945. While in some respects, Covid-19 united the world in a common cause, it had a profoundly deglobalising impact on the economy.
Globalisation as a Political Project
Globalisation has, up to now, been synonymous with growth. The uneven growth and prosperity of the past several decades has been premised upon global economic integration. Falling transport costs made it efficient to split production into an ever-larger number of discrete processes, before the product was assembled and shipped to its final destination.
Disparities in wages and labour laws between different jurisdictions made such a strategy highly profitable for some companies, which were able simultaneously to take advantage of low labour costs in one part of the world and high purchasing power in another.
This movement of capital is an inherent feature of capitalism, but globalisation was also a political project driven by those seeking to promote their own class interests—removing barriers to the movement of goods and capital while constructing barriers to the movement of people. The disparity between the two has delivered huge gains from trade for capital, as the fixity of ‘human capital’ has prevented the equalisation of wages throughout the world economy.
With every potential barrier to trade and investment that was cleared—technological, physical or political—the profits that could be generated from this system of globalised production increased. By the late 2010s, we lived in a world of ‘just in time’ production, within which companies could manufacture and ship their products based on current demand, obviating the need for expensive inventories.
This system broke down in 2020, when factories that acted as key nodes in production networks that spanned the globe began to shut down, and ships carrying millions of dollars’ worth of cargo found themselves trapped at sea. Just in time production turned from one of the multinationals’ greatest assets into a huge liability.
One of the many lessons that could have been learned from the financial crisis of 2008—the last great crisis of globalisation—is that increasing the speed with which capital flows around the world increases profits, but it also makes the system more fragile. In a fast-moving economy—just like a fast-moving racetrack—the potential impact of a sudden stop is much greater.
While the shock experienced in 2020 owed to obstacles to the movement of goods, the shock experienced in 2008 was about obstacles to the movement of money. US banks made billions minting new securities—MBSs, CDOs and the like—based on the mortgages they were issuing to consumers. For as long as the money kept flowing, no one was paying much attention to what was actually in these securities.
But when the money stopped flowing—when you couldn’t simply create a new mortgage, turn it into a security and sell it to someone else—suddenly everyone had to start worrying about what on earth they had bought. If the banks didn’t know what was on their own books, they certainly didn’t know what was on their neighbours’ books—so they stopped lending to each other and many collapsed as a result, only to be bailed out by governments.
The impact of this crisis was so far-reaching that, unlike during each previous crisis, the international flow of dollars never recovered to its pre-crisis peaks. We are still far from the end of dollar hegemony, but we are also far from the days of endless, uninterrupted growth in US—and indeed global—financial markets.
The Covid-19 pandemic and the geopolitical chaos that followed will be to international trade what the financial crisis was to international capital flows: a point of fundamental rupture. And nowhere does this seem clearer than in the case of global shipping.
Covid’s Shipping Chaos
The planet’s oceans, rivers and canals are the veins and arteries of the global economy; container ships are its blood; and commodities are its oxygen. 90 percent of the world’s goods are transported by ship—most along a few highly congested routes that link commodity producers in China with consumers in the US and Europe.
At the best of times, the world’s intricate system of sea freight works like a finely oiled machine. Goods are produced in massive industrial zones like Shenzhen in China. They are loaded into containers, which are transported to nearby ports. The containers are loaded onto container ships by crane—a process that can take several days, and up to a week for the largest vessels.
Those vessels leave Chinese ports and make the 15–20-day long journey to a US destination like the Port of LA, the busiest port in the US. Over the next several days, the containers are then unloaded onto trucks, which transport their cargo to warehouses. Warehouses take the stock, ready to distribute it to producers and consumers via road.
The whole process of turning a ship around from China to the US tends to take around 60 days. And the process of loading and unloading at ports is constant. Once one vessel has left the port, another vessel arrives. The system is perfectly tuned to ensure maximum efficiency—and therefore profit.
Covid-19 hit this system like a heart attack. First, factories in China shut down, meaning there were fewer goods to load onto the ships docked at ports. At the same time, ports in China and the US were hit by worker shortages, which made it harder to load and unload the cargo that was available. New orders also slowed down as uncertainty about the future of the global economy affected consumption and investment.
What’s more, many boats were simply unable to dock because of Covid restrictions. This was a disaster for the already deeply exploited seafarers who made up the crew on these container ships. Many found themselves adrift, unable to see their families, and often without pay, for months on end.
But as the pandemic wore on, traffic began to pick up again. Factories across China reopened and re-started production. Restrictions on ships entering and leaving ports were eased. And most importantly, consumers in the global North started buying stuff—in fact, far more stuff than they had previously because they couldn’t spend their money on services.
This trend only deepened with the massive interventions undertaken by states across the world to prop up demand. When the Federal government sent out stimulus cheques to households across the US, much of that cash was spent on goods like exercise bikes and electronics. With supply already compromised due to factory shutdowns earlier in the pandemic, this increase in orders led to shortages throughout the world economy—particularly of critical inputs like semi-conductors.
Suddenly, everyone wanted to move everything as quickly as possible, but the infrastructure was still compromised from the shock of the sudden stop that had taken place. There were backlogs due to the hundreds of ships, carrying hundreds of thousands of containers, that had spent months stuck at sea and now needed to be unloaded before new ships could dock.
Capacity became an acute issue. Container production increased on the news, and several companies—shipping companies and producers themselves—announced plans to invest in new ships. But the impact of these decisions wouldn’t be felt for many months.
Storing Up Trouble
In addition, workers in many parts of the world were still scarce. As employment surged in the US, shortages in particular sectors—especially logistics—became acute. Even if it was possible to find enough workers to unload all the containers from the ships, it was often not possible to find enough truck drivers to take the containers to their final destinations, or warehouse workers to unload them.
The turnaround time for a ship travelling between China and the US increased from an average of sixty days to one hundred days as these backlogs transformed the ultra-efficient system of global shipping into a tangled mess. Shipping companies were being flooded with requests, but there simply wasn’t enough capacity within the system. High demand and low supply allowed companies like Maersk, Cosco and MSC to increase their prices. By late 2021, the cost of shipping to the west coast of the US from Asia had risen 330 percent in just one year.
This price hike also made the trip to the US from Asia twenty times more expensive than the reverse journey. Companies were loading up on goods in Asia, shipping them to the US, and bringing back empty containers because it was more profitable for them to return to China empty than to wait for US exporters to load up their cargo. None of this was helped by the latest Suez Crisis, which saw the Ever Given block the canal for six days.
Just like banks packaging up and reselling mortgages, the quest for ever greater profits in shipping worked fine for as long as it was smooth sailing for the world economy. But as soon as a storm hit, the entire system ground to a halt. At the peak of the shipping crisis, more than one hundred ships were waiting to dock off the coast of California. If you laid the containers waiting on those ships end to end, they’d reach from LA to Chicago.
While the shipping companies were making millions, the costs were being passed on to consumers. Higher shipping rates translate into higher consumer prices, but not until many months later, so much of the inflation we’re experiencing now is the result of those historic effects. The United Nations Conference on Trade and Development (UNCTAD) estimated that higher shipping rates during the Great Lockdown pushed up inflation by 1.5 percent.
Things have improved somewhat since the end of 2021. President Biden has ordered ports to remain open 24/7 as ports try to clear backlogs and has threatened to impose fines on ports that fail to meet his targets. Ports on the east coast have also become much busier as traffic was diverted away from the clogged-up ports on the west coast. As a result, the number of long-dwelling container ships sat outside LA-Long Beach fell by fifty percent between October 2021 and January 2022.
But this improvement has been relative. As I write this article, there are nineteen container ships queuing up outside the ports of LA-Long Beach. And there are now far more on the east coast too as ships are diverted away from the busy west coast ports. In mid-April, there were eighteen ships waiting off the port of Charleston, North Carolina, and twelve outside Norfolk, Virginia.
But that’s not the worst news. At the time of writing, there were a staggering 344 ships waiting to load or unload at the Port of Shanghai, and more outside Shenzhen and Qingdao. The delays in China are part of what has made it easier to clear congestion in US ports, but slower exports from China will cause delays and shortages in the US over the coming months.
Last year, many experts predicted that the backlog would be cleared by mid-2022, after which costs would fall and the global shipping system would return to normal. But now, many are not expecting congestion to ease again until 2023. The reason: renewed lockdowns in China and the Russian invasion of Ukraine.
China’s zero Covid strategy has led local governments to impose harsh lockdowns in response to the rapid spread of the Omicron variant in cities like Shanghai. Even with ports still operating, a shortage of workers is leading to far higher loading and unloading times.
This blockage is once again impacting the availability of both ships and containers. Some estimates suggest that between ten to fifteen percent of capacity has been removed due to congestion, pushing up prices. One measure of global shipping prices—The Freightos Baltic Index—is at nearly $10,000, up from $1,400 in March 2020. And shipping a container from Shanghai to LA will cost you 158 percent more than it would have a year ago.
Then there’s the war in Ukraine. The United Nations Conference on Trade and Development has conducted a simulation to assess the likely impact of the war on supply chains. Prior to the war, around 1.5 million containers were being shipped through Russia by rail. As the report notes, if those containers all end up being transported by sea ‘this would mean a five percent to eight percent increase in an already congested trade route’.
UNCTAD notes that this disruption will likely lead to a further increase in shipping rates. Shipping tanker earnings in the affected region have already increased from around $10,000 per day on 18 February to an astonishing $170,000 per day on 25 February. Costs on these routes have only increased by around 400 percent, so most of this increase is accruing to shipping companies in the form of higher profits. It’s also worth bearing in mind that nearly fifteen percent of the world’s seafarers come from either Russia or Ukraine.
The effects of the war on the supply chain won’t be felt in full for several months, however, as the cost of shipping today affects the prices of goods on the shelves tomorrow. If, as now seems likely, the war in Ukraine—and the associated sanctions on Russia—drags on for months or years, Russian oil will continue to trade at a discount. The only country in a position to purchase and store all this cheap fuel is China, which is already buying up stakes in cheap Russian companies.
If China starts to buy up Russian oil, it won’t have the space to store it on land, so it will probably simply keep the oil on floating vessels. Rates for vessels equipped to carry oil have increased sharply since the start of the invasion.
Ratings agency S&P wrote in April that it sees little chance of the ‘log jam’ in global shipping ending any time soon. Drewry, which releases a monthly report on the state of global shipping, noted in March that the war was having a significant impact on an already stressed market. And if it takes twelve to eighteen months for higher prices to be felt in consumer prices, then the inflationary cycle which the UK and wider Western economy is experiencing, is only likely to get worse.
Shipping Barons Profit
The global shipping crisis—which some industry professionals have called ‘containergeddon’—is by no means over. The system needs time to reset, but this is unlikely given ongoing high import demand and new exogenous shocks. The only way to clear the backlog is for orders to slow. And for orders to slow, the steam needs to come out of the recovery.
For this reason, the disruption to global shipping could be self-correcting—though not without considerable collateral damage. While businesses are responding to higher inflation by hiking up prices, workers—who suffer from low bargaining power thanks to a decades-long war on the labour movement—are unable to do the same. As I explained in the last issue of Tribune, inflation is political, it involves choices about who will pay for higher prices.
With workers bearing the brunt of price increases, real incomes are falling, which means people will spend less and therefore purchase fewer imports. Fewer imports will allow some of the backlog of ships to be cleared, but not for some time. Meanwhile, the shipping companies are raking it in. The largest shipping companies made profits of $150bn in 2021 alone—nine times higher than the previous year. Those profits represent a direct transfer from workers to a few corporations.
The workers employed by these companies are paid poverty wages and denied basic rights. The ships sail under ‘flags of convenience’—a form of regulatory arbitrage, which allows ships to register in jurisdictions with weak labour laws and low taxes to avoid basic obligations to their workers and society.
These massive profits and horrendous labour practices are hardly surprising given that the global shipping industry is one massive monopoly. Just ten companies—all based either in Asia or Europe—control eighty-five percent of global shipping capacity. And these firms all collude with each other in plain sight of regulators. Having invested billions of dollars in huge super-ships, capable of carrying tens of thousands of containers, many liners found themselves with huge debts, and excess capacity that they simply couldn’t fill. Some firms, like Cosco, survived through state ownership or state subsidies.
The United Nations described the market structure of the global shipping industry as oligopolistic. And regulators can’t prosecute the companies because, in the US at least, they’ve been exempt from anti-trust regulation for more than a century. Shipping companies enclosed the infrastructure required to ship ninety percent of the world’s trade, drove down wages and conditions for their workers, drove up prices for their customers, and we’re all stuck with the consequences.
Private Gain, Public Loss
The fate of the shipping industry over the last several decades provides a lesson in what happens when private companies control the infrastructure upon which the global economy depends.
Infrastructure—whether railways, ships, fibre optic cables, payments systems or social networks—tends to require a huge amount of investment to construct, but not much to operate. This makes it highly inefficient for lots of companies to try to build competing networks. As a result, infrastructure is generally either owned by the state or huge private monopolies.
State control isn’t always an effective fix—especially without democratic accountability—but private ownership gives you the worst of all worlds. The companies operating the infrastructure are unaccountable behemoths that are ‘too big to fail’ and can therefore raise prices, push down wages and avoid tax and regulation with little consequence. They’re your classic rentiers, skimming profits off the work of others.
Part of the reason that the globalisation of the past several decades has been so unfair is that it has been reliant on these privately-owned infrastructures. The rentier owners of our transport, financial, energy communications and digital infrastructure have reaped huge gains from their enclosure of these networks, while workers have been subjected to poor pay and terrible conditions.
What’s more, the incentive for those who operate these networks will always be to push for greater traffic, more speed and less spare capacity. As we’ve seen over the last few decades, increasing the speed of these systems while removing the slack in the system generates huge profits, but also makes them extremely fragile to shocks. Another example of private gain, public loss.
Many liberals have pushed for regulation, whether at the domestic or international levels. Treasury Secretary Janet Yellen went so far as to argue for a ‘new Bretton Woods’ based on the innocuous-sounding ‘friend-shoring’, whereby the US would shift supply chains to friendly nations based on the recognition that what the world needs is not just ‘free but secure trade’ (Yellen’s way of recognising the emergence of a bipolar world).
But shifting the rules of the world economy can only go so far when the imperative that governs it is the capitalist drive towards ever-greater accumulation. What this crisis does show, however, is that this drive always comes up against limits. Capitalism is coming up against plenty of external crises—from growing worker militancy to the breakdown of the natural environment. But the breakdown of globalisation is an example of an internal crisis—a brake on capitalist accumulation driven by the dynamics created by the system itself.
The growth of a finely tuned, highly efficient system of global shipping, which was both highly profitable and extraordinarily vulnerable to shocks, is just one example. The rise and fall of the financial networks that underpinned the crisis of 2008 is another. Globalisation as we have known it in recent decades is slowly breaking down—unfortunately for socialists, it’s unlikely that its replacement will be anything better.