The shipping industry often faces turmoil and challenges trying to maintain the seamless flow of global trade. Geopolitical events are a significant contributor to disrupting the flow of the supply chain. Geopolitical events affect shipping rates, cause tremendous fluctuations for the shippers, and in worst cases even delay shipments. The container industry also witnesses an influx or shortage of containers based on the current shipping rates and the impact of geopolitical events. Let us learn how geopolitical events cause fluctuations in shipping rates and the container industry.
What is the cause of geopolitical events?
The trade industry is a global business that works through the coordination and cooperation of many countries to avoid any disruptions in the supply chain. Every country economically benefits from the import and export business, thereby contributing to the rise of the global economy. Since every country has made knee-deep investments in trade, any political tension can impact the entire flow of goods in the supply chain. Such events threaten the financial stability of any country. Due to any political feud between two or more countries causing unrest and tension, businesses suffer and can also lead to severe losses due to delays in the supply of raw materials or finished products. These geopolitical events can be triggered in between countries due to many reasons-
- Power dynamics – Due to any uncertain shift of power control, the fight for power may lead to internal feuds in a country or between several countries leading to hostility and conflicts. Under such situations, it becomes difficult to smoothly carry out any economic activity as a significant portion of the economy is directed towards winning power.
- Military activities – Countries often adapt to futile means to control and capture other countries, exercise power, and show dominance. During politically turbulent and spiteful scenarios, such as surgical strikes or invasions, the unrest makes it difficult to transport goods through countries in tension and often to minimise and impose limitations on cross-border trade.
- Terrorist activities – In such a hostile situation, countries suffer economically and witness the loss of lives and humanity. Countries invest their capital in arming themselves and repairing the damage instead of spending it lavishly on trade. Trade routes often get hampered, and the economy of the country suffers.
Types of Geopolitical Events that affect supply chain
Among all the geopolitical tensions, some immensely affect the global supply chain and interrupt the smooth running of supply chain operations. These can be due to natural or man-made causes.
- Trade Wars – A commercial war arises between two or more countries when a country pushes tariffs and quotas to safeguard its domestic interests instead of promoting international trade. It is done to upscale a country’s economy in the face of other global competition. If the countries at trade war are significant exporters, the global economy suffers as the supply of goods gets disrupted and delayed leading to severe losses.
- Pandemic – Covid-19 led to a worldwide outage of trade and caused many supply chain disbalances. Although e-commerce saved the trade industry from substantial losses, many industries still suffered due to labour shortages and high prices. The supply chain is therefore switching towards automation to withstand any other disruption of a similar nature.
- Global Recession – Political tensions are very often the cause of inflation that leads to a significant recession. It can lead to increased fuel costs that can disrupt the transportation industry, a central backbone of the supply chain. Labour shortages can also cause significant delays in shipping activities, leading to losses for shippers.
How do geopolitical events affect the shipping industry?
The shipping industry is dedicated to delivering supply chain operations efficiently and on time. Logistics and transportation, significant sectors of the shipping industry, coordinate to smoothly handle the shipping operations and complete the delivery of goods.
- Disrupted transportation – The maritime industry is one of the most utilised among the various transportation modes in the shipping industry. Ships are used to make international goods shipments as they are cost-effective, sustainable and reliable means of shipping goods abroad. If any political tensions are brewing, there have been times when the impact has been seen in the maritime sector. Political rivalries are taken out on vessels in the form of attacks that sabotage transit routes, cause cargo damage, and make shipping dangerous during such times.
- Increase in Trade Tariffs – Trade wars in the supply chain already have an immense impact on the trade industry and therefore infect the shipping industry. Continuous tariff hikes by a country issue an economic burden on the domestic importer. The importer, in turn, charges more for the goods to the consignee leading to high prices on goods in the market. The profit rate lowers as international shipping activities are neglected due to domestic trade.
How do Geopolitical Events affect shipping rates and the container industry?
The shipping industry gets affected due to the disruptions in the supply chain caused by the geopolitical tensions between countries. The crisis causes a ripple effect that can be seen in the shipping industry in the form of increased shipping rates and the container industry.
1. Increased shipping rates
- An increase in trade tariffs leads to decreased international trade and reduced shipping orders. Shipping companies are forced to lower shipping rates under such circumstances as the demand for shipping decreases.
- Cases of political tensions, such as wars, conflicts and power change, can lead to security risks, trade route diversions and closures, and many disruptions in shipping operations. Under such circumstances, shipping prices increase as the burden of shipping causes congestion and delays.
- The rise or fluctuation in fuel prices due to energy politics or inflation and recession can lead to instability in the expense for many shipping companies. It causes shipping rates to oscillate violently.
2. Container shortages and surplus
- During the pandemic, the demand for shipping containers increased as e-commerce was the only means of acquiring goods since companies shut down many retail stores. Shipping companies were in shortage of containers, so container manufacturers started building new containers at an increased rate.
- When the pandemic came to a halt, it was followed by a global recession that hampered economic activities and barred financial spending. The container industry has more containers than ever due to emergency manufacturing during the lockdown. The container surplus is due to decreased trade business triggered by inflation.
How to minimise the impact of geopolitical events on the shipping industry?
Since geopolitical events impact the economic conditions of the shipping industry and the flow of goods in the supply chain, it is necessary to find solutions to tackle their impact on the shipping industry.
- Predictive planning – Forecasting any stirring geopolitical events is necessary to stay ahead in the trade business. It helps manage time inventory and prevents last-minute delays and disruptions in delivery or procuring goods.
- Outsourcing from multiple shippers – It is better to have distributed your order among multiple shippers so that the entire consignment is not at stake in case the shipper’s country slips into geopolitical unrest.
- Consider local shippers – International shipment delays are always a potential possibility why trade suffers. It is better to connect with local exporters who can help in faster and guaranteed delivery of goods.
- Alternative shipping companies – In case of delays or cancellations from the designated shipping company, shippers must always have a backup or alternative they can rely on. It helps in reducing congestion and significant delays in shipment.
These are a few ways geopolitical events affect shipping rates and the container industry. Therefore, shippers must take the necessary steps to minimise their impact.
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