Geopolitical Chokepoints and Their Impact on International Trade and Investments

Abstract

This article examines maritime chokepoints and their severe impact on the economies and how they can squeeze out margins from businesses. Various occasions have pushed for better preparedness in terms of infrastructure, maintaining secure routes, alternative trade routes, comprehensive financial planning, and adopting tech-based solutions to make the global supply chain more robust and resilient. Here we will also draw the multiple connections of factors such as FTA, tariffs, carbon tariffs, ESG, etc, and their contribution to international trade.

Introduction or Situation

Maritime trade is the lifeline of the global supply chain. Therefore, maritime chokepoints can cause significant disruption to the global supply chain. Choke points are geographically narrow strategic passages that connect two larger areas. Over the years new chokepoints have emerged worldwide, however, this article will keep its focus on six of them. These choke points have the potential to cause disruptions to the global supply chain, which is why they are strategically crucial for countries despite being surrounded by geopolitical and structural risks.

Disruption to these choke points can severely impact the inflation rate which can lead to significant change in the commodity prices therefore leading to economic imbalance. However, the effects of it were felt worldwide with COVID-19, the 2021 Suez Canal blockage, Russia-Ukraine war. Cargo Ships would need to travel thousands of miles from alternate trade routes making it economically unfeasible, which was observed in the case of the 2021 Suez Canal blockage. It was estimated that the blockage could cost global trade between 6 to 10 billion a week and reduce annual trade growth by 0.2 to 0.4 percent. Before the blockage shipping costs had already doubled due to Covid-19 and the blockage of 6 days’ cost approximately dollars’ worth of trade loss had occurred, essential goods like oil and gas were trapped, pushing up prices even further. The blockage also affected the trade of apparel such as footwear as the U.S. imports this apparel from India and Southeast Asia via the Suez Canal. Hence, blockages in any of these choke points can have disastrous consequences for the global economy.

Strait of Hormuz

This strait constitutes a major trade route for global oil trade, around  20-30% of it. With no other alternative routes that pass through the Persian Gulf which makes it one of the world’s most vulnerable and precarious choke points. This chokepoint remains heightened by geopolitical tensions between Iran and the US which have been bubbling over a decade and leading to serious concerns about global oil trade. The former U.S. president Donald Trump had blamed Iran for attacking U.S. oil tankers in 2019, but the Iranian military has denied such accusations. Due to the tensions between the U.S. and Iran, the UAE and Saudi Arabia are finding ways to bypass the Strait of Hormuz. The countries have mainly tried to build pipelines as potential alternatives however these pipelines have been frequently attacked by the Houthi militia, which makes them unfeasible alternatives to the strait. 

Bab-el Mandep Strait

Known as the Gate of Tears for its dangerous navigation conditions. This choke point like the Strait of Hormuz is essential for the oil trade globally. Approximately 3.8 million barrels of oil pass through the waterway per day. The blockade of this choke point has the potential to impact global oil trade as the only other alternative would be to go through the Cape of Good Hope, making it the center of global trade and geopolitical tension. It was historically the site of a naval blockade of Israel by Egypt in the Yom Kippur War and is presently the site of Yemen’s Houthis due to the ongoing conflict in Palestine as a way to extend support to Hamas. These blockades have led to major shippers re-routing their trade via the Cape of Good Hope. Alternatively, many ships have docked themselves at the Red Sea and others have turned off their tracking systems as traders adjusted their routes.

Strait of Malacca

The Strait of Malacca is one of the narrowest straits in the world and is surrounded by Indonesia, Malaysia and Singapore . It is a particularly significant strait for China as two-thirds of its trade passes through this strait. It provides vessels with the shortest access to the Asian market. It also faces significant structural challenges by being narrow and poses high risks for grounding, spills, and collisions. It is also a focal point for geopolitical tension due to its significance for China, there are serious attempts to build alternatives like the Kra Canal. However, the costs to build such a canal are massive, and various governments have failed in their attempts to build the canal. Hence, making the strait of Malacca one of the most vulnerable yet important choke points in the world.

Panama Canal

This strait provides a shortcut for ships traveling between the Pacific and Atlantic Ocean. It became operational in 1914  and links the east and the west coast of the United States, shortening the trade route by 21 days, making it strategically advantageous. However, this strait faces many challenges due to climate change and El Niño. The canal has been facing conditions of drought which has significantly dropped water levels at the canal, causing authorities to significantly limit the number of ships that can pass through the canal. Which has caused significant shipping problems for the U.S.

Turkish Straits

These straits consist mainly of two waterways, the Bosporus and Dardanelles. They act as the primary maritime link between the Black Sea and the Sea of Marmara. Turkish strait was set as the prime trade route for Russian oil for Southern and Western Europe. Thus, making it essential for Europe’s oil and energy trade. It is one of the world’s most difficult waterways to navigate, facing challenges like heavy traffic and narrow waterways. Similar to the Panama Canal, Turkish authorities have imposed restrictions on commercial trade in this strait. Additionally, the region faces geopolitical challenges due to new insurance regulations implemented by Turkish authorities, resulting in shipping delays.

Danish Straits

Like the Turkish Straits, the Danish Straits are also essential to European Oil trade. It is estimated that around 3.2 million barrels of crude oil and petroleum products flowed through the strait in 2016. Despite geopolitical tensions, it is unlikely that this strait will face a blockade as Russia would essentially be sabotaging its trade routes and would end up losing millions of dollars.

Impact

Choke points in international trade are largely controlled based on geopolitical interests. Today, economic giants wield significant control over these critical junctures. However, choke points pose substantial geographical risks to supply chains and industries, potentially leading to economic disruptions. Producers are at the forefront of the risk as it may impact them financially and lower their profit margins. This will not stop here, labor economics plays a vital role in making trade profitable and continuity of availability of goods and supply chain effective for global trade. Industrial policies help businesses to shape, prosper, and align with the national interest, making it a dual sword for the supply chain, as disruption over the choke points can highly impact the industrial policies of the nation by realigning with the incentive offerings by the state.

As global and domestic agendas pressurize industries to follow ESG-based norms and decarbonize their operations, many companies are globally increasing their focus on the regions with clean energy supplies to reduce their carbon footprints and enhance overall sustainability. Policies such as the EU’s Green Deal are incentivizing European companies to adopt more low-carbon energy sources by relocating manufacturing closer to home.

Simultaneously, managing domestic consumption versus port traffic and securing trade routes has become increasingly challenging and costly business for many countries. As securing trade routes with the help of private or military escorts are adding to the budget of the countries. Port infrastructure equipped with modern technology and machinery have become most needed for the effective operations on the ports. Combining all the leading focal points in the trade business are asking for alternatives and innovative solutions to transform global trade practices, to ensure a more sustainable and efficient future for the global economy and trade.

Factors

Maritime trade remains the primary mode of trade in an increasingly globalized world, with 80% of global trade conducted via sea routes. Sea routes are the most cost-effective means of transporting large volumes of goods compared to land, air, or rail. The presence of Free Trade Agreements (FTAs) further reduces costs by decreasing or eliminating customs duties associated with maritime trade. These agreements enable companies to invest in more sustainable practices and promote decarbonization efforts, helping them meet their ESG goals and reduce global carbon emissions. The increasing number of FTAs will allow businesses to maximize profits and expand their trade potential, thereby increasing their investment capacity. A prime example is seen in Korean firms, which benefit significantly from an efficient maritime supply chain bolstered by FTAs. The success of these firms demonstrates that increased investments lead to a higher demand for maritime trade as businesses expand, creating a cycle of economic growth on a global scale.

Bilateral and multilateral agreements will be and have been a key focus for leaders globally to expand their nation's economic opportunities by making “friendly” partners where trade exists. This estimates the rise in regional trade and blocs such as the USMCA, Comprehensive and Progressive Agreement for Trans-Pacific Partnership, Regional Comprehensive Economic Partnership, and EU-Vietnam Free Trade Agreement, etc. This also means working with their counterparts on effective strategies to mitigate the challenges and opportunities of the trade.

Author -

1. Jay Makhijani, Program Manager at Insights International

2. Mansi Bahl, Political Science and International Relations Student at Ashoka University

References

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https://unctad.org/system/files/official-document/rmt2023_en.pdf