Global Commerce, Competition & Prospects for Conflict
Tony Padilla, Director, Office of Cargo & Commercial Sealift at the US Department of Transportation’s (DOT) Maritime Administration (MARAD), presented during the Update on the Maritime Industry class at the NDTA-USTRANSCOM Fall Meeting on October 7, 2019, in St. Louis, Missouri.
What I’d like to talk about is what happens before the war starts, and indeed recapitalizing our fleet is of paramount importance,” said Padilla, adding that this must be done quickly. “We need to invest in new ways to strengthen our sealift capability and agility.”
Any consideration of warfare must take into account the drivers and the precursors of conflict. Padilla provided two key takeaways for the audience. First, the center of gravity of the global economy is rapidly shifting in unprecedented ways that require not only military preparedness but dovetailed with economic, political, and commercial preparedness. The second takeaway was that US-China competition is, above all, an economic game. To play and win in this game, US commerce, and national security must be brought into alignment.
The world is rapidly changing. The eastern hemisphere is experiencing dramatic increases in population growth, Gross Domestic Product (GDP) per capita, and rising consumer spending, especially on luxury goods, technology, and petroleum. All of these things happening in Asia have made it the most important region for international companies.
“Due to these forces, over the next ten years, Asian economies will need nearly $2 trillion per year in infrastructure development, just to keep pace with demand. So, if the 19th century was a British one and the 20th century was an American one, then the 21st century will be an Asian one, and this is where we need to focus our efforts. The question is just what kind of role will we play in this new world?
“Some would say that we’re already at war. Some would say we’re not at war. I would argue that we are already at war—a war for the competition of supply chain dominance. There’s a lot of talk obviously about the tariff war. But under a business as usual scenario, shifts in global supply chains in the eastern hemisphere will drive changes and trade patterns like [we’ve] never seen before. We’ve entered a new era of supply chain competition.”
Marine shipping is an integral part of the global economy. It plays a vital role in trade and is the backbone of the world economy. Nearly 60,000 merchant ships are trading internationally, with 1.6 million seafarers from about 150 different countries. In 2018, seaborn trade exceeded 10 billion tons. Since 1995, the marine traffic across the globe has quadrupled, and global GDP doubled during that same period. Ports are concentrated in the eastern hemisphere.
Two-thirds of the world population lives in Asia, with China and India having the largest populations. India has the highest population acceleration rate. By the year 2025, 27 out of 33 megacities, defined as 8 million people or more, will be located in the developing world. By the end of the century, all 33 megacities will be found in the developing world. The immense density and congestion of these megacities will necessitate immense investments in infrastructure.
Besides having the largest populations in Asia, China and India also lead in terms of GDP growth. From 1997 to today, China has taken a lead role in the world economy, surpassing the US in trade relationships. Chinese diplomats have been mobilized, and they have mobilized businesses, scientists, other diplomats, and taken a whole of country approach to dominate trade. These trade routes will be defended by an expanded Chinese military that is “built to fight” and “able to win wars.”
“Even though trade has expanded with China, it’s interesting to know that the gross exports as a share of GDP has declined for both India and China. In 2017, it’s dropped down to about 8.3 percent,” said Padilla. “Historically, China was known as the factory of the world, but while low-cost labor was its competitive advantage, the wage gap between China and the rest of Asia is closing. For example, in 1996, wages in Japan were 46 times higher than in China, and in 2016, those wages were only four times higher.” He added that as China’s ability to provide low-cost labor declines, countries such as Vietnam, Cambodia, Bangladesh, India, Indonesia, and Thailand are stepping up to fill that gap.
“This has happened around the same time that China has announced its Made in China 2025 initiative. In other words, its goal is to dominate ten key manufacturing sectors—and one of them includes shipping and marine technology,” said Padilla. “Further, companies are increasingly becoming focused on speed to market and improving coordination and visibility across the entire value chain. As a result, supply chains are becoming shorter, and more localized firms are building self-contained regional supply chains to serve Asian markets. This also reflects the deepening trade ties among Asian countries themselves, with much more room to grow.“ All of this means that even as trade has expanded with China, India, and Asia at large, intra-Asia trade in increasing as exports from China and India decrease shifting the center of gravity to more low-cost countries within the Asia-Pacific region.
Another shift has occurred as rail service between China and Europe has dramatically increased. Westbound from China to Europe, approximately 53 different blockchains leave every week, while eastbound about 23 blockchains go towards China. This is rapidly increasing cold chain facilities across the Eurasian continent, and improved diplomatic alliances are forming. Relative to the cost competitiveness of the maritime sector, sea freight is now competing with rail freight.
Asia will drive 50 percent of global consumption by 2030. As companies compete for consumer market share, megacities represent a serious portion of future economic growth and an evolving dynamic role for global supply chains.
Anxieties exist over the control of ports in the Indian Ocean, and these are at the forefront of strategic thinking. Of particular importance is the degree to which China is carving out a commercial maritime presence along the periphery of East Africa, the Middle East, Central, and South Asia. China’s strategy is essentially to build a chain of naval bases across the northern Indian Ocean that would be used by the Chinese Navy to protect its trade.
“It’s already been said that China is deploying all elements of national power to quietly shape global supply chains, many of which the US depends for its economic welfare,” said Padilla. “How this chessboard looks tomorrow and [in] the coming years is up to us as citizens, it’s up to us as policymakers.”