Nature, it is said, abhors a vacuum. So, too, do the markets. When the US and Israel attacked Iran on February 28, the subsequent closure of the Strait of Hormuz proved to be one of the most destabilising events to hit the worldwide economy in recent decades. It also accelerated an evolution in globalisation as workarounds emerged. This looks set to redefine how billions of dollars’ worth of goods get to their destinations.
Yesterday, The National reported how, just days after the war broke out, Dubai-bound vehicles shipped from Japan and South Korea were being unloaded at ports in Sri Lanka. Other cargo has been rerouted through the UAE port of Khor Fakkan, and there has been an increase in traffic through Saudi Arabia's King Abdullah Port and Jeddah Islamic Port on the Red Sea.
Air links have changed too. EMFIS, a certification organisation that promotes ways to reduce exposure to electromagnetic radiation inside buildings, had to figure out how to source the special paint it supplies to clients. The paint, bought from Germany, France, Belgium and Switzerland, would usually be sent by sea and arrive in the UAE at Jebel Ali Port. The company eventually switched to air fright to meet customers’ needs despite this being about 40 per cent more expensive than sea freight.
The age of globalisation was defined by speed. As trade barriers fell and economies grew more interconnected, consumers became used to the seamless and efficient delivery of goods. This system of trade depended upon stability, especially at the site of geographical chokepoints such as the Strait of Hormuz or Bab Al Mandeb. The events of the past three months show that such stability can no longer be taken for granted.
This should encourage governments, businesses and logistics companies to reassess old assumptions. Supply chains are changing to become adaptive networks rather than the linear pipelines that went before. Rerouting, split shipments and the emergence of regional supply loops represent a kind of fragmentation of the globalisation seen so far.
These emerging changes and accompanying re-mapping of trade geography will have consequences for a major logistics centre such as the UAE. The country has been proactive about mitigating the effect of external shocks; its support for domestic industries can be seen in strategies such as Make it in the Emirates and Operation 300bn. Significant investment by the UAE and other Gulf countries in freight rail and new oil pipelines also signal readiness and flexibility.
Nevertheless, although everyone is hoping that an expected peace deal between the US and Iran this week will de-escalate the situation in the Middle East, when it comes to the international economy, not only will recovery take a long time, it will likely no longer be a question of getting back to normal. It is too soon to say if this will benefit most economies, but countries should be ready for a different kind of globalisation.
