The potential for global geopolitics to disrupt maritime trade is on the rise as national ambitions create marine flashpoints and the spread of trade protectionism heightens the risks for the world’s shipping community.
Those were some of the key messages from experts at Willis Towers Watson’s Global Marine Geopolitical Forum held in
co-ordination with the biennial series of virtual conferences that this year comprised London International Shipping Week.
Geopolitics is back with a vengeance in the insurance world and all aspects of business.”Sir Richard Dearlove
KCMG OBE, Non-Executive Chairman of Ascot Underwriting Limited
“Geopolitics is back with a vengeance in the insurance world and all aspects of business,” the keynote speaker and former head of the British Secret Intelligence Service, Sir Richard Dearlove, told delegates. “We are seeing a significant rise in the influence of government decision-making and interventionism and we are all living with the consequences of those decisions.”
Sir Richard and his fellow panellists spoke extensively about how geopolitical events such as trade protectionism, the rise of artificial intelligence, cybercrime - state-sponsored and otherwise - and the global response to climate change may impact on maritime trade and the fortunes of the shipowners who rely on it. Clearly, understanding the geopolitical landscape and managing the resultant risks is a non-discretionary activity for resilient organisations - whatever the sector.
The panel touched on most of the world’s strategic ‘choke points’ for maritime trade, which Sir Richard described as “incredibly vulnerable to the vagaries of geopolitics”, with the Strait of Hormuz; by consensus the most dangerous, given that hostilities between Iran and Saudi Arabia are expected to “continue to escalate”.
“If we do not maintain freedom of navigation through these narrow chokepoints, our opponents will seek to close them off, or dominate them,” Sir Richard said.
According to Jens Martin Jensen, CEO of the Athenian Group Inc., the biggest geopolitical impact on shipping in his lifetime was the closure of the Suez Canal from 1967-75. “That changed ship types, [prompted] the rise and fall of the tanker market and the development of new oil fields,” Jensen said. “The whole development of the North Sea came as a result of that crisis.”
He said the impact of the recent high-profile Ever Given grounding in the Suez Canal was “mainly on the container shipping market”. Had the blockage continued, he said, “the routings for tankers would have changed, increasing tonne-miles” and costs.
From chokepoints to potential flashpoints, the panel singled out China’s ongoing activities in the South China Sea
From chokepoints to potential flashpoints, the panel singled out China’s ongoing activities in the South China Sea - and the emerging Western response - as a worrying trend that could impact one of the world’s busiest trade corridors.
China, which Sir Richard said had plans to “build more vessels annually than the tonnage of the British Navy”, has long claimed the territorial waters of the expansive South China Sea as its own, dismissing similar claims from neighbouring countries such as The Philippines, Vietnam and Malaysia.
In a pre-emptive move on September 1, China introduced ‘rules’ requiring all foreign vessels transiting the South China Sea to identify themselves. Critics, Asian and Western nations among them, say adherence to those rules would tacitly recognise China’s authority over the Sea, and potentially allow it to manage access to the area.
Japan has actively warned its allies about China’s intentions in the region, and in September the U.S., the U.K. and Australia announced the formation of a ‘security and defence’ partnership as well as a new fleet of nuclear submarines for Canberra in response to Beijing’s expansionism.
Given that up to a third of the world’s maritime trade transits the South China Sea, many shipowners are nervously watching developments.
The South China Sea remains a pretty challenging area.”Johanna Holliday
Managing Director, Special Contingency Risks, Willis Towers Watson
“The South China Sea remains a pretty challenging area,” Johanna Holliday, Willis Towers Watson’s Managing Director for Special Contingency Risks told delegates. “While an intentional escalation is not expected, it is a highly contested and increasingly militarised area. Intimidation with regards to freedom of navigation and the new ‘rules’ coming up could lead to a miscalculated or accidental use of force.”
Delegates to this year’s forum also expressed concern about the potential for the global trend towards market protectionism to derail global trade growth. While Sir Richard noted that the Chinese were “building maritime systems that exclude competitors”, he said the U.S. and the E.U. also had poor track records for trade protectionism.
They are not alone. According to the World Trade Organization (WTO), from the fourth quarter of 2019 to the end of second quarter 2020, its members and observers implemented 56 new trade restrictive measures unrelated to the pandemic mainly tariff increases, import bans, export duties and stricter customs procedures for exports.
The WTO’s most recent report estimated the value of trade impacted by the array of restrictive measures during the period to have been US$423.1 billion, or the third highest total since October 2012. It noted that import restrictions alone implemented since 2009 (and still in force), suggested that 8.7% of world imports are affected by these restrictions.
“Free trade is no longer the passport it was 15-20 years ago. It is not a problem that is going to get any easier and that is going to affect international transportation,” Sir Richard said. “I don’t see a dramatic change or escalation. But, currently, the international system isn’t preoccupied with WTO-type negotiation. It is a problem that is affecting more of us.”
Even well-intentioned global regulations, such as those recently placed on shipping to combat the causes of climate change and stem the spread of COVID-19, have the potential to impact the world fleet and increase costs for owners and operators.
According to Jensen, the biggest shipping-related impact from the pandemic had been on seafarers, some of whom remain locked onboard their ships for a year or more due to the tighter restrictions on cross-border travel.
It is remarkable that we don't have a better system to ensure all seafarers can be vaccinated immediately.”Jens Martin Jensen
Chief Executive Officer, Athenian Group Inc.
“It has been an intolerable situation,” Jensen told delegates. “Given that 90% of all trade moves by sea, it is remarkable that we don’t have a better system to ensure all seafarers can be vaccinated immediately. In London, bus and train drivers are vaccinated immediately. You have to ask why this hasn’t happened for seafarers.”
Jensen blamed the shipping industry’s lack of a ‘strong enough uniform voice’ to address issues of this magnitude, despite the presence of its own regulatory authority and well-financed bodies that represent most major shipping sectors.
“We simply have to have a better voice, and a better way to deal with these crises” he said.
On the climate side, to support its bid to lower carbon-based emissions from global shipping, the International Maritime Organization (IMO) has implemented an array of new regulatory initiatives aimed at gradually increasing the fuel efficiency of ships. Not least of these is the mandatory Energy Efficiency Existing Ship Index (EEXI), which will force owners to either modernise existing ships, or buy new ones.
Enforcement of the EEXI’s requirements will begin on January 1, 2023. An example of the impact these regulations could have was highlighted in a recent report from the American classification society, ABS, which estimated that about 85% of the current global tanker fleet would “face challenges with compliance”. It predicted that similar proportions of other shipping sectors would face similar compliance challenges.
While the panel agreed that the biggest climate-related threat from events such as changing weather patterns, rising sea levels and storm surges was to the global port operations, there were already signs that ships in transit were vulnerable.
“Rerouting is becoming more common [to avoid storms], with all the associated costs and impacts from a decline in productivity,” said Neal Croft, Willis Towers Watson’s Head of Geopolitical Risk.
The panel also addressed the prospect of the growing number of cyber threats being used to disrupt maritime commerce, pointing out shipping’s strategic attractiveness to the ill-intentioned actor.
From a cross-industry perspective, there is growing evidence that commercial cybercrime is becoming increasingly lucrative for its perpetrators.
From a cross-industry perspective, there is growing evidence that commercial cybercrime is becoming increasingly lucrative for its perpetrators. A recent report by cyber insurance specialist Coalition found that the cost of failure to adequately defend a company’s digital systems from ransomware attacks almost tripled during 2020.
The average ransom demand rose to $1.3 million in the second half (from just over US$440,000 in 1H 2020), before falling marginally to just under $1.2m in the first half of this year, Coalition said.
While private actors are largely motivated by profit, known state actors - including North Korea, Iran and Russia - may have different motivations, according to Sir Richard.
“There is a lot of technical expertise available in government, and there are some very troublesome players out there. The nature of cyberattacks is that they raise the prospect of deniability to almost unattributability,” he said. “So, if you want a hands-off excuse for major interference, you have the methodology for doing it.”
The scale of the threat posed by cyberattacks will widen as maritime companies continue their industry’s technological journey towards automation and autonomous shipping, the panel agreed.
“As shipping becomes more cyber-dependent, the security of those systems becomes of greater importance. So [the challenge] becomes how we strengthen not just the physical protection of shipping, but also the [defences against] technological interventions. Whether those maligned players are non-governmental, governmental or criminal.”
Author and panel moderator at London International Shipping Week 2021.