The Shipping as Global and International Trade - Term Paper Example

SHIPPING TRADE AND INTERNATIONAL BUSINESS IN THE 21ST CENTURY Introduction The shipping industry is on the growth path due to the globalization of the world. Today, 90% of world trade is carried by the international shipping industry, making it play an important role (International Chamber of Shipping 2015). Moreover, shipping industry helps in the importation and exportation of goods that contributes to the continuation of international trade and partnerships. Many nations rely on the shipping industry for the movement of goods from one area to another because of the convenience, low cost, and fixed routes. Moreover, expansion of seaborne continues to benefit consumers all over the world because it leads to competitive freight cost (International Chamber of Shipping 2015). The increased economic liberalization of many countries and regional organizations such as WTO has also facilitated the growth of the shipping industry as a preferred mode of transport. Through this, the industry is set for further growth and expansion, as it will attract many players. This is because of global campaign against piracy, making alliances, growing economy of many nations, and building of efficient vessels. Currently, there are over 50,000 merchant ships involved in the international transportation of any cargo and registered in over 150 countries around the world (International Chamber of Shipping 2015). There are also over one million seafarers operating the ships in every nation (International Chamber of Shipping 2015). Despite all these achievements and emerging trend, the shipping industry is faced with challenges such as piracy and armed robbery along the deep-sea. The industry bears high economic cost in relation to insurance, re-routing, ransom, deterring security equipments among others This is a world problem, and it is a far-reaching effect in every corner of the world. Hence, a change or implementation of different policies will influence and correct the problem and steer the industry. The paper will discuss the shipping as global and international trade, the economic cost of piracy, shipping trade forecast among other issues. Shipping as a global and international trade Throughout the history of humankind and civilization, the ocean has been important in facilitating transportation. However, things have changed a bit on the role of shipping from what it used to do. Today, the shipping industry carries goods as opposed to people like earlier known. The rise of intercontinental air travel opened more transport opportunities and other means making people prefer air travel to connect between continents. Because of this, sea transport or shipping remained for recreational cruises and used for shorter trips. The shipping industry soared in growth because of globalized markets. Over the years, the global trade has been expanding, hence facilitating the growth of international trade. For instance, world trade increased by 5% yearly between 2000 and 2008 (World Ocean Review 2012). At the same time, economic activity in GDP increased by 3% per year (World Ocean Review 2012). The rise of international trade and economic growth has made the world trade to treble to 45% of the global GDP since 1950 (World Ocean Review 2012). Similarly, goods sent to the processing industry have quadrupled in the same time. This is a strong indication that shipping industry plays an important role in the global market since it expansion has an influence on the international trade and vice versa. Besides, it is important to note the factors that have influenced the high traffic in the shipping industry. It is noted that one of the factors that led to increased shipping is the growth and development of world trade. Other factors such as institutional and technological factors also played a role in ensuring the shipping traffic. The liberalization of WTO opened a new chapter in the world trade. Moreover, Chinas economic opening to the outside world, as well as their admission to the WTO, played a significant in the shipping industry and global trade. This led China to quadruple its exports within a span of five years. Additionally, trebling of Mexico exports to the US six years after establishing NAFTA also played an essential role in the growth of international trade and the subsequent effect on the shipping industry. Moreover, the high demand of the industrialized and emerging economies for energy and mineral resources led to the expansion of the shipping industry to transport goods from far distant nations. Nations such as India and China have been developing rapidly over the last decades, making them increase their demand for raw materials as well as energy to drive their industries (World Ocean Review 2012). Because of this, shipping mode of transport was the best for the owing to their proximity to the Indian Ocean and other oceans. Economic cost of piracy and armed robbery at sea on global shipping Piracy and armed robbery at sea on global shipping is one of the great challenges faced by this industry. It has devastating economic effects on the whole world. Some of the economic cost is discussed in subsequent sections. Cost of ransoms The increase in the cost of piracy has been due to high ransom prices that pirates demand to release the hijacked ships. For instance, Somalia pirates seek ransom before releasing ships. Pirates from other regions steal the vessel or cargo in return. In 2010, a ransom totaling to $9.5 million was paid to Somalia pirates to release “Samho Dream”, a South Korean tanker, is the highest ransom on record (Bowden 2010). Negotiation of ransom, usually takes longer time, hence delaying the delivery of goods and endangering the lives of crews. Cost of insurance There is a high cost of maritime insurance due to growing sea threats and cost of ransoms especially to ships designated to high-risk piracy zones (Reuchlin 2012). Shipping insurance is categorized into four, namely war risk, kidnap and ransom, cargo and lastly, hull insurance. The rate of piracy has been on the increasing trend making insurance become a lucrative business for many investors (Reuchlin 2012). However, the many players in the market have led to reduced rate. Until today, the high cost of ransom is a big challenge to the international shipping industry, although it has reduced with increased patrols of the European marine in prone areas. Cost of re-routing Low and slow moving ships re-route because of the piracy attack since it is the cheaper option (UNCTAD 2014). Over the years, many ships have ignored passing through the Gulf of Aden and Suez Canal making them transit the longer route through Cape of Good Hope (UNCTAD 2014). Because of this, Egypt has been affected since it no longer gets revenues from the ships as they escape piracy. Similarly, re-routing the ships adds the miles to be covered. It also adds the number of days to a journey of up to 20 days for a cargo ship (UNCTAD 2014). The cost of deterrent security equipment Ship owners are attempting to protect their ships and crews from pirate attack, hence preparing their ships with security equipment before transiting to high-risk areas with piracy. Purchasing deterring equipment is costly, and they are not normally accessible easily (Bowden 2010). Hence, this increased the cost of transport and may sometimes discourage one from investing in the business. Their economic cost in significant and hugely affects the shipping industry. The cost of naval forces There is a high cost associated with patrolling naval forces in deterring piracy. Currently, 27 countries are contributing and involved in military and naval attention in the Horn of Africa (Bowden 2010). There are three anti-piracy missions, including “Operation Atlanta”, “Operation Ocean Shield” and “Combined Task Force”. The European Union launched the Operation Atalanta to protect World Food Program vessel that was going to deliver aid in Somalia and to protect others ships in the region too. NATO initiated Operation Ocean Shield with the aim of protecting shipping in the region. Combined Task Force was because of the multinational task force efforts to secure the Gulf of Aden and eastern coast of Somalia from 2009 (UNCTAD 2014). There are over 34 vessels operating in the Horn of Africa and Indian Ocean with one US Navy vessel costing around $82,800 to operate daily. This is as per the 2010 Government of Accountability Office (GAO) (UNCTAD 2014). Therefore, there is a high cost incurred by the Navy in securing the sea against piracy. The cost of piracy prosecution The universal jurisdiction for piracy states that any country can prosecute piracy crime irrespective of its direct nexus, nationality of crews and owner. Many nations lack the capacity to try pirate crimes because of low prosecutorial capacity. Hence, the international community does give financial assistance to regional nations to enable them conduct piracy trials. In the last years, Kenya and Seychelles signed MoU with EU, USA, UK, Canada, Denmark, and Australia for a commitment to try pirate criminals (UNCTAD 2014). Improving the prosecutorial capacity to try pirates is very costly, making these nations seek funding from international agencies. The fund is needed to build piracy prisons, and for legal training and development. The cost of piracy-deterrence organizations The increased number of piracy and armed robbery in the sea has led to emerging of national and multinational agencies and organization to work towards finding a solution to the problem. Setting these organizations is costly since they have to hire staff and meet other costs. Some of the organizations include UN Contact Group on Piracy off the Coast of Somalia, IMO Djibouti Code, UNODC (Reuchlin 2012). Cost to Regional Trade Piracy has affected the economy of East African countries and the wider world. Piracy threatens international trade routes and goods in the region, making transport very expensive. Piracy affects the cost of trade because of intercepting the ships delivering goods (Reuchlin 2012). Ships are re-routing to other ports for security reason, hence affecting some nations. Kenya has borne the high cost of piracy in the Indian Ocean and increased the rate of export by $9.8 million and import by 23.8 million per month (Reuchlin 2012). The consumer bears the cost of all these. Similarly, it affects the fishing industry and oil industry, hence denying nations like Nigeria revenues from fishing. Cost of food and price inflation Statistics shows that more than 40% of piracy attacks are on bulk carriers and general cargo vessels that carry world’s food staples (UNCTAD 2014). Piracy of food vessels has a direct impact on the prices since it delays the delivery and sometimes perish. Failed states like Somalia that depend on commercially imported food have suffered food inflation due to the scarcity (UNCTAD 2014). This has also put pressure on the little available food to supplement on the imports, which is sometimes never reached. Cost of reduced foreign revenue Piracy affected nations such as Somalia, Egypt among others have suffered foreign revues loss. Their instability and volatility make investors look for alternatives to invest and spend their money. Today, Egypt no longer receives revenues from Suez Canal transit since few shippers use it because of the piracy tendency as they re-route to Cape of Good Hope. Many nations along the Indian Ocean shores have suffered tourism loss due to piracy, leading to loss of revenues (Bowden 2010). Nations such as Kenya generated much revenue from tourism, and it was ranked among the best destination in the world. Today, the country is suffering, and investors are moving out due to piracy, terrorism, and other related activities. Policy options to improve international shipping business The shipping business has become the preferred means of transport for bulky and heavy goods. Similarly, nearly 90% of goods are transported using this mode of transport as it links different continents all over the world. More so, the developed nations in Europe, America and other parts of Asia rely on shipping transport for raw materials as well as energy that helps in driving their energy needs. Therefore, shipping industry plays a fundamental role in driving the world economy. However, there are challenges that shipping transport experiences and this poses different challenges leading to in-convince. Despite this, policy recommendations can help minimize the effects as well as counter the challenges to bring efficiency. The important sea routes are very vital when considered because they have much influence on the success of the shipping industry. One of the important policies or factors to consider is the improvement of human resources, seamanship, and maritime expertise (Europa 2009). There is no doubt that shipping industry connect different continents and provides the convenient mode of transport that delivers the raw materials and finished products to different corners of the world. Because of this, there is a growing shortage of the workforce to work on the ships. The shortage of marine professionals is posing a dark picture in the industry. Therefore, there is a need to improve the capacities of seamanship and human resources to increase their number. Similarly, different nations involved in maritime business must value maritime skills and careers in the industry. This can be through establishing more maritime training centers and allowing or encouraging labor mobility among the continents (Europa 2009). Trained officers should be allowed to work in any part of the world. Moreover, shipping industry must develop better working conditions on board ships through complying with International Labour Organization Maritime Labour Convention. Through all these, the Maritime will address human resource, seamanship, and maritime know-how. Secondly, there is a need for quality shipping to remain competitive and sustained mode of transport (Kennedy & Leslie 2014). The world is looking for “zero-waste, zero-emission” maritime transport hence the industry must put efforts by prioritizing certain actions to make them realize quality shipping. For instance, shipping industry must work round the clock to reduce greenhouse gas emission; they must improve the environmental quality of marine waters and promote ecological shipping. Similarly, quality shipping can be achieved through managing ship-generated waste and ship dismantling as well as reducing sulphur oxides and nitrogen oxides emissions (Kennedy & Leslie 2014). The world can achieve all these by developing laws and policies that guarantee quality shipping. Through this, the shipping industry will be more appealing to many, including the environmentalists as well as others who have a negative perception towards shipping industry. Thirdly, the issue of security is paramount in the shipping industry and policies must be enacted to address the increasing insecurity in the oceans (Kennedy & Leslie 2014). The world and the stakeholders in the shipping industry should pursue the implementation of the comprehensive framework of security measures to ensure success in the industry. The stakeholders and the world need to foster navigation area security and protect crews and passengers (Kennedy & Leslie 2014). There is a need to promote a security culture in the international shipping to attract more investors as well as users since many investors and customers fear the frequent insecurity characterized by piracy and armed robbery. Nations that border the major oceans should improve surveillance of vessels sailing in or near waters (Kennedy & Leslie 2014). This can be done successfully through the implementation of an integrated information management system that complies with benchmarked practices such as “e-maritime” initiative. Moreover, there is a need to create integrated, cross-border and cross-sector surveillance system (Kennedy & Leslie 2014). This will be fundamental because it will help in enhancing security in the shipping leading to the protection of the shipping industry and all that are involved. Additionally, there is a need to develop policies that allow the exploitation of potential short sea shipping (Europa 2009). The shipping industry looks promising hence calling the need to develop more infrastructures and strengthening the existing. This can be achieved through creating a transport space without barriers and making short sea shipping more attractive (Europa 2009). Currently, some of the short shipping routes are not used because of the barriers and high tariffs required. Similarly, piracy is making some vessels to go the long route, which is very expensive in long and short-term basis. There is a need to reduce the navigation fee that nations such as Egypt charges for ships passing through. The high fees charged discourages some ships, hence resorting to the long route of the Cape of Good Hope, which is not healthy for any business. Therefore, policies should be enacted to make it easy in accessing the short sea shipping, as this will help save the amount of expenses incurred in the long route. Lastly, there is a need to establish a maritime research and innovation center to benefit maritime transport by creating a new ships design and equipment for safer and cleaner transport (Europa 2009). The body should also use technology to maximize the efficiency of the transport chain. Moreover, there is a need for inspection and monitoring tools and advanced telecommunication system (Europa 2009). Although much has been done and the ships used today have increased speed, there is also a need to improve the efficiencies. Building ships that deter piracy is expensive, and this can be reduced and be affordable through the use of technology. International shipping trade forecast The global economy is expanding and reaching new heights. The emerging economies are increasing the consumption of goods and providing a ready market for foreign goods. Through this, foreign companies are shipping their products to oversea markets. Today, there are more shipping to the emerging markets, which transports raw materials, as well as finished products that go to the market. Through this, there is evidence that emerging economies, as well as the developed world, will increase the usability of shipping transport. Therefore, the forecast of shipping transports looks promising because it helps in linking different continents with a transport network for bulk goods and raw materials. China, India, the US, and other nations rely on energy supply from the Indian Ocean coast, which is transported using vessels (Knowler 2015). The increased demand for energy is likely to influence the shipping transport. Today, the world largest shipping company, Maersk, is sending more containers around the world because of improved trade hence signifying economic growth. There is a rise in freight volumes in China and other European nations. This is promising for the shipping industry since it is the preferred mode of transport and likely to increase as the global economy expands. China is expanding in terms of manufacturing and exporting finished products to the emerging economies where there is a ready market (Olsen 2014). Hence, it is likely to drive shipping industry to transport its finished products to the market. Additionally, the partnership of European nations with other developing nations is likely to steer the shipping industry in transporting the products and other goods to these nations (Olsen 2014). Maersk, a Danish shipping company, rose its shipping volumes by 6.6% in the second quarter of 2014 making it increase a profit by tripling to $2.3 billion. As at 2014, the World Trade Organization focused that shipping transport and international trade would grow by 4.7% that doubles the 2013 production (Olsen 2014). The major drivers of these changes are the trade increase and expansion in the US, Europe and the developing nations (Olsen 2014). Additionally, the race to build and deploy more vessels that are efficient is an indicator of a promising future for the shipping industry. Although it puts financial pressure on the industry, its completion is a success in the industry. This will help increase the volumes of goods transported across the ocean at ago (Olsen 2014). It will in turn help the shipping organization to generate more revenues to invest in their daily operations. However, the manufacturing of large vessels may pose a challenge in scrambling for sea routes from the current number. Operational consideration may be a problem with the building of big ships on the trade lanes. Scrambling to find new ways of filling these vessels may be a challenge to the industry (Olsen 2014). However, the success and completion of these projects will surge the operations in the industry and meet the demands of transporting goods and products across the continents. Moreover, shipping organizations or traders are making alliances that promise high-level utilization, low slot cost, and improved market share (AlixPartners 2015). Today, players in the shipping industry are making alliances in efforts to improve the services and save on the cost. Because of this, the future looks good since it is advantageous to the industry and other stakeholders. The larger line pioneers and the new alliances are separating from those unable to make capital investments. They are also resorting to cost-cutting measures that will reshape the nature of their services (AlixPartners 2015). These changes are very significant in making them have and enjoy a prosperous future. Currently, the high cost of operation is reducing their profit margin and preventing them from investing in other places. Cutting the cost and building alliances is a good move towards shaping the future of the shipping industry (AlixPartners 2015). However, there are some challenges witnessed in the economy that might hinder the perceived growth of the shipping industry. For instance, many economists believe China is slowing its growth, and this might not favor the shipping industry. For instance, they feel China is slowing its growth to about 7% as in 2014 (Knowler 2015). Despite the trend in China, many believe that recovery in other nations in Europe and the US will grow the market of cargo volumes. Analysts believe or forecast that the US imports will increase to 6.8% and Europe container trade will grow by 7.6% (Knowler 2015). Moreover, there is a forecast that China exports to the US will grow at 5.9% as of 2014 which is an improvement compared to 4.1% in 2013 (Knowler 2015). Therefore, the shipping industry is still stable and havent witnessed any alarming declining trend. Despite one sector or nation tumbling in terms of economic performances, others are still doing better which is significant in steering the industry forward. As China declines in shipping trend, Europe, and the US are recovering from recession making shippers find market and transport goods and other products (Knowler 2015). Lastly, the global campaign against sea terrorism, piracy, and armed robbery along the ocean is likely to influence the use of shipping as the mode of transport. Today, naval forces are patrolling the ocean and at the risk prone areas to ensure safety in the shipping industry. This is a recommendable step because it will help minimize the cost of shipping, as well as the insurance cost. Hence, it will be attractive to more investors, leading to expanded use. Additionally, the more it is used, the more the investors will put in more resources. Through all these, the shipping industry will still be the preferred mode of transport in driving the global trade. Conclusion Shipping transport has been fundamental in bridging the transport gap between continents. It has stood out to be the preferred mode of transport, specifically for bulk and raw materials found within the ocean hence facilitating the trade. The increased shipping traffic has been facilitated by institutional and technological innovation and revamping, liberalization of WTO and China’s openness to the international trade. Moreover, high demand for raw material and energy from the World Oceans as well as trebling of Mexico has resulted to increase shipping trafficking. Despite these tremendous improvements, the industry is paying high economic cost because of piracy. For instance, there is a high cost associated with ransoms, insurance, re-routing, deterrent security equipment, naval forces, piracy prosecution, and inflation. However, the challenges of shipping industry can be solved through developing policies in relation to improving human resources, improving quality shipping, and enhancing security. Additionally, policies relating to marine research and innovation as well as exploiting short sea routes will help improve the shipping industry. Overall, the international shipping industry looks promising because of global campaign against piracy and improving sea security. Major stakeholders in the industry are also making alliances hence developing a promising future as well as building efficient vessels. References AlixPartners 2015, Change on Horizon. Available from http://www.alixpartners.com/en/Publications/AllArticles/tabid/635/articleType/ArticleVi ew/articleId/1087/Change-on-the-Horizon.aspx#sthash.D2AjdI80.VnOAJKAy.dpbs [April 29, 2015] Bowden, A 2010, Economic cost of maritime piracy. Available from http://oneearthfuture.org/sites/1earthfuture.org/files//documents/publications/The- Economic-Cost-of-Piracy-Full-Report.pdf [April 29, 2015] Europa 2009, European maritime transport policy until 2018. Available from http://europa.eu/legislation_summaries/transport/waterborne_transport/tr0015_en.htm [April 29, 2015] International Chamber of Shipping 2015, Shipping and World Trade. 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