Global shipping is under pressure.

As I mentioned on Friday, Iran-backed Houthi militants, based out of Yemen, are attacking commercial ships in the Red Sea with drones and missiles.

Source: afr.com

The Houthis claim the attacks support Hamas and punish companies aiding Israel. What they’re really doing is disrupting shipping through the Suez Canal, a critical artery for ships traveling between the Middle East and Europe.

This creates problems for everyone. Typically, around 30% of global container traffic flows through the Suez Canal.

A US-led coalition is fighting back. It includes the UK, Germany, and Japan, among others. Last week, the US Navy sank three Houthi boats after they attacked a Maersk container ship.

Maersk has since pulled its ships out of the region. Oil giant BP, Belgian oil tanker firm Euronav, Norwegian tanker group Frontline, and a long list of other shippers have either paused or rerouted ships during this conflict.

With any conflict, I’m always mindful of the humanitarian element. There are plenty of thoughtful voices commenting on that. My job here at Global Macro Update is to see the macroeconomic implications. That is why I’m writing to you today.

Geopolitical conflicts have dynamic consequences.

As global shipping grows more difficult and dangerous, it also grows more expensive. As of Tuesday, shipping rates for the North Asia-Mediterranean route had more than tripled since early December.

Source: freightwaves.com

Even when the Red Sea situation is under control, which I hope is soon, I don’t see the overall level of geopolitical conflict waning. Remember, the Houthis are relatively minor players in a broader Middle East conflict where Iran pulls a lot of the strings.

Unfortunately, today’s level of global tension could be our new baseline. That is contributing to a realignment of global trade patterns.

Companies are looking to de-risk. And for US companies, that often means reshoring and nearshoring production. It just makes sense to reinforce supply chains by producing and trading things closer to home.

This is the next step in a reshoring/nearshoring megatrend that’s been gaining traction for over a decade.

Pandemic-era supply disruptions accelerated it, prompting more companies to question the value of operating in faraway places like China. They were willing to deal with the complexities of a far-flung supply chain when it was cheap to do business there. But rising labor costs have made manufacturing in China much more expensive in recent years.

Source: TACNA

You’ve likely heard that businesses are moving production of vital products like semiconductor chips and pharmaceuticals back to the US. Others are moving production of cars, appliances, and textiles to neighbors like Mexico, which now offers the second-cheapest manufacturing labor in the world. It also helps that you don’t need to move things made in Mexico via ship.

This is all contributing to an explosion of North American trade that I’ve been following with the Macro Team here at Mauldin Economics.

Earlier this year, Mexico became the top US trading partner. Canada comes in at number two. I expect these trade relationships to keep growing stronger. This is an investible trend, and it is not too late to participate. I’ll share more details about my research on this with you in the coming weeks.

Best regards,

Ed D’Agostino
Publisher & COO

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