Sea Change

Did we take our way of life for granted?

After all, humans are optimists. Our ancestors struggled over just one more hill since that’s where there’s bound to be water – or maybe a bush full of succulent berries. Even when our expectations are shattered by a so-called Black Swan event, like recently, we expect to get back to “business as usual” quickly. Remember “15 Days to Slow the Spread”?

The last two decades have been replete with terrorism, war, economic crisis and bad politics. Still, democracy, the rule of law and capitalism – Western civilization’s “secret sauce” for centuries – have been solid as a rock. That may soon come up for renegotiation. But why would shipping care?

An Agnostic Industry

Traditionally, shipping is an agnostic industry that thrives on indiscriminate trade and interfaces with all ways of thinking and government, regardless of what rulers may decree. It can navigate a systemic realignment if needed. In fact, as I wrote late last year (“Tariff Follies” in the September/October 2020 edition), all the bellyaching about tariffs hasn’t actually stopped oceangoing trade from continuing its strong growth.

But big or small, no ship can forever remain at sea. Shipping needs crucial access to ports, markets and labor. The industry is under threat from and vulnerable to powerful governments that are discovering they can throw their weight around willy-nilly. Another risk found in all our charterparties, but one that many in the industry have had the privilege of overlooking until they can’t, is war.  

We may yet avoid the worst. But an ideological debate is underway that sees trade as a threat to workers, democracy as a venue for corruption and weakness and freedom as selfishness. This tension is akin to the “battle for hearts and minds” of the Cold War.

Josep Borrel, the E.U. High Representative for Foreign Affairs & Security Policy, admitted the E.U. was defenseless against these kinds of foreign propaganda attacks, recently stating that China has been “targeting our democratic values, our information space and even our infrastructure” during the pandemic. The E.U., he added, did not have the resources or even the mandate to counter such aggressive “hybrid tactics.”

The 800-Pound Gorilla

Meanwhile, China is buying shares in big European ports like Antwerp, Piraeus, Valencia and Zeebrugge (coincidence: In February 2021, the ports of Antwerp and Zeebrugge – 204 nautical miles or 60 land miles apart – announced they will be merging). NPR reported in 2018 that 16 European and Mediterranean ports have significant Chinese ownership stakes either through COSCO, China Merchants Port Holdings or Quingdao Port International Development.

Since 2019, Italy has been part of China’s politicized, world-straddling “Belt and Road” strategic investment partnership, which is designed – by China’s own admission – to funnel trade and resources to the homeland.

Following roughly $1 billion spent and after remaking it into the biggest Mediterranean gateway, Chinese government-owned shipping company COSCO now controls 67 percent of Piraeus. This is part of a strategy of vertical integration. The European Chamber of Commerce remarked: “Chinese shippers use ports built and run by SOEs (State-Owned Enterprises) using steel and cement provided by SOEs; they use vessels built by the newly created shipbuilding behemoth […] using steel made by SOEs, which is provided using iron and coal from SOEs; all of which is financed by SOE banks.”

Piraeus is now funneling relay and feeder services throughout the Mediterranean to COSCO’s big Asia-bound ships. COSCO has openly declared in its Annual Report that it will aim to replicate its Piraeus model elsewhere, specifically identifying Abu Dhabi in the U.A.E. and Chancay in Peru as the next potential targets.

So it goes. Shipping may be growing, but it’s not doing so freely and fairly. This is a world where the market is rigged to favor certain (state-owned) companies over others. Asia/Europe market leaders Maersk and MSC are much easier to sue in the impartial commercial courts of Europe. Suing COSCO, on the other hand, is as good as suing the Chinese government – under Chinese law in the Shanghai Maritime Court.

The Chamber of Commerce of Pfalz, which has major German exporters among its members, did not mince words: “In addition to corrupt and poorly trained judges (around 80 percent have not studied law), political meddling frequently leads to ‘erroneous verdicts.’”

To quote Britney Spears: “Hit me, baby, one more time.”

Montenegro and China agreed in 2017 that a “Belt and Road” loan would provide $944 million for the first section of a highway to the Adriatic port of Bar, giving landlocked Serbia easier access. The construction is being carried out by Chinese workers hired by the Chinese Road and Bridge Corporation (you guessed it, an SOE), and the loan has ballooned Montenegro’s national debt, which has in turn triggered tax increases, a freeze in public sector wages and a rollback of some social programs. Montenegro owes the first installment on the loan, amounting to $67.5 million, early in 2022. 

A February 21, 2021 article in the South China Morning Post argued, “There is no evidence China aims to deliberately push poor countries into debt as a way of seizing their assets or gaining a greater say in their internal affairs.” In that case, perhaps this is merely a convenient by-product.

It's possible that European leaders, in spite of the allure of Chinese money, will wake up to the problem of striking deals with an 800-pound gorilla. At the end of the day, it sits where it wants.

The Russian Bear

But gorillas, metaphorically, are as bad as bears. And life feels easier when you don’t learn its lessons.

On the “Russian Front,” the fateful Nord Stream 2 gas pipeline is a security risk to the new democracies of Eastern Europe. It moves inexorably closer to completion even though nobody but Germany and Russia want it (see “Cowboys vs. Cossacks” in the January/February 2019 edition).

It’s especially awkward now that Russia just seized 11,000 plots of Ukrainian-owned land, an act which the E.U. complained violates international humanitarian law. Authoritarian regimes have honed a sixth sense that reliably tells them just how far they can push their luck – and how far they can push the E.U. – before there’s no going back.

But maybe that threshold approaches. Economic dependencies can be a prelude to political accommodation: He who pays the orchestra will direct the music it plays. The E.U. is still deferential in the face of Russia’s antagonisms. And when China expressed irritation at German Chancellor Angela Merkel’s calling it a “systemic rival,” she was quick to smooth ruffled feathers with a compliment, suggesting the phrase showed that “Europe recognizes China’s growing strength and influence.”  

Meanwhile, the E.U. picks fights with Amazon, Google and Facebook, presumably in a bid to grow tax revenues. The International Monetary Fund noted: “If successful, new tax regimes could make it easier for countries to collect revenue generated within their borders and reduce public ire toward the outsize successes of American companies…” Such moves go under the portmanteau of “techno-nationalism.” They also jeopardize the relationship with the U.S., which provides the E.U. its security.

New “allies” may gain sought-after access as old allies grow more frustrated.

The COVID Effect

COVID-19 costs may also act as an accelerant for Europe’s thirst for Chinese credit.

Bloomberg calculated that global public debt in 2020 grew by $19.5 trillion as governments lit their budgets on fire to pay for lockdowns aimed at stopping COVID-19. The world’s advanced economies are more indebted now relative to their GDPs than they were amid the rubble of World War II, not counting 2021’s spending. Europe can achieve its pre-COVID-19 GDP but maybe only by 2025, says the International Monetary Fund.

That lost growth has a human cost that will stir unrest.

High debt means governments may pressure central banks to allow inflation via low interest rates. That will keep debt service and borrowing cheap at the expense of savers and retirees on fixed incomes and frustrate businesses who like stable prices, i.e., the middle class. In Germany, according to commercial broadsheet Handelsblatt, 277 banks now charge customers negative interest on money that is sitting in accounts. “The dynamism is intense,” says consumer advocacy group Verivox. “Almost daily, additional banks begin charging negative interest rates.”

Meanwhile, inflation is trending upward, and Germany’s Economic Advisory Council warns that “three to four percent” inflation is a possibility in the coming years, especially given fluctuations in the cost of imported energy.

Stemming the Tide

A debt-inflation spiral coupled with the E.U.’s deteriorating security outlook and economic capability is troubling. If China succeeds in controlling more ports and critical infrastructure in the E.U. and elsewhere, then shipping companies that don’t enjoy the endorsement of the Chinese Communist Party may find themselves without upstream customers or blocked from accessing terminals.

We can still enjoy the freedom of the seas for now. To keep it that way, the E.U. will need to do more than just manage its own decline. And that will require what the E.U. hates most: making choices.

Or the E.U. may have become so undermined that a reversal is impossible.

As Fleetwood Mac opined: “Thunder only happens when it’s raining.” 

Erik Kravets is a founding partner of Kravets & Kravets, a maritime and admiralty law firm providing bespoke solutions to clients navigating the North Sea and beyond. Clients involved in ship brokering and management, offshore, towage and salvage, vessel chartering, cargo handling/stevedoring and carriage of goods by sea come to Mr. Kravets for representation.