Trading through the political tensions of the Yellow Sea

This sum­mer, HMS Queen Eliz­a­beth made its maid­en voy­age to the Asia-Pacif­ic. While the air­craft car­ri­er con­duct­ed mil­i­tary exer­cis­es with British allies, its jour­ney said as much about the UK’s evolv­ing com­mer­cial ambi­tions as it did the country’s defence strat­e­gy. 

With new trade agree­ments locked down with key play­ers includ­ing Aus­tralia and Japan, polit­i­cal ten­sions in the area are not lost on the British gov­ern­ment. The sea is still the dom­i­nant way of trans­port­ing goods and com­modi­ties, so what hap­pens in these waters is impor­tant to busi­ness­es and the econ­o­my.

Those ten­sions are rife in the Yel­low Sea, an area of water between Chi­na and the Kore­an Penin­su­la. The region is the focus of a mar­itime bound­ary dis­pute between North and South Korea. It’s also increas­ing­ly impor­tant to Chi­na, which is seek­ing to boost its naval pres­ence to secure an exit from the Pacif­ic in the wake of any future US-led trade block­ade. On top of this, there’s Japan’s long­stand­ing rival­ries with Chi­na and South Korea, Chi­nese claims over Tai­wan, and dete­ri­o­rat­ing rela­tions between Bei­jing and Can­ber­ra. 

Busi­ness­es that rely on safe and easy trade in one of the busiest trade areas in the world, there­fore, must poten­tial­ly mit­i­gate such ten­sions, which could rebound in the form of offi­cial and unof­fi­cial bans on goods, duties, cus­toms delays and ship rerout­ing. All of this could ulti­mate­ly slow pro­duc­tion, hit their bot­tom line or force them to pass costs on to the con­sumer.

And accord­ing to a report last year from strate­gic advi­so­ry firm Sibylline, there’s also an increased risk of state-spon­sored cyber espi­onage and intel­lec­tu­al prop­er­ty theft, which could force organ­i­sa­tions to pick sides or even turn them into pawns.

“The les­son is to devel­op a con­tin­gency plan,” says Guo Yu, lead ana­lyst on Asia Pacif­ic at Sibylline. “Short­en the sup­ply chain or diver­si­fy so you don’t rely on a sin­gle or few routes from the same region where there has been a theme of polit­i­cal tur­moil, nat­ur­al dis­as­ter or dis­eases like Covid.”

Relationship building across the seas

Andrew Fer­gu­son’s seafood com­pa­ny Fer­gu­son Aus­tralia Group is famil­iar with the dis­rup­tion that can be caused by polit­i­cal spats. Last year, after Aus­trali­a’s prime min­is­ter Scott Mor­ri­son led calls for a coro­n­avirus inquiry, Bei­jing tar­get­ed imports. Despite decades of rich trade in live lob­ster to Chi­na, Fer­gu­son’s exports took a hit; four of his con­tain­ers were held for four days for sup­posed test­ing last Octo­ber, lead­ing to all the live prod­uct dying and a loss of around A$320,000 (about £170,000). 

“Due to cus­tomer rela­tion­ships, half was recov­ered in good faith,” explains Fer­gu­son. Build­ing rela­tion­ships and hav­ing an on-the-ground pres­ence to under­stand the con­text of oper­a­tions is huge­ly impor­tant, he says, par­tic­u­lar­ly when the sup­ply chain is vul­ner­a­ble to unpre­dictabil­i­ty, includ­ing geopo­lit­i­cal risks. So when pro­duce like Fer­gu­son’s live lob­sters per­ish, it’s not a reflec­tion on the com­pa­ny or qual­i­ty of prod­uct but is under­stood to be due to fac­tors beyond the com­pa­ny’s con­trol.

The US-Chi­na trade war also led to tight­ened reg­u­la­tions around access to Chi­nese tech­nol­o­gy and con­se­quent­ly semi­con­duc­tor short­ages, caus­ing rip­ple effects for oth­er indus­tries like the auto­mo­tive sec­tor.

The response has involved shift­ing busi­ness mod­els, includ­ing a reduc­tion in pro­duc­tion hours and, in some cas­es, com­pa­nies hav­ing to invest in their own research and devel­op­ment.

For exam­ple, the Chi­nese Elec­tric car man­u­fac­tur­er Aiways has con­sid­ered shift­ing bat­tery man­u­fac­tur­ing – which requires semi­con­duc­tors – from Chi­na to Europe to help cush­ion the fall­out from polit­i­cal feud­ing and high duties. How­ev­er, the ben­e­fit of build­ing that oper­a­tion won’t stack up until demand increas­es, notes Alex Klose, its head of over­seas oper­a­tions.

“The tip­ping point will be a cer­tain vol­ume for us, which is sev­er­al hun­dreds of thou­sands of units. If we could do that, we would prob­a­bly have a plant loca­tion [in Europe] as well,” he says. Until then, it makes more sense to absorb the duties.

Navigating troubled waters

In addi­tion to cre­at­ing trade lever­age, mil­i­tary esca­la­tion in the region could impact busi­ness­es in numer­ous ways. 

“I think about [geopol­i­tics] all the time,” says Ian Hat­ton, founder and CEO of renew­able ener­gy start­up Enter­prize Ener­gy. “A lot of effort goes into risk assess­ment. The gen­er­al approach is ‘don’t make a fuss over it, but don’t ignore it’, so you always end up with con­tin­gency plan­ning around sce­nar­ios [in case] some­thing does go com­plete­ly off-piste.”

Chi­na assert­ing its claims over Tai­wan is a less abstract notion to Hat­ton, who is based in Taipei, than say an import com­pa­ny in the UK that relies on goods from Chi­na.

“Plan­ning for if North and South Kore­as have a war? That’s just so far away from my think­ing — there’s too many oth­er more imme­di­ate things to deal with,” says Nick Glynne, CEO of Buy It Direct, a large retail­er of elec­tron­ics, appli­ances and fur­ni­ture.

When things go awry and unprece­dent­ed events occur, Glynne says busi­ness con­ti­nu­ity plan­ning only takes you so far. This was high­light­ed by the ship­ping cri­sis of the last few months, with Covid out­breaks caus­ing Chi­nese ports to close amid the increased demand. “It’s a mov­ing jig­saw, so you’ve just got to react or spread your risk. You can’t sud­den­ly change your strate­gies overnight,” he says.

Glynne says he is now try­ing to relieve the busi­ness’s depen­den­cy on Chi­na, which dom­i­nates man­u­fac­tur­ing of raw mate­ri­als or com­po­nents, in part by sourc­ing from across fac­to­ries in Europe, North Africa and Mex­i­co.

You’ve got to reduce sin­gle points of fail­ure, says Glynne. “Whether it’s a pan­dem­ic or pol­i­cy change in Chi­na, or gov­ern­ment change around pol­lu­tion, it has such a knock-on for UK imports and there­fore UK con­sumers.” 

Some ecom­merce com­pa­nies have also been build­ing or rent­ing ware­house space near cus­tomers in Europe for goods to be shipped in advance, so they have less dis­tance to trav­el.

Seeking new routes

How­ev­er much busi­ness­es plan, there are some con­tin­gen­cies for which you can’t pre­pare. For instance, while Aiways was ready to use alter­na­tive and more expen­sive trans­porta­tion like air freight dur­ing the ship­ping cri­sis, it would not nec­es­sar­i­ly plan to replace ship­ping from the begin­ning, Klose says. 

And if all busi­ness­es reroute their trade via land trans­porta­tion, a solu­tion tout­ed by some thinkers, that would mean con­ges­tion on the rail­ways or roads, pre­sent­ing new prob­lems for busi­ness­es. 

At the end of the day, the sea is big enough, points out Yu. If trans­port­ing goods through the Yel­low Sea proves prob­lem­at­ic over the longer term, there are oth­er mar­itime solu­tions. The North­ern Sea Route through the Arc­tic is one intrigu­ing pos­si­bil­i­ty as cli­mate change and melt­ing ice sheets make it avail­able for more of the year. It could also be quick­er. 

How­ev­er, with this route run­ning along the Russ­ian coast­line in the unpre­dictable envi­ron­ment of the Arc­tic, it might present its own set of chal­lenges that Britain has not antic­i­pat­ed.