Trading through the political tensions of the Yellow Sea

As the UK seeks more trade with Asia-Pacific, businesses may have to navigate the challenges and risks of the Yellow Seau0026nbsp;
HMS Queen Elizabeth sits anchored at the U.S. naval base in Yokosuka, Japan during the aircraft carrier’s world tour

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.

It’s a moving jigsaw, so you’ve just got to react or spread your risk. You can’t suddenly change your strategies overnight

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.