The Decisive | Season 3 Ep.10 -Takeaways from TPM25: Tariffs, trade and geopolitical risks for shippers and carriers

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Kristen Hallam  

Welcome to the Decisive Podcast. I'm your host, Kristen Hallam. This past week, I attended the Trans-Pacific Maritime or TPM Conference in Long Beach, California. It's the world's largest container shipping conference organized by my colleagues at the Journal of Commerce, and it turned 25 this year. In this episode, we've got some takeaways from the conference from my Market Intelligence colleagues, Natznet Tesfay, Head of Insights and Analysis; and Jack Kennedy, Head of Middle East, North Africa Country Risk. Natznet spoke with former UN Ambassador and National Security Adviser, John Bolton, on the main stage at TPM. And Jack was featured in a panel discussion about the outlook for shipping in the Red Sea. You may remember the TPM preview we did in November, featuring Peter Tirschwell, Vice President, Maritime Trade and Supply Chain at S&P Global Market Intelligence and Founder and Chair of the TPM Conference. And if you don't, here's a clip of Peter describing the event.

Peter Tirschwell  

The reason why TPM has grown so much over the years, it was started by journalists with the idea of interviewing our sources in front of a live audience. and having direct face-to-face interaction with the market, which benefits our news reporting. And so the value of TPM for the industry is to get really close to the market. And that means close to information and data and analysis and perspective and forecast, which is all embedded into our program and perspectives on various topics that are relevant in any given year, but also close to the market in terms of people like other people who are your vendors, are your business partners because you get so plugged into what's happening at TPM, it's such an invaluable experience that more and more people are coming every year. So to answer your question, what it really means is that when we ask what key themes should shippers be monitoring, -- it's whichever themes are those which happen to be dominant at any given time and what's dominant this year is going to be impact of tariffs, the impact of any further black swan event that we can't even foresee right now and the way to manage your way through that in this particular ecosystem of ocean containerized shipping is to become an insider in that market, where your access to information is better than that of your competitors. And obtaining that is the rationale for TPM essentially. It's a conference of 4,000 insiders and growing.

Kristen Hallam  

So I spoke to Natza on the sidelines of TPM about her conversation with Ambassador Bolton. Here's what she had to say.

Kristen Hallam  

What were some of your key takeaways from that conversation?

Natznet Tesfay  

Starting with Asia, particularly interesting that Ambassador Bolton had raised that India will be a critical relationship for the U.S. over the 21st century. There's a recognition of the opportunities within the Indian market. It's definitely increasing prominence as part of China Plus One strategy, so diversifying supply chains, also looking at the endogenous growth that the Indian subcontinent has, also from a geopolitical perspective in terms of maintaining freedom of navigation principles in the 21st century. A second item that was noteworthy was the -- from his perspective -- the ambitions of the Chinese government to become a greater Arctic power and just thinking about the changing climate and how it will open up new areas that were previously less hospitable, opening up the resources that sit underneath these areas, as well as the open sea access routes that would become more available, how that is likely to be a sphere of competition in the 21st century as we go forward. So the futurescaping points were ones that I don't think we've heard other attendees raise with regard to how geopolitical competition amongst so-called great powers will form.

Kristen Hallam  

And I heard you mention one of our big themes for 2025, which is elusive alliances. Were you surprised that geopolitics has so much of a presence here at TPM?

Natznet Tesfay  

No, considering the events and developments that led up to us arriving at TPM 25, including a meeting between the Ukrainian President Zelensky with U.S. President and Vice President, Donald Trump and J.D. Vance, respectively. That was front of mind as to how that might influence the trans-Atlantic relationship, considering a shift in U.S. administration position and the willingness to provide support to Ukraine and its current attempts to stymie Russian advances. We saw subsequently, there was an announcement to suspend military aid to Ukraine. So that's on the mind of many of the attendees here, both because it's a global conference where we have over 44 countries represented. A number of carriers are Europe-based, thinking about what partnership looks like in the Trans-Atlantic Alliance and how that might evolve and how it might be derailed potentially by some of these developments is front of mind. Secondly, also acknowledging leaning towards tariff policies. So there was 25% tariffs on trade applied to Mexico and Canada that came into effect on the 4th of March as well as an additional 10% on China. Many of the conversations we've heard today have raised questions as to what that means for the container shipping industry and how that is likely to have an impact in terms of pass-through costs to their consumers, increase along the value chain or the logistics supply chain. And one critical question that I hear in a number of our sessions is: Who's going to be paying that cost? And there is a very animated debate as to where that cost might be absorbed or passed through to with concerns to inflation.

Kristen Hallam  

And what are some of the questions that are top of mind for our clients right now when you think about that theme of elusive alliances?

Natznet Tesfay  

Freedom of navigation, if there is less willingness from the current U.S. administration to provide a greater provision of security for critical trade arteries and how are our clients going to ensure that they have access to these critical corridors in terms of competition around accessing the ports in terms of -- well, there's the USTR recommendations under Section 301 and applying tax or duties for ships built in China. That is going to have an impact if that proceeds and comes into effect as to how they're able to navigate from what I understand. It is a fee that will be charged by port calls. So that is likely to lead to changes in strategy. And there's a concern about the port capacity in the U.S. and there's been a consistent comparison of port capacity, productivity and efficiency in the U.S. as compared to ports around the world. There's one session earlier today where a speaker highlighted that Mundra Port in India is probably more productive than any port that you could compare it to in the U.S. There are a number of other factors to take into consideration. But just as a shipper, it was a notable comment as to the competitiveness of the U.S. ports as compared to the level of automation, labor costs, the ability to to operate in certain ways like 24/7 and other parts of the world that could put U.S. ports at a disadvantaged position.

Kristen Hallam  

So one of the panelists in a session that I was at today, which was on tariffs and very -- as you mentioned, very timely given the tariff announcement this week. And she said that in a world where much is uncontrollable, the one thing that you can control is the quality of your information and what types of information that you get. Agree or disagree?

Natznet Tesfay  

As an analyst within our Global Insight business, I'd have to say I would lean into that statement.

Kristen Hallam  

Okay.

Natznet Tesfay  

We provide our clients with an understanding as to how the macroeconomic, geopolitical country risk environment and related to that, trade, logistics, shipping, supply chain are likely to evolve. And so we look at the proprietary data that we have, whether it's bills of lading, -- we look at the now-casting that we're able to produce in order to provide the real-time indicators as to where we see these shifts and changes to underpin the forecasts that help provide our clients with some clarity. And where there is greater uncertainty, we lean on our scenario capability to understand what are the potential what ifs. And while we may not be able to point to one specific pathway for development, we could at least point out what are going to be the impacts of a potential course of action. And for our clients, it gives them an ability to plan ahead and mitigate as many of the known risks or identified risks as possible. And most importantly, there are always latent opportunities. So how do we lean into that? Amongst other views, we have economic angst and domestic discontent. So in the global macro level where we see more elusive alliances, there are greater pressures on policymakers and trying to understand how to navigate that while also delivering towards expected populations. And when you're trying to plan around those sometimes countervailing factors, -- it's for the private sector corporates, those who are trying to expand their businesses or at least ensure that they're sustainable and profitable to be able to anticipate that as much as possible. So I have to agree with the statement that information and more importantly, intelligence, which is valuable information, timely and relevant to your exact question is most important. That ironically brings up a point in my mind around the power of Gen AI. It's knowing what are the right questions to prompt, not just generally having access to an infinite pool of resource and data, you need to know what you're looking for in that needle in the haystack.

Kristen Hallam  

I also spoke with Jack Kennedy on the sidelines of TPM about the Red Sea, the Houthis and Syria. Here's what he had to say.

Kristen Hallam  

It was interesting that Mark, when he introduced the session, said we're not going to make any predictions about the Red Sea, but we do have an outlook. What is our outlook there?

Jack Kennedy  

We think that the outlook for shipping disruption in the Red Sea is going to remain severe through 2025. The Houthi have paused their attack activity for the last 6 or 7 weeks in line with a cease fire between Israel and Hamas in Gaza, but they had conditioned that on Israel halting military operations against Hamas. And as that cease fire has now completed its first phase without being extended or without progressing into Phase 2, it seems likely that at some point in the next several months, Israel will probably resume high intensity or higher intensity military operations against Hamas. And in response, we're expecting the Houthi to pick up their attack activity on Israel, which in turn is likely to be met by air strikes from a U.S.-led coalition in the Red Sea. And if that starts again, we're expecting that the Houthi will probably renew their attacks on shipping as a means of contributing to that conflict in Gaza.

Kristen Hallam  

I thought you made an interesting distinction with the Houthi and their capabilities compared to other non-state actors. Could you go into that for our listeners on the podcast?

Jack Kennedy  

Yes. I think it's really important for understanding the stamina that the group had in terms of their operations is that they get mischaracterized quite a lot as maybe like a large terrorist group like Islamic State or even like Hamas in Gaza. But they control about 1/3 of Yemen's territory and about 2/3 of the population. And within that, we're talking about major urban areas, industrial capacity and a lot of coastline. And they have an indigenous weapons production capability that they've used to great effect and they've been able to replicate a lot of the designs that are sent over by Iran. And that kind of development has meant that they have the sophisticated capabilities in terms of how they can use UAVs and particularly anti-ship ballistic missiles in these kind of attacks. And what that means is that they're able to maintain a level of conflict operation, I think, that is very extensive. And the idea that they could be halted or dissuaded from these kind of attacks with anything but a major military operation is going to be quite flawed, I think.

Kristen Hallam  

In the fireside chat with Natza, the former UN ambassador, John Bolton, did make some comments like, oh, there should have been a military operation and so on. But there would be some serious kind of geopolitical consequences to any attempt to do something like that. And maybe before we even get into potential consequences, it would make sense just to say, what is the actual likelihood that a major military operation would be undertaken?

Jack Kennedy  

Well, I mean, now, obviously, with the Trump administration as well, there's a lot of uncertainty around how exactly they will look to project additional military force in the MENA region, for example. But even if it was at the level that we were seeing before the ceasefire, you're talking about maybe the deployment of an aircraft carrier strike group into the Red Sea or even two, the level of kind of strike capability that we've seen from that, it certainly had an impact in terms of reducing the frequency of Houthi attacks. Like I was saying yesterday, our data suggested there was about a 55% decrease in attack events from the second half of 2024 compared to the first half. But we really have to be thinking about could a joint coalition, probably involving Israel, the U.S. and maybe the Gulf states, try and carry out a major military operation? They’re the only real actors I think that have the desire, the intent and probably the capability to do so now. But the major risk factor there is that the Houthi would pivot their operations, not just in terms of trying to strike ships in transit, but they could resume attacks directly on the Gulf states, for example, using the same missiles and UAVs that they've been firing at Israel. And that was something that they were doing very frequently before a ceasefire was arranged between the Houthi, the Yemeni internationally recognized government of Saudi Arabia in 2022. So that's another a big question mark from what we were hearing from Ambassador Bolton was the subsequent consequences of what an escalation looks like without a plan for protecting the wider region, but there might be an immediate impact in terms of reducing Houthi activity, but they can certainly bring it back.

Kristen Hallam  

What is it that the Houthis want out of this exactly?

Jack Kennedy  

Yes, that's a really good question. Well, they've tied their attacks to Israel's operations in Gaza. And that's in itself, it's a mischaracterization of what their true intent is. And we think that they're trying to secure international recognition for their role in Yemen and probably to establish themselves as a significant regional geopolitical actor. So they operate within the Iranian axis of resistance. Now in fact, they're probably the most prominent non-state actor within that since Hamas and Hezbollah have been significantly degraded in terms of their capabilities as well over the last year with the fall of the Assad government in Syria. That was a major loss to Iran’s regional footprint. But they have this domestic interest, the Houthi, as well, and that's something that they're developing over the ceasefire we saw them pivot their activity to escalate militarily domestically along the kind of frozen front lines of the civil war against the government, and they’ve started threatening civil aviation if it doesn't pay permits to overfly Yemeni airspace. So it's building a position where they're able to continue to apply financial leverage to the government. And whether it's threatening aviation or threatening shipping, I think that shows that they have an intent to keep that going and they can use that as a revenue generation stream. So it's a domestic angle to what they're doing in terms of how they can situate themselves within Yemen's domestic stability and then using it to project force externally. It's very good for their own internal recruitment if they've certainly been able to bring on tens of thousands of additional fighters in the last 18 months because they've positioned themselves as an actor that is capable of escalating militarily against Israel, United States, Europe and doing it, if not successfully, but certainly not being defeated while they’re at it.

Kristen Hallam  

The Red Sea was a common thread, if you will, throughout this conference. What struck you about some of the things that came up either in different sessions or things that you heard attendees talking about at the conference that stood out to you?

Jack Kennedy  

In terms of the Red Sea, I think it's really interesting to me in a way that hadn't really been able to appreciate previously is the extent to which the uncertainty that has been created around it in terms of the outlook for a lot of the shipping operators that are present here, they need to know very distinct and concrete timelines for how they're projecting forward in terms of what it means for chartering vessels, what freight rates are going to look like and how that was going to be impacted by the uncertainty and the longer-term time line of that, I think it is really interesting. A bit surprised that the around the discussions that there doesn't seem to have been a kind of wider thought process. For a lot of these guys, it seems that the idea of Suez, I mean they just described it as being closed. It's not even a question of do we risk transits or is it worth thinking about it in terms of maybe less frequent input into the Red Sea or it's simply that it's closed. And so much of their discussions around shipping routes is now baked into that. It just seems to take it completely off of the table as a means of doing business.

Kristen Hallam  

Now is there anything that I haven't asked you that you would like to talk about?

Jack Kennedy  

The big question mark for MENA and our stability and our forecasting, whether it's for the Red Sea, whether it's for the war in Gaza in Israel, but particularly for how we're thinking about security and stability for the wider region is going to be the outlook for Iran's nuclear issue. And if we're going to see negotiations between the Trump administration and Iran around that, our time line has been that if there's not a deal by the time the final clauses of the 2015 agreement expire in October and very significant sanctions from the UN are automatically reimposed on Iran and presumably continues with its development of an enrichment of uranium does that make it more likely that Israel with or without U.S. support could carry out strikes on its nuclear facilities? And on a follow-on from that, what the Iranian response will be, which we think will probably be to respond very directly against U.S. military bases in the Gulf and probably a lot of the energy infrastructure of the Gulf states that are allied with it. And we've been talking about the impact that reduced access to the Red Sea and the Suez Canal has had on the global economy and for shippers and anyone with a maritime interest here. And that's sometimes characterized as a choke point. It's not a choke point. One of the things that we've been showing and being shown here is that if you can't go through the Suez Canal, you just reroute around Africa. And so there is another alternative to doing that. With the Strait of Hormuz in the Gulf, that is a choke point. And if it's closed, there's absolutely no way of getting goods or oil or anything else out into the wider global economy. And the impact of that would be an order of magnitude, more significant than what we've been seeing in the Red Sea.

Kristen Hallam  

One thing that didn't come up very much at the TPM conference was Syria, and they've got a new government in place now. What, if any, impact is that likely to have for this audience, for shippers, for carriers, for trade?

Jack Kennedy  

Syria and the stability in Syria is probably not going to have a majorly direct impact for the kind of shipping and trade and commercial interests that have been mostly present at TPM, regardless of its limited port capacity, but also the way that it's been effectively removed from the global economy over the past 12 years as a result of the civil war impact. But indirectly, and what's really interesting in terms of how these various conflicts in region are being tied together and linked, the Israeli government has effectively opposed the current transition government process because of its ties or its previous affiliation with terrorist groups like Al Qaeda and Islamic State and has continued to carry out air strikes on what it would say are military facilities and stockpiles in the country. It occupies or has extended its territorial occupation in the Syrian territory in Golan and is currently trying to enforce something like a demilitarized space in the south of the country, which the Syrian government opposes. And what's really interesting is that the Houthi have extended their own threats to Israel. So what we've been seeing and what we were seeing over the last year is that they tried to tie their attack activity in Israel to the status of the conflict in Gaza. And over the past couple of weeks, what the Houthi been at least saying is that if military activity from Israel against the Syrian government continues, the Houthi would consider also responding militarily to those attacks by resuming their missile and UAV launches against Israel as a means of trying to influence the dynamic of the fighting in Syria. And again, in line with our current forecast, if the Houthis start attacking in Israel, again, whether it's for at least for the stated reason of supporting Hamas and Gaza or for supporting the government in Syria, it becomes much more likely that we start seeing an Israeli military response against the Houthi or U.S. response to the Houthi. And again, that brings us back into the outlook, which is that probably means the Houthi would start targeting shipping again, at least in some capacity. It's all becoming very connected. And I think that flags again one of the internal justifications for the Houthi regardless of whether or not it's the true intent of their aims, they will continue to frame their activities as being part of a wider geopolitical strategy and the contribution to that. So we need to keep track of it.