Maritime trade in Commonwealth South Asia: A boon for post-COVID recovery and resilience

21-10-2021

By Salamat Ali, Brendan Vickers and Ganeshan Wignaraja

With long coast lines, vast marine areas and leading global seaports, South Asian countries in the Commonwealth are important players in the global ocean domain.

The maritime and shipping sector handles a significant share of these countries’ global exports. Trade and growth in Commonwealth South Asia seem to be on a recovery trajectory from the devastating impact of the COVID-19 pandemic. However, skyrocketing freight rates on major shipping routes fuelling rising trade costs and other risks could affect exports to western markets and derail recovery.

A set of policies aimed at improving logistics, facilitating trade and ensuring environmental sustainability can help to harness the power of maritime trade in building back better in Commonwealth South Asia. Maritime trade profile South Asia is the largest region globally with almost one quarter of the world’s population.

The bulk of the region’s population lives in the five larger countries (Bangladesh, India, the Maldives, Pakistan and Sri Lanka), which are members of the Commonwealth – an inter-governmental organisation of 54-member countries. Maritime shipping is emerging as an important sector in Commonwealth South Asia. One of the notable initial conditions for maritime shipping activity is the long coastline and extensive maritime domain of Commonwealth South Asia.

The marine area of Commonwealth South Asian countries is almost equal to their land area. However, it varies from 30% (of land area) for Pakistan to about 800% for Sri Lanka. For the Maldives, the marine area is much bigger, almost 3,000 times the country’s land area, indicating huge unexploited potential of maritime trade, shipping and the wider ocean economy. The Maldives is one of the largest ocean states in the world, ranking third largest globally in terms of marine-to-land-area ratio.

The gradual integration of Commonwealth South Asia into the world trading system following economic reforms in recent decades has shifted the focus of global production and trade to Asia. Around 80% of world merchandise is handled through maritime trade routes and the same applies to the exports and imports of the five Commonwealth South Asian countries. The shipping and maritime sector provides a lifeline to these countries by linking production centres in East Asia with export markets in Europe and North America. Before the pandemic, the combined merchandise exports of these five Commonwealth countries amounted to $ 400 billion in 2019. Since 2000, the volume of container traffic handled at seaports in Commonwealth South Asia rose nearly sixfold to around 30 million twenty-foot equivalent units (TEUs) in 2019.

The share of these countries in total container traffic in the 54 members of the Commonwealth rose to 28% in 2019 (up from 17% in 2000). This increase is largely due to India’s maritime trade expansion, which is one of the largest Commonwealth maritime traders. Container traffic at India’s ports has increased almost ten-fold since 2000 to about 20 million TEUs in 2019. Interestingly too, Commonwealth South Asia is home to five important seaports that appear on the Lloyd list of top 100 container shipping ports in the world in 2020.

Two are located in India — Jawaharlal Nehru and Mundra, with their global ranking at 33rd and 37th, respectively. The others are Colombo Port in Sri Lanka (24th), Chittagong Port in Bangladesh (58th) and Karachi Port in Pakistan (85th). The key success factors underlying the high performing ports in Commonwealth South Asia include a strategic geographical location, significant Belt and Road Initiative (BRI) investment from China in ports and other trade-related infrastructure, notable shipping liner connectivity, well-organised logistics networks and efficient port-related services. For instance, a geographical advantage in the Indian Ocean has enabled Colombo port to become a key transshipment hub for India – a site where many shipping lines consolidate and de-consolidate cargo for transhipment to other destinations.

Around 45% of Colombo’s transshipment volumes either originate from or are destined to an Adani port terminal in India. The CICT Terminal, the only deep-water terminal capable of handling large ships, is the most efficient and environmentally friendly of Colombo Port’s terminals. Gwadar port on the Arabian Sea at the mouth of the Strait of Hormuz is the landmark project in the $ 62 billion China Pakistan Economic Corridor. The Payra Deep Sea Port project in Bangladesh, with Chinese investment of around $ 15 billion, is another significant development in this region.

Chinese BRI investment in these South Asian ports has improved port efficiency considerably. Besides this hard infrastructure and ready access to the ocean, Commonwealth South Asia is also one of the largest sources of sea crew in the world. Almost 15% of the world’s seafarers (of around 1.6 million) originate from India and there are growing numbers from Bangladesh, Pakistan and Sri Lanka. While the world was in lockdown, this crew has worked tirelessly and often beyond the expiry of their contracts to keep ships and maritime trade moving, providing us with the necessary food supplies, medical goods and industrial raw materials. Resilience to shocks Maritime trade of Commonwealth South Asia has largely shown great resilience to various global shocks. The global financial crisis (GFC) of 2008-09 was a watershed moment in the growth of maritime trade of these countries.

Their container traffic, which was growing around 13% per annum before the GFC dropped to almost half, at around 7%, but even this reduced growth rate has been higher than the figure for other Commonwealth countries. During the COVID-19 pandemic, most Commonwealth South Asian ports have remained operational. Countries adopted various measures to mitigate the effect of the outbreak. There has been huge uptake in the adoption of digital technologies and shifting away from physical paper documentation. India has launched its world leading port community system that integrates all shipping-related stakeholders to one online platform. Pakistan is expediting the implementation of a single window that would automate the trade-related processes of more than 50 public sector regulatory agencies.

Moreover, shipping-related services, such as warehousing, financial, logistics and port documentation, have become increasingly digital. It is important to make these measures permanent once the pandemic is over and do not resort to business as usual. India’s digitisation of seaport-related services through the development of a port community system has greatly helped the country and its regional neighbours also. Non-Commonwealth landlocked South Asian countries, such as Nepal and Bhutan, use India’s seaports for transhipment of their cargos. Skyrocketing freight rates: a crisis within a crisis In 2020, the COVID-19 pandemic adversely affected maritime trade and shipping in Commonwealth South Asia. However, this sector has shown great resilience. Maritime trade has rebounded sharply in 2021, partly linked to a base effect and a rapid pick up in East-West sea trade. However, the emergence of any new variant of coronavirus could derail this nascent trade recovery. In fact, the shipping and maritime sector in Commonwealth South Asia is now passing through the second critical phase of the pandemic. Easing of restrictions in most economies and adoption of business activities and containment measures have fuelled a huge demand for shipping services.

Skewed consumer expenditure on goods, rather than services, stimulus-related financial support and switching to hybrid working arrangements have created a massive demand for new kind of goods related to remote working, home improvement and health and wellbeing. The maritime sector is struggling to manage this unprecedented demand in Europe and North America, which has led to shortages of containers worldwide and caused a rise in freight rates. Some of these issues are hang overs from the earlier phase of the pandemic when many shipping lines resorted to cancellation or dry sailing, leading containers stranded at various ports. Freight rates on east-west routes linking Commonwealth South Asian ports with Europe and North America have increased almost ten-fold. Around 40% of exports from South Asian economies are shipped to the markets in Europe and North America.

Skyrocketing freight rates on the East-West routes that link South Asia’s ports with these regions, could pose a great challenge for the recovery of maritime trade. More than half of India’s exports and around 70% of those from Pakistan, Bangladesh and Sri Lanka are destined to these markets. This exponential rise in freight rates could affect competitiveness of South Asian firms, leading to delayed trade recovery. This could also create challenges in meeting exports orders during in the peak demand season before Christmas. The maritime trade outlook The shipping and maritime sector successfully weathered the global financial crises in the past as well as the blockage of the Suez Canal, more recently. Although this sector has shown a considerable resilience in the early phase of the current pandemic, it is now struggling to manage the unprecedented demand. With the gradual removal of pandemic-related restrictions on air travel and resumption of tourism, the demand for maritime trade could stabilise in coming months. But the emergence of new variants of COVID-19 could pose a short-term risk.

The changing political economy dynamics in Asia-Pacific would also have implications for maritime trade in this region. In the long run, the opening of a potential Northern Sea route because of melting Arctic ice offers several opportunities. This shipping route would considerably reduce sailing distance between South Asia and European markets and provide an alternative to the Suez Canal. To use trade as an engine of growth and build back better from the pandemic, Commonwealth South Asia can focus on improving ports and logistics performance, enabling efficient and digitised trade facilitation, promoting trade openness, and regulating container freight rates. As the world increasingly pivots to tackle the climate crisis, the focus should also gradually shift to ensuring greener shipping and building climate resilience and environmental sustainability of ports and maritime trade infrastructure. Implementing conducive policies in these areas can help to harness maritime trade for COVID recovery and building resilience.