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Explained: How consumers will feel ripple effect of surging freight rates

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Everything from coffee to toys will become more expensive as the pandemic plays its role in stoking freight costs. Developing regions, especially South America and western Africa will face the brunt of rising costs.

Explained: How consumers will feel ripple effect of surging freight rates
Remember the Suez Canal blockade for almost a week in March by mega ship Ever Given? It triggered a new surge in container freight rates, which had finally started to settle from an all-time high reached after the outbreak of the COVID-19 pandemic.
Now, freight cost surges are threatening to hike prices of everything from toys, furniture and car parts to coffee and anchovies.
"The incident reminded the world just how much we rely on shipping," said Jan Hoffmann, head of the trade and logistics branch of United Nations Conference on Trade and Development (UNCTAD). "About 80 percent of the goods we consume are carried by ships, but we easily forget this," he said.
Impact on Consumers
Shipping rates are a major component of trade costs since almost all manufactured goods, including clothes, medicines and processed food products, are shipped in containers.
Hoffmann said the ripples will will be felt by most consumers as many businesses will not be able to bear the brunt of the higher rates and pass them on to their customers.
Transporting a 40-feet steel container of cargo by sea from Shanghai to Rotterdam now costs $10,522, a massive 547 percent higher than the seasonal average over the last five years, says a Bloomberg report quoting Drewry Shipping data.
Shipping bottlenecks and costs are hurting the transport of arabica coffee beans, favoured by Starbucks, and robusta beans used to make instant coffee, which are largely sourced from Asia. Freight costs are more for clunky, low value items like toys and furniture.
The new hike poses an additional challenge to the world economy, even as it struggles to recover from the worst global crisis since the Great Depression.
Freight Rates and the Pandemic
According to the UNCTAD policy brief published in April, demand for container shipping has grown during the pandemic, bouncing back quickly from an initial slowdown.
“Changes in consumption and shopping patterns triggered by COVID, including a surge in electronic commerce and lockdown measures, have led to increased demand for imported manufactured consumer goods, a large part of which is moved in shipping containers,” the UNCTAD policy brief said.
As some governments approved national stimulus packages, businesses stocked up in anticipation of new waves of the pandemic.
Developing Regions Worst Hit
The impact on freight rates has been greatest on trade routes to developing regions.
As of April, the rates for South America and western Africa were higher than for any other major trade region. For example, freight rates from China to South America had jumped 443 percent by early 2021, compared with 63 percent between Asia and North America’s eastern coast.
This is because more ships are required on longer routes, like from China to South America and Africa, meaning many containers are “stuck” on these routes.
“When empty containers are scarce, an importer has to pay not only for the transport, but also for the inventory holding of the empty container,” the policy brief said.
Another factor is the lack of return cargo as it’s costly for carriers to return empty boxes on long routes.
Among other factors are saturated ports and scarcity of ships and dock workers, which have contributed to the squeeze on transportation capacity on every freight path.
Now, the retailers are faced with three choices -- either halt trade, raise prices goods or absorb the cost to pass it on later, all of which would effectively mean more expensive goods, Jordi Espin, strategic relations manager at European Shippers’ Council told Bloomberg. The Brussels-based council represents about one lakh retailers, wholesalers and manufacturers.
With this, some firms in Europe are resorting to using truck convoys to import products like automotive parts, bikes and scooters from China, said Espin.
How to Avoid Future Shortages
The UNCTAD policy brief highlights three issues -- advancing trade facilitation reforms, improving maritime trade tracking and forecasting, and strengthening national competition authorities.
First, policymakers need to implement reforms to make trade easier and less costly, many of which are enshrined in the World Trade Organization’s Trade Facilitation Agreement.
The reforms, which rely on modernising trade procedures by reducing physical contact between workers in the shipping industry, would also make supply chains more resilient and protect employees better.
Shortly after COVID-19 struck, UNCTAD provided a 10-point action plan to keep ships moving, ports open and trade flowing during the pandemic.
Second, policymakers need to promote transparency and encourage collaboration along the maritime supply chain to improve the monitoring of port calls and liner schedules.
Further, governments must ensure that authorities have the resources and expertise needed to investigate potentially abusive practices in the shipping industry.
 

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