New Silk Road
and maybe a little peace in the middle east?
The proposed India Middle-East Transport Corridor (IMEC) is the most underreported story of 2023. The blood of the global economy is trade goods: untested cosmetics, ineffectual weight-loss supplements, and single-use small kitchen appliances. That blood is pumped by the heart, the world’s manufacturing base. Those factories, and the countries in which they sit, get a lot of attention (see China trade war). Equally important, though, are the capillaries through which the world’s goods are transmitted. The world’s established trade routes are lattices upon which the global economic order is constructed. The introduction of a new trade route, IMEC, would therefore be the most important geopolitical development since Taylor Swift attended the Chiefs/Eagles game.
Why trade routes are important.
The majority of the world’s GDP comes from trade. In other words, most of the wealth created in the world is a function of people in different countries selling goods & services (mainly goods). The majority of that trade flows through only a handful of routes:
There are so few routes because creating a new trade route is a massive undertaking. Every country along the trade route needs to agree to host the trade route, protect it, share economics, and invest in massive public infrastructure (ports, roads, railways, customs, power supply, etc). On top of that, private capital has to be incentivized to build the route. Trade routes need telecommunications, refueling stations, logistics support, and of course actual substance to ship. This level of investment and coordination on par with the International Space Station or hunting Bin Laden. It’s rare to see, which is why a major trade route is only created once a century or so. Plus, trade routes have a ton of capacity that comes with low marginal costs (so big-time economies of scale) and network effects (the more users at each port, the more utility for receivers at the other ports), which make building a new, alternative route even less financially appealing.
Trade routes are a quiet centers of power
China accounts for ~40% of global manufacturing output and 14% of global trade. By no coincidence, major trade routes mostly originate in China and end up in Europe or the US. Much of that trade goes through the the Maritime Silk Road (blue route below):
The Maritime Silk Road connects to Europe through the Suez Canal - 12% of global trade goes through the Suez Canal. But even these figures understate the importance of the Maritime Silk Road. Basically anything that Europe exports to the US includes something previously imported from Asia. The statistics wouldn’t capture that. If the Maritime Silk Road were vaporized then global trade would come to a standstill because Asian inputs are in everything.
Countries along trade routes benefit massively because their effective cost to produce and trade any good is much lower. In a 2009 paper McKinsey estimated that half of supply chain costs are transportation. If you have a bunch of ports in your country linked to a global trade route, and the rest of the world has invested massive amounts of resources in that trade route, then your cost of transport will be lower. This is part of the reason why China’s share of global manufacturing is at all time high even though their labor costs haven’t been competitive in over a decade:
Why does the world need IMEC now?
Political goodwill for a new Asia-to-Europe trade route has materialized very quickly, and it’s the confluence of five main global developments:
First, the current Maritime Silk Route is a major asset for China. It goes without saying that the US would love to devalue that asset by creating an alternative route. This would be a huge win for the US in their burgeoning economic war with China. Second, as part of that trade war, the US and its allies are promoting a “China derisking,” which means rotating manufacturing outside of China and into other cheap-labor Asian markets like India, Thailand, Indonesia and Vietnam. That process will be easier if those countries are integrated into new trade routes. Third, China has been investing in its own alternative trade routes for over a decade (known as the Belt Road Initiative), but the sanctions on Russia have created a willing partner to double-down on the initiative. The US and its Allies need to respond fast.
Fourth, Egypt’s political and economic destabilization continues, which creates a more urgent need for alternatives to the Suez Canal. Plus, the canal extracts ~$10 billion in fees per year at high rates, so competition could bring down the cost of trade. Fifth, and finally, the supply chain bottlenecks of 2021 revealed the need for updating and adding redundancy to the global logistics network.
Where to put a new trade route?
Now more than ever, the US and their allies want an alternative trade route. The question though, is where would that route go? A northern route would mean going through Russia, that sure as shit isn’t happening. A southern route goes through Africa is longer and would cross unstable countries. The fastest route, actually a route that is purportedly 40% faster than any existing route, would be a rail line that cuts through the Middle East. That is what the IMEC plans to do:
If this is such a good idea, why doesn’t it exist already? If you notice, the trade route has to run through Saudi Arabia, and then it has to run through Israel. The problem is that Saudi Arabia and Israel have been mortal enemies for all of Israel’s existence. Up until very recently, there’s been absolutely no way they would cooperate on a trade route. That’s changing fast. Israel has been normalizing relationships with other Arab states. Saudi Arabia needs this trade route if it wants to accomplish its economic diversification away from oil. Recently, Mohammed bin Salman, ruler of Saudi Arabia, said in an interview that his country is “closer” to normalizing relations with Israel. This is mind-blowing stuff, it’s like if Taylor and Kanye teamed up to record an album with Joe Jonas as producer. Importantly, it’s the last condition needed for IMEC to really happen.
[Since I started writing this article, the Gaza conflict broke out, throwing a fat wrench into any ‘peace in the Middle East’ plans, and likely delaying IMEC discussions. But the timing is no coincidence. Part of Hamas motivation for its terrorist attack was to disrupt peace talks. Another interesting development has been Turkey partnering with Iraq to promote a competitor to the IMEC, since the IMEC would circumvent Turkey, thus disenfranchising its access to global trade. World events move fast!]
Progress on the IMEC
All these conditions led to a huge announcement at September’s G20 Meeting in Mumbai: a memorandum of understanding was signed by participating countries to develop the IMEC. There have also been some private sector investments, for instance India’s largest port owner, Adani Ports, purchased Israel’s largest port, Haifa, earlier this year, which would help grease some wheels (and also suggests that backdoor talks have been going on far before the G20). But really, limited resources have been committed so far, and there will be a lot required.
Implications of the IMEC
If IMEC happens, there’s two sets of implications: economic/political and cultural. On the economic front, interestingly the IMEC will start in India - a huge win for India and its southeast Asian neighbors. Saudi Arabia, Israel, and the UAE will also benefit from being linked up to global trade and having traffic through their territory. Europe and North America gain from cheaper and faster shipping, plus additional leverage over China. Then there are the losers. China and Egypt are obvious ones. Russia will be further isolated as some of the countries it is courting as potential allies (Saudi, India) will take a step closer to the US. Then there’s Iran, which will watch as its enemy Saudi Arabia partners with its other enemy in Israel to make a bunch of money in conjunction with its other enemy the US. If that doesn’t motivate them to finally build that nuke, nothing will.
More interestingly are the long-term cultural implications. Increased trade goes hand-in-hand with economic integration, which goes hand-in-hand with cultural influence. Countries trade stuff and then they trade culture. If Southeast Asia and the Middle East do become more important trade partners to the west, then the next generation of Americans will have a very different worldview than the current one. Today, some of Japan’s most important exports to the US are cultural: HelloKitty, Sushi, Pokemon, Super Mario, DragonBall Z, J-Pop, OnePiece, Ramen, that Netflix lady who loves cleaning, weird game shows, and treating the elderly with respect. Wait no, that last one never got adopted in the US. Japan has a huge influence on the US culture, the same way Italy or France does. But before Americans embraced Japanese culture, they embraced Japanese stuff: electronics & automobiles.
A more recent version of this is South Korea. In the last few years K-pop music has topped the charts, Korean cinema has won Academy Awards, and Korean TV shows have taken over Netflix. But before we fell in love with Korean culture, we fell in love with the stuff they made:
Along the new IMEC trade route are a dozen countries that Americans and Europeans either disapprove of (Saudi Arabia) or have no awareness of. What does the typical American think of Indonesia? As these countries develop economically, and if they continue to integrate and trade with the US & Europe, it’s possible that the next generation of Americans binge Bollywood movies instead of overrated French Cinema, and obsess over Vietnamese gin instead of overrated French wine. There was a time when people in Italy (or Romans) thought the people in France (Gauls) were barbarians and the people in America didn’t know who either Romans or Gauls were. Things change. The IMEC would be a big moment in economic history, but could be a moment in cultural history as well.
Another MoneyLemma masterclass. I love love this. Thank you for writing ☺️