How the Red Sea crisis is affecting global trade and shipping costs

The Red Sea is one of the most important waterways in the world, as it carries about 12% of global trade, including 30% of global container traffic. It also connects Europe to Asia and east Africa, and is a vital route for oil and gas shipments. However, the Red Sea region has been facing a situation of increased tension and violence since late November 2022, when the Houthi rebels in Yemen, who are backed by Iran, escalated their attacks on commercial shipping vessels that pass through the Bab el-Mandeb strait, which connects the Gulf of Aden and the southern Red Sea². The Houthis have been using bomb-laden drone boats and missiles to target tankers and cargo ships, some of which belong to or are headed to Israel, their declared enemy. The attacks have disrupted global trade and raised the risk of a wider conflict in the region

In this blog post, I will explain how the Red Sea crisis is affecting global trade and shipping costs, and what are the possible implications and solutions for this problem.

The impact of the Red Sea crisis on global trade and shipping costs

The Red Sea crisis has had a significant impact on global trade and shipping costs, as it has caused delays, damages, and diversions of many ships that use the Red Sea route. Some of the effects of the crisis are:

• Increased freight rates: Due to the increased risk and uncertainty in the Red Sea, shipping companies have imposed surcharges and increased their freight rates for the Red Sea route. According to Freightos, as of Jan. 3, 2024, rates from Asia to Northern Europe rose 151% week-over-week to more than $4,000 per forty foot equivalent unit³. Similarly, rates from Asia to the US East Coast rose 51% week-over-week to more than $3,000 per forty foot equivalent unit³. These rates are expected to remain high until the situation stabilizes in the region.
• Longer transit times: Due to the attacks and the threat of further attacks, many shipping companies have decided to reroute their vessels through the Cape of Good Hope, encircling Africa, instead of using the Red Sea route. This adds about 14-20 days to the transit time, depending on the destination. This also increases the fuel consumption and the carbon footprint of the shipping industry.
• Disrupted supply chains: Due to the longer transit times and the higher freight rates, many importers and exporters have faced disruptions in their supply chains, as they have to deal with delays, shortages, and higher costs of their goods. This affects the availability and affordability of many products, such as electronics, clothing, food, and medical supplies, especially in Europe and the US, which are major markets for the Red Sea route. This also affects the competitiveness and profitability of many businesses that rely on the Red Sea trade.

The implications of the Red Sea crisis for global trade and security

The Red Sea crisis has implications for global trade and security, as it poses a challenge to the stability and prosperity of the region and the world. Some of the implications of the crisis are:

• Increased inflation and economic slowdown: Due to the higher shipping costs and the disrupted supply chains, many countries and regions may face increased inflation and economic slowdown, as the prices of many goods and services may rise and the demand may fall. This may affect the recovery and growth of the global economy, which is already struggling with the effects of the COVID-19 pandemic and the climate change crisis.
• Increased geopolitical tensions and conflicts: Due to the involvement of Iran and Israel in the Red Sea crisis, the situation may escalate into a wider regional or even global conflict, as both countries have been engaged in a long-standing rivalry and confrontation over their nuclear and security interests². The US, which is an ally of Israel and a rival of Iran, has also announced a maritime coalition to defend shipping against the Houthi attacks. This may increase the chances of a military confrontation or a proxy war in the region, which may have serious consequences for the peace and security of the world.
• Increased humanitarian and environmental crises: Due to the attacks and the rerouting of the ships, many people and ecosystems may suffer from the humanitarian and environmental consequences of the Red Sea crisis. For instance, the people of Yemen, who are already facing a devastating civil war and a severe famine, may face further hardships and dangers due to the attacks and the blockade of their ports by the Saudi-led coalition, which is fighting against the Houthis. Moreover, the Red Sea, which is home to many endangered species and coral reefs, may face further degradation and pollution due to the oil spills, the waste dumping, and the increased traffic of the ships.

The possible solutions for the Red Sea crisis

The Red Sea crisis is a complex and multifaceted problem that requires a comprehensive and coordinated solution from the international community. Some of the possible solutions for the crisis are:

• Political and diplomatic engagement: The root cause of the Red Sea crisis is the conflict in Yemen, which is a proxy war between Iran and Saudi Arabia, and between the Houthis and the internationally recognized government of Yemen. Therefore, the first and foremost step to resolve the crisis is to end the war in Yemen, which requires a political and diplomatic engagement among all the parties involved, including Iran, Saudi Arabia, the Houthis, the Yemeni government, and the UN². A ceasefire, a humanitarian aid, and a political dialogue are essential to achieve a lasting peace and stability in Yemen and the region.
• Maritime security and cooperation: The second step to resolve the crisis is to enhance the maritime security and cooperation in the Red Sea, which requires a joint effort from all the countries and stakeholders that use and benefit from the Red Sea route, including Egypt, Sudan, Eritrea, Djibouti, Somalia, Ethiopia, Saudi Arabia, Yemen, Israel, Jordan, and the EU. A regional framework, such as the Red Sea Forum, which was launched in 2020, can provide a platform for dialogue, coordination, and collaboration among these countries and stakeholders, to address the common challenges and opportunities in the Red Sea, such as the security, the trade, the environment, and the development.
• Diversification and innovation: The third step to resolve the crisis is to diversify and innovate the global trade and shipping industry, which requires a vision and a strategy from the governments, the businesses, and the consumers, to reduce the dependence and the vulnerability of the Red Sea route, and to explore and exploit the alternative and emerging modes and routes of trade and transportation, such as the land-based corridors, the air cargo, the digital platforms, and the green technologies. This can help to increase the resilience and the efficiency of the global trade and shipping industry, and to cope with the changing and challenging circumstances in the world.

Conclusion

The Red Sea crisis is a serious and urgent problem that affects the global trade and shipping industry, and has implications for the global economy, security, and environment. The international community needs to act swiftly and decisively to resolve the crisis, by engaging in political and diplomatic dialogue, enhancing maritime security and cooperation, and diversifying and innovating the global trade and shipping industry. This can help to restore the stability and prosperity of the Red Sea region and the world.

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