Ishasree Mukherjee
Associate
Intueri Consulting
ishasree.mukherjee@intueriglobal.com
The Red Sea Crisis in Global Trade
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Red Sea: A Crucial Trade Artery
The Red Sea, a vital waterway connecting the Mediterranean Sea to the Indian Ocean, plays a pivotal role in global trade. This narrow passage is crucial for maritime transportation, especially for vessels travelling between Asia and Europe. The Suez Canal, a key part of this route, facilitates the quick movement of goods, including oil and liquefied natural gas (LNG). Approximately 40% of Asia-Europe trade, including a substantial amount of oil, diesel fuel, and essential food products like palm oil and grain, typically goes through this area, making it a strategic hub for the global economy. With the discovery of oil and gas in West Asia, the Red Sea route’s strategic importance has increased. Every year, around 17,000 ships pass through the Suez Canal, accounting for 10% of global trade (Source). The Red Sea serves as a conduit for almost 15% of global seaborne trade, encompassing significant proportions such as 8% of the global grain trade, 12% of seaborne-traded oil, and 8% of the world’s liquefied natural gas trade (Source). The broader region between Egypt and India is home to three maritime chokepoints: the Strait of Hormuz, linking the Persian Gulf to the Indian Ocean; the Strait of Bab-el-Mandeb, connecting the Red Sea with the Indian Ocean; and the Suez Canal, linking the Red Sea with the Mediterranean Sea. These chokepoints are critical, as cargo ships are vulnerable to attacks and interdiction while transiting through these narrow waterways. Major ports along the Red Sea, such as those in Egypt, Saudi Arabia, and Yemen, contribute significantly to the efficient movement of goods, serving as critical hubs for loading and unloading cargo and ensuring a smooth flow of international trade. About 30% of global container traffic and more than 1 million barrels of crude oil daily typically head through the Suez Canal. The Red Sea, strategically positioned as a central route for international shipping and trade, is not immune to becoming a critical maritime chokepoint under certain conditions. This was highlighted in March 2021, when the ‘Ever Given’ containership ran aground in the canal, halting passage for six days and causing significant disruptions in global maritime trade, thereby underlining the channel’s pivotal role in global commerce. Disruptions in this crucial waterway have profound implications for global supply chains, impacting diverse sectors and economies worldwide. The security and stability of these critical passages are paramount for ensuring the seamless flow of goods and maintaining the integrity of global supply chains (Source).
Houthi Actions and Trade Disruption
The Houthis, also known as Ansar Allah, are a group originating from Yemen’s Shia-Zaidi minority in the Saada district of northern Yemen. They gained significant influence during the Arab Spring in the early 2010s, capturing Yemen’s capital, Sanaa, by the end of 2014 and declaring control over the country by February 2015 (Source). Allegedly supported by Iran and receiving training and weaponry, the Houthis have been involved in the ongoing Yemeni civil war, posing challenges to regional stability. They control a significant portion of Yemen, including Sanaa and parts of the northwest, where they operate a de facto government, managing administrative functions like tax collection and currency issuance. Their military capabilities include the use of ballistic missiles, cruise missiles, and drones, with actions mainly directed against Saudi Arabia and the UAE. The Houthis have also shown solidarity with Hamas, particularly in the context of conflicts involving Israel. Their rise and activities are central to the complex dynamics of regional politics and security in the Middle East (Source).
The Houthis initiated an escalation of attacks since the beginning of the Israel-Hamas conflict in October. Allegedly supported by Iran, the group specifically targeted commercial and military ships in the Red Sea, with a focus on vessels potentially associated with Israel. The primary objective was to exert pressure on Tel Aviv to cease its actions in the Gaza Strip. Yet, a significant number of the targeted vessels have no direct connections with Israel. These attacks, marked by the hijacking of ships and the use of drones, missiles, and speedboats, significantly heightened regional tensions. Notably, the Galaxy Leader, a cargo ship, was taken over and repurposed as a tourist attraction for Yemenis. Simultaneously, the Houthis intensified their assaults using drones and rockets on foreign-owned vessels navigating through the critical Strait of Bab al-Mandab, a vital channel for goods transportation. The threat and occurrence of these attacks prompted major shipping firms, including the Mediterranean Shipping Company and Maersk, to reroute vessels around Africa’s Cape of Good Hope, bypassing the Red Sea. This strategic shift in shipping routes has profound implications for global trade, affecting nearly 15% of seaborne trade that typically passes through the Red Sea to reach the Suez Canal (Source). The Houthis also claimed a successful attack on the US military cargo ship Ocean Jazz in the Gulf of Aden, aligning their actions with their stance on the Israel-Gaza conflict (Source).
Global Response
In response to the Houthis’ heightened attacks on ships in the Red Sea, the United States initiated an international naval operation in December, joined by key allies including the UK, Canada, France, Bahrain, Norway, and Spain. Despite collective efforts, some shipping companies remained cautious about resuming the route. Maersk briefly resumed shipments through the Red Sea following the implementation of a security operation but suspended sailing again after one of its container ships faced an attack. The US and UK naval forces in the Red Sea responded with air strikes against Houthi rebel targets in Yemen.
President Joe Biden emphasized that these strikes were a “direct response” to the attacks on Red Sea ships, which posed risks to trade and threatened freedom of navigation (Source).
Notably, on January 11, US Navy Seals boarded a ship off the coast of Somalia to seize Iranian-made weapons bound for the Houthis. Two Navy Seals went missing and are presumed dead. The Houthis have declared their determination to continue hindering Israeli ships from navigating in the Arab and Red Seas.
Their spokesperson, Mohammed Abdelsalam, emphasized this stance, stating: “We will not give up targeting Israeli ships or ships heading towards ports in occupied Palestine.” He further clarified their actions as being “in support of the Palestinian people.” (Source)
Houthi spokesperson Mohammed al-Bukhaiti expressed that the group would confront any US-led coalition in the Red Sea, emphasizing that confrontations in the waterway would continue throughout the new year. This ongoing situation underscores the complexities and confrontations in the waterway, with the US and UK, underscoring the importance of their actions to protect international commerce.
UK Prime Minister Rishi Sunak deemed the action “necessary and proportionate” to safeguard global shipping (Source).
The U.S. government has reinstated the Yemen-based Houthi rebels on the “Specially Designated Global Terrorist” (SDGT) list to combat attacks on international shipping. This designation subjects the Iran-aligned group to severe sanctions, aiming to disrupt their access to funding and weapons used for attacks or hijackings in crucial Red Sea shipping lanes. White House National Security Advisor Jake Sullivan emphasized that the designation is a tool to impede terrorist funding to the Houthis, restrict their financial market access, and hold them accountable. The decision allows for reevaluation if the Houthis cease attacks in the Red Sea and Gulf of Aden. Formerly designated by the Trump administration, Secretary of State Antony Blinken revoked the classification in 2021, citing concerns about impacting humanitarian flows into Yemen. The recent reinstatement categorizes the Houthis as an SDGT group, not a “foreign terrorist organization” (FTO), facilitating exemptions for humanitarian goods from sanctions (Source). House Foreign Affairs Committee Chairman Michael McCaul urged a reevaluation, suggesting a designation as an FTO for the Iran-backed Houthis. The Houthis responded, asserting that the designation would not impact their operations to prevent Israeli ships or vessels heading to Israel from crossing the Red Sea, the Arabian Sea, and the Bab al-Mandeb Strait (Source).
Global and Indian Trade Adjustments
Global Impact
The Houthi rebels’ attacks in the Red Sea have profoundly affected global supply chains, forcing major shipping companies such as the Mediterranean Shipping Company, Maersk, and France’s CMA CGM to reroute their vessels via Africa’s Cape of Good Hope. This necessary diversion extends shipping routes and raises security concerns, leading to delays and increased operational costs. Industries like furniture and automotive are experiencing the brunt of these changes, with potential delays and price surges. The Red Sea’s significance in global trade, especially for many of the world’s seaborne trade, including oil shipments, cannot be overstated. This disruption has widespread implications, impacting businesses and consumers globally. Retail giants like Ikea, Next, and Tesla have raised alarms over possible delays from these shipping challenges (Source).
Moreover, the surge in insurance premiums for ships passing through the Red Sea, which have risen nearly tenfold since the attacks began, adds to the cost burden. Some shipping firms, such as CMA CGM, the world’s second-largest shipper, have started transferring these increased costs to customers by doubling their shipping rates from Asia to Europe. The escalation in container rates, potential increase in oil prices, and growing concerns about inflation reflect the global supply chain’s susceptibility to geopolitical tensions. While sea transport remains dominant in global trade, alternative routes come with their own set of challenges, such as navigating regions under economic sanctions like Russia.
The recent deterioration in maritime security in the Red Sea has made monitoring traffic through this vital area more crucial than ever. The conflict has significantly affected transit through the Suez Canal, with containership passages decreasing by 26% in December 2023. Oil tanker traffic saw a 7% reduction, and dry bulker traffic experienced a modest 3% drop during the same period (Source). These shifts in shipping traffic are causing ripple effects elsewhere. As vessels, including containerships and oil tankers, bypass the Red Sea route, there’s a noticeable increase in traffic around the Cape of Good Hope. This shift is driving up freight rates due to longer travel distances, leading to higher fuel consumption and escalated carbon emissions. These rate rises on this critical lane could boost liner companies’ profits to some extent, but this is contingent on the duration of the current situation. The role of various multinational navies, including the U.S. Navy, in preventing further attacks on ships could lead to a correction in freight rates. The U.S. government’s airstrikes on Houthi targets demonstrate the international community’s efforts to address these disruptions, highlighting the collective endeavour to secure maritime trade and maintain the interconnectivity of global economies and trade routes (Source).
Impact on India
In response to the Houthi rebels’ recurrent attacks on merchant ships in the Red Sea, India’s trade dynamics have undergone significant disruptions, particularly impacting the nation’s exports and oil imports. This maritime conflict has necessitated the diversion of approximately 95% of shipping vessels to longer routes around the Cape of Good Hope, increasing both the travel distance and time significantly. This detour has resulted in a steep hike in shipping costs, with the price for a 24-foot shipping container from India to destinations like Europe, the eastern coast of America, and the UK soaring from $600 to $1,500. Indian exporters, as highlighted by Arun Kumar Garodia, chairman of the Engineering Export Promotion Council of India, are experiencing a substantial erosion of profit margins. Garodia notes that this rise in shipping expenses could adversely affect Indian exports valued at around $10 billion in the fiscal year ending March 2024 (Source).
Arun Kumar Garodia, chairman of the Engineering Export Promotion Council of India (EEPC), remarked, “Our profit margins have been wiped out as the shipping costs have gone up.” He further observed that most buyers have been reluctant to revise their prices due to these elevated shipping expenses.
Moreover, these maritime tensions indirectly affect the global oil market, a critical concern for India as a significant oil importer. Despite the current dynamics of India’s crude oil imports, with Russia maintaining its position as the primary supplier amidst a temporary reduction in exports to India, the overarching effects of the Red Sea disruptions are poised to compound India’s economic challenges. The Indian government is proactively seeking alternative trade pathways and has urged the Export Credit Guarantee Corporation to maintain stable insurance premiums despite the escalating shipping costs and intensifying Red Sea tensions. This predicament highlights India’s susceptibility to disruptions in crucial maritime corridors and underscores the importance of flexible strategies in managing its international trade and oil importation policies (Source).
Future Outlook: Trade Resilience and Strategy
The ongoing crisis in the Red Sea, sparked by the Houthi rebels’ attacks, not only underscores the vulnerability of global trade routes but also has significant implications for the business and corporate sectors. This challenging environment is prompting countries and companies across the globe to reassess and diversify their trade routes and supply chain strategies, potentially paving the way for a transformation in global trade dynamics. In response, corporations are exploring the development of alternative maritime and overland transportation routes. These strategies include rerouting through safer, albeit longer, maritime paths, such as circumnavigating Africa via the Cape of Good Hope and utilizing extensive rail and road networks across Eurasia as alternatives to maritime shipping.
This strategic shift necessitates rigorous scenario planning and network topology analysis to effectively anticipate and mitigate potential disruptions. Such changes will likely increase regional infrastructure and logistics investments, strengthening economic connections and potentially creating new commercial hubs. Alongside these measures, companies worldwide must develop robust backup plans and maintain an agile and nimble-footed supply chain management (SCM). These steps are essential for mitigating risks associated with unexpected global events and ensuring the resilience and agility of their SCM in the face of evolving global trade challenges.
In addition to these strategic changes, the situation poses a nuanced challenge for global inflation and monetary policy. Christine Lagarde, President of the European Central Bank, has highlighted the resurgence of supply bottlenecks as a significant risk factor. With existing issues like low water levels affecting the Panama Canal, the potential for a spike in oil prices due to supply disruptions poses an additional inflationary risk. Saad Rahim, Chief Economist at Trafigura Group, notes the precarious nature of the situation, pointing out that a direct attack on an oil tanker could have significant consequences.
Economic analysis has indicated that the heightened shipping costs arising from the current crisis could give central banks more reasons to delay reductions in interest rates. Economists predict a possible increase of 0.7 percentage points in global goods inflation during the first half of this year should the shipping difficulties persist. These projections highlight the urgency for increased international cooperation and more robust security protocols in vital maritime routes, which are crucial for the shipping and logistics industries.
Furthermore, the geopolitical landscape’s ongoing volatility underscores the need for corporate vigilance and adaptation. The year 2023 served as a stark reminder of the world’s precarious state of peace, security, and cooperation. The escalation of conflict in the Middle East, including the Houthis’ attacks on Red Sea shipping and the continuing conflict in Ukraine, contribute to a tense global environment as we move into 2024. This complex geopolitical arena, marked by increased conflict and competition, demands a renewed focus on global cooperation, particularly in areas where collaborative solutions are most needed.
In response to these challenges, the World Economic Forum’s Global Future Council on the Future of Geopolitics plays a pivotal role. This council aims to identify ways global stakeholders can collaborate to address pressing geopolitical issues. The goal is to foster a safer, healthier, and more prosperous world despite the turbulent geopolitical context. The emphasis is on strengthening global cooperation to effectively respond to and manage the increasing challenges and uncertainties of the modern geopolitical landscape.
In this period of heightened global trade challenges, particularly highlighted by the Red Sea disruptions, a unified strategic approach reshapes the landscape of international commerce and corporate strategy. This approach underscores resilience, adaptability, and collaborative problem-solving. Countries like India are finding this situation especially pivotal, as it may accelerate their push towards economic self-sufficiency, notably in crucial sectors such as energy. This shift impacts business strategies not only within India but also on a global scale. Worldwide, companies are expected to speed up the integration of technological advancements in shipping and logistics to enhance efficiency and mitigate geopolitical risks. The collective response to the challenges in the Red Sea is ushering in a new era characterized by strategic shifts towards flexibility, regional cooperation, and technological innovation. This evolving dynamic, necessitating stakeholders to collaborate in securing essential maritime routes, redefines corporate strategies, emphasizing the importance of agility and cooperative solutions in addressing global supply chain uncertainties in an increasingly interconnected world.
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