Is The Red Sea Crisis Affecting Global Trade?
According to the World Economic Forum, there have been repeated disruptions to shipping in the Red Sea since 19th November 2023 by Houthi forces. The numbers indicate over 33 vessels have been assaulted in the region, resulting in delivery delays and increased shipping costs.[1]
Global trade relies heavily on the transportation of goods, and much of that is achieved by shipping (i.e. the carriage of goods by sea). About 30% of container carriage happens in the Suez Canal in the Red Sea, rendering it worthy of attention in global commerce.[2]
However, due to these disruptions, shipping firms have been avoiding the Suez Canal and rerouting their ships to the Cape of Good Hope in South Africa. The added transit time this takes “implies an approximately 9% reduction in effective global container shipping capacity”, says Nora Szentivanyi, a Senior Economist at J.P. Morgan.[3] She adds that “the longer the duration of these disruptions, the more likely shipping rates will stay elevated – if not increase further.”[4]
There are different estimates as to whether the Red Sea crisis will affect the global economy. J. P. Morgan estimates a 0.3% increase in overall core inflation in the first half of 2024, as the increase in shipping costs could lead to inflation and higher value in imported goods.[5] On the other hand, others, such as Simon Evenett, the founder of St. Gallen Endowment for Prosperity Through Trade, claim the crisis will not disrupt the world economy on its own as the Suez Canal is only responsible for 11% of global trade.[6] There is support to his claim from others, such as Samsonite CFO Reza Taleghani saying, “All of our facilities, even if there is a week or two delay, not that big of a deal”, or Williams-Sonoma CEO Laura Alber: “The Red Sea disruption is pretty terrible. However, it is not costing us any more money. So far it is costing us about 10 days of delivery, give or take.”[7]
While the disruption may not affect big corporations economically at the moment, late delivery is still a vital problem in shipping and is capable of causing significant economic loss depending on the cargo and the amount of delay. Given that the Red Sea offers a corridor between Asia and Europe allowing vital cargo such as food, oil, and manufactured products to transit, I would assume that disruption to shipping in the Red Sea could affect the global economy.
Overall, the scale of actual damage to global trade will depend on the “duration and intensity of the attacks”, which, so far, has not amounted to the damage endured during the pandemic, as Stephen Olson from Pacific Forum International suggests.[8] He adds that if the situation settles down, it will merely be a “minor blip for the global economy and a footnote in corporate reports”. However, the crisis has been going on since mid-November 2023 and there is speculation by some, such as the Hapag-Lloyd CEO, that it will go on for a few more months,[9] which renders it challenging to have an optimistic view.
[1] https://www.britishchambers.org.uk/news/2024/02/scale-of-red-sea-disruption-revealed/
[2] https://www.jpmorgan.com/insights/global-research/supply-chain/red-sea-shipping
[3] Ibid.
[4] Ibid.
[5] Ibid.
[6] https://www.weforum.org/agenda/2024/02/red-sea-attacks-trade-experts-houthi-shipping-yemen/#:~:text=“The%20Red%20Sea%20has%20become,%241%20trillion%20in%20annual%20merchandise
[7] https://www.bloomberg.com/news/newsletters/2024-03-14/supply-chain-latest-red-sea-shipping-disruptions
[8] https://www.weforum.org/agenda/2024/02/red-sea-attacks-trade-experts-houthi-shipping-yemen/#:~:text=
[9] https://www.bloomberg.com/news/newsletters/2024-03-14/supply-chain-latest-red-sea-shipping-disruptions
