Canal are raising questions about the future of maritime trade

On February 19, the crew of Rubymar—a merchant vessel registered in the United Kingdom—abandoned ship near the Bab al-Mandab strait that connects the Red Sea to the Gulf of Aden. The ship, which was transporting 41,000 tons of fertilizer from the United Arab Emirates to Belarus, had sustained damage a day earlier from a missile fired by the Houthis, an armed group holding sway over large parts of Yemen. Unfortunately, this was no isolated incident; since November 19, 2023, there have been close to 60 attacks by the Houthis on merchant ships passing through the Red Sea. These attacks haven’t ceased even after the launch of Operation Prosperity Guardian, an effort by the United States and its allies to protect this key shipping route.

Ships are vital for international trade, with maritime transport accounting for close to 80% of the global trade in goods. Yet, transporting goods across the world hasn’t been easy in the last few years. The global spread of COVID-19 was the first major disruption. Then came the Russia-Ukraine conflict, which dealt a blow to shipments of foodgrain from Ukraine via the Black Sea. As if that was not enough, conflict has now come to the Red Sea. Worryingly, it’s not just a tiny virus or mighty missiles that have jolted global trade routes. Climate events are also taking a toll: Drought has reduced water levels in the Panama Canal, thereby leading to declining shipping transit through the waterway.

Red Sea attacks are more than a minor interruption

According to the United Nations Conference on Trade and Development (UNCTAD), about 12% to 15% of global trade in 2023 passed through the Suez Canal, a key trade route linking Asia and Europe. The attacks on merchant ships, however, have dealt a blow to this free flow of goods, with major shipping companies announcing either a complete halt to voyages through the canal or minimizing the number of vessels taking the route. Research by UNCTAD suggests that between November 2023 and January 2024, transits through the Suez Canal have fallen by close to 40% (figure 1). And liquefied natural gas carriers have stopped plying this route since January 16.

As ships avoid the Suez Canal and opt for a longer route via the Cape of Good Hope, travel time has risen by at least 10 days. For those ships that opt to continue transit via the Suez Canal, the cost of insurance, which now includes war risk premiums, has also increased. Either option has caused the cost of maritime trade to rise. Analysis of data from the Shanghai Containerized Freight Index suggests that container shipping spot rates from Shanghai have more than doubled since November 2023. The Freightos Baltic Container Index, which covers spot rates for 40-feet containers on 12 key global trade routes also shows a similar jump (figure 2).

Delays and rising costs are especially worrying for Europe, a major importer of consumer goods from Asia and energy from the Middle East. A few retail majors have already cautioned about delays, while some automakers have briefly suspended production due to a lack of key components. While some of these issues are likely to be resolved as businesses plan for longer shipping times, higher costs of goods if passed on to consumers will push up prices. Goods inflation, which had troubled Europe and other parts of the world in 2021 and 2022 has eased over the past year. Yet, such gains against inflation may prove temporary if these supply disruptions continue for a prolonged period, especially if that comes at a time when economic growth rebounds in Europe.

Vulnerable emerging and developing nations could be hit too in the near term. The price of wheat destined for East Africa from Europe, Russia, and Ukraine will increase as these ships typically route through the Suez Canal. For Egypt, the current crisis couldn’t have come at a worse time. The country raked in US$9.4 billion of revenue from the Suez Canal in the last fiscal year, much-needed earnings for an economy grappling with high fiscal deficit and debt levels; it had to tap funds from the International Monetary Fund in 2022. Yet, with the transit of ships declining, revenue from the canal has fallen by about 40% so far.