The Red Sea shipping crisis and its global impact
On 3 February 2024, the US Department of Defense confirmed a new wave of joint UK and US military airstrikes on Houthi targets in Yemen, with support from several other nations. It has been revealed that over 30 targets were hit across at least 10 locations. These targets included command and control centers, an underground weapons storage facility, and other weapons used by the Houthis. These joint airstrikes signify military retaliation against the Houthis’ ongoing assaults on commercial ships in the Red Sea, which commenced following Israel’s attacks on Gaza.
Who are the Houthis and what is happening in the Red Sea?
The Houthis are a Yemeni militia group advocating for the Zaidi sect of Shia Islam. The group derives its name from its late founder, Hussein al-Houthi, and emerged in the 1990s in resistance to Saudi Arabia’s political and religious influence in Yemen. Having seized control of Sanaa and the northwestern region of Yemen, including the Red Sea coastline, from the internationally recognized government of Yemen, the Houthis are described by the BBC as the “de facto government,” overseeing tax collection and currency printing.
It is widely believed that the Houthis are backed by Iran, which has been accused of providing the rebel group with ballistic missiles and aiding in the establishment of drone factories. It is also noteworthy that both the Houthis and Iran view Israel as a “common enemy.” Iran has been engaged in ideological tensions and proxy conflicts with Israel for approximately four decades, and the Houthis have maintained a long-standing opposition to Israel since 2004, rooted in antisemitism. This backdrop has led Iran to emerge as “one of the most strident voices against the brutal Israeli bombardment of Gaza,” while the Houthis have repeatedly launched.
On 19 November 2023 the Houthis hijacked the Galaxy Leader, a Japanese-operated vessel associated with an Israeli businessman, who remains detained in Yemen along with its crew. Following the assault, The Guardian reports that the Houthis issued a warning stating that all vessels linked to Israel “will become a legitimate target for armed forces”. Since then, there have been numerous attacks on merchant ships since, with the Houthi military spokesman claiming that the attacks were launched in solidarity with the Palestinians, while Israel has denied any connection to the ships.
In response, US and UK forces initiated strikes against the Houthis on 11 January 2024. Such intervention is believed to have reduced the risk of vessels being attacked in the Red Sea, with the frequency of Houthi attacks falling significantly. However, a risk analyst has noted that the Houthis have since begun targeting US and UK ships, as evidenced by the attack on a British-linked tanker, which the Houthis claim is a response to “American-British aggression”.
These escalating maritime conflicts have prompted commercial vessels to pause or divert from the Red Sea, which acts as the gateway to the Suez Canal, the shortest shipping route between Asia and Europe. Instead, many ships have opted for the longer journey around South Africa’s Cape of Good Hope.
Impact on the shipping industry and the global market
The Red Sea and the Suez Canal account for approximately 30% of the world’s container ship traffic and 12% of seaborne-traded oil. Consequently, disruptions in these crucial maritime routes have significant implications for global trade and the shipping industry. Container ship arrivals in the Gulf of Aden were 92% lower in the week ending 5 February 2024, compared to the average for the first half of December 2023.
The rerouting of ships around the Cape of Good Hope, as reported by Trade Finance Global (TFG), a B2B fintech in trade finance, has added approximately 10 days, 13,000 km, and $1 million in costs per journey. Such delays represent a significant adverse impact on the global supply chain, disrupting production timelines and leading to higher shipping costs. TFG identifies several major companies whose supply chains have been affected by the Red Sea crisis. Tesla announced a manufacturing pause on 12 January 2024, potentially resulting in 5,000-7,000 cars not being built. Additionally, Volvo’s Belgian factory halted production, and Michelin faced two production halts due to the inability to access raw materials.
The reductions in global shipping capacity and the increase in freight costs also pose concerns for corporate profit margins, leading to job losses and reductions in purchasing and stocks (i.e., a decrease in the amount of inventory or raw materials that a company purchases or holds in stock). These issues could have broader economic implications for the market, contributing to the risk of slower growth and higher inflation.
However, it is worth noting that the expected spillover effect of the shipping crisis on inflation will not be as drastic as that observed during the Covid-19 pandemic. According to ING’s THINK, the financial institution’s economic and financial analysis platform, demand is currently subdued compared to the rapid escalation in global goods demand sparked by the pandemic. Consequently, supply chains experience significantly fewer disruptions, and average shipping rates are far from reaching the peaks observed previously, resulting in limited price pressures. Furthermore, there is a greater capacity of ships worldwide, with many vessels ordered during the pandemic still being deployed. As a result, it is likely that shipping rates could decrease “fairly quickly” once the disruptions subside.
What to foresee and other potential impacts
Although the current circumstances may appear limited, we can anticipate the long-term consequences of the Red Sea crisis. The key concern lies in the duration of continued disruptions; the longer these disruptions affect re-routing, the greater the risks of sustained elevation of shipping rates and inflationary pressure. Forbes raises concerns that a prolonged shutdown of the Red Sea could impede the speed at which the rate of inflation returns to normal, despite the European Central Bank maintaining its projection for eurozone inflation to decrease from 5.4% in 2023 to 2.7% this year.
Beyond economic implications, there are also mounting environmental concerns regarding the ramifications of longer shipping routes. The CEO of CarbonChain, a carbon accounting firm, informed TFG that an average bulk carrier going through the Shanghai to Rotterdam route “could see an emissions increase of around 30% by rerouting via the Cape of Good Hope, compared to the Suez Canal route”. He added,
“With shipping responsible for 2-3% of global emission, this escalation poses yet another challenge to the industry’s decarbonization targets, which it’s already off track to meet (per the IEA).”
Additionally, other data also suggest that CO2 emissions could further escalate due to faster sailing speed to compensate for the time lost on longer routes and the use of smaller, less fuel-efficient vessels to accommodate additional shipping capacity.
There are also intriguing discussions around “China’s silence” regards to the Red Sea attacks and the potential for a shift in the geopolitical balance. Some criticize China’s non-involvement as “freeriding on US and European security guarantees” and “reaping benefits”. It is argued that the Chinese rhetoric is strategically designed to assign responsibility for present or future challenges in the Middle East to the West, particularly the US, especially in light of the military actions taken by the US and UK against Houthi infrastructure in Yemen.However, others caution that the West “should perhaps be careful what they wish for”. As American influence, once a cornerstone of the international order, wanes in the current era, America’s efforts to safeguard the sea lanes are seen as relics of the past. Should China assume an active role in resolving conflicts in the Middle East, it could signal a significant geopolitical shift where China fills the void and assumes the role of a “security provider” once held by the US. Only time will reveal how these shifts unfold, but they promise to be captivating chapters in the annals of history.
Image courtesy of 4ing via Wikimedia, ©2014. Some rights reserved.
The views and opinions expressed in this article are those of the author and do not necessarily reflect those of the wider St. Andrews Foreign Affairs Review team.
