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Tension In the Red Sea: What Does it Mean for The Global Trade Market?

Written by Rheia Walia for the Middle East Section.



It would be naive to assume that the Israel-Palestine War is not having far-reaching implications on the global supply chain and trade. The Suez Canal is under attack by Iran-backed Houthis and this is not good for our livelihoods abroad. In this article, Walia reports on this issue and its importance.

Why the Red Sea shipping route is so important?

The Red Sea is a vital route for shipping, located in the Middle East it separates the coasts of Saudi Arabia and Yemen with that of Egypt, Sudan and Eritrea. The main area of the Red Sea is at threat from the Houthi Militia is the Suez Canal which is the most northern part of the Red Sea and connects the Red Sea to European waters. Specifically, the Suez Canal, accounts for almost 15% of global trade each year; hence the escalating tension is creating a lot of instability for large shipping corporations, trade as well as suppliers.[1]


What is the Red Sea crisis?

Since November 2023, Houthi militants of Yemen have been attacking ships in the Red Sea as an alleged retaliation to the ongoing Israel-Hamas war.[2] The militants are backed by Iran who have been supplying their attacks with weapons such as drones and missiles.[3] British Prime Minister Rishi Sunak, in a press statement justifying the United Kingdom’s intervention in the Red Sea, stated that the “Houthi militia has carried out a series of dangerous and destabilising attacks against commercial shipping in the Red Sea, threatening the UK and other international ships, causing major disruption to a vital trade routes and driving up commodity prices.”[4] The Red Sea crisis has drawn international attention with both the United States of America and the United Kingdom intervening in response to the Houthi Militia’s threat to the “freedom of navigation and the free flow of trade.”[5]  These attacks have mostly been carried out on commercial ships and in recent weeks, though with conflict escalating warships are also now being attacked.[6] 

 

The impact on the global trade market:

Any disruption on a key shipping route can have catastrophic effects, as seen in March 2021 when Ever Given, a large vessel, became grounded after striking the back of the canal, and was blocked for six days.[7] As a result, no shipping could pass through the canal and almost 10 billion USD was stopped per day.[8] 

This event significantly highlighted the world’s reliance on the Suez Canal and the Red Sea for trade, making the ongoing crisis more alarming as its impacts intensify every day.


As a result, major shipping corporations, including Maersk, have rerouted and suspended the Red Sea routes indefinitely.[9] This means ships travelling from Europe to Asia now have to divert through the Cape of Good Hope, which increases shipping times by an estimated minimum of 30-50%.[10] This has led to an increase in fuel and labour costs and a decrease in ship traffic.[11] It is estimated that it will cost shipping corporations around 1 million USD in resources for each rerouted ship.[12] For example, European-based car manufacturers, such as Germany-based Tesla, have faced supply chain issues because of the diversion and cancellation of ships.[13] 


With a recent fuel tank being hit in the Red Sea and China expressing concern for the value of oil declining, it would be arrogant to assume that this crisis has no repercussions.[14] The global trade market is dominantly being affected by the Red Sea crisis.  A majority of different industries have reported concerns of an increase in shipment time in addition to subsequent supply chain issues, with this only being the beginning of the Red Sea Crisis impacts, long term impacts with conflict in the Middle East ongoing can be assumed.


Future Predictions on the Red Sea Crisis:

The conflict in the Red Sea is drawing wide international attention and causing disruption. It has been claimed that the aim of the Houthi rebels is for Western nations to “put pressure on Israel into accepting a ceasefire in Gaza.”[15] Both the United Kingdom and the United States of America have condemned the violent acts of the Houthi rebels, with military intervention continuing to escalate. Tensions in the Middle East have only worsened with the ongoing war between Israel-Hamas and ever-increasing death tolls in Gaza. With no clear indication of a ceasefire and the claims of the Houthi rebels, it is unlikely that they will stop attacking ships in the Red Sea. With industries such as oil and car manufacturing already affected, it is feared that this will broaden over the coming months.


Oliver Rakau, an economist at Oxford Economics predicts that rising shipping costs and ongoing supply issues are likely to persist over the next several months.[16] With tensions in Middle East escalating and the Suez Canal under threat by the Houthi, shipping times will likely increase further, causing maintained inflation and worsening supply issues.


If this is to be a long-standing conflict in the Middle East, like that of the current Israel-Hamas war, the rapid impacts we are seeing on the global trade market are likely to be only the beginning.







References

[1] United Nations, ‘The Red Sea shipping crisis is having a ‘dramatic’ impact warns logistics chief’ (United Nations, 25th January 2024) <https://news.un.org/en/story/2024/01/1145902> accessed 5th February 2024

[2] CSIS, ‘The Global Economic Consequences of the Attacks on Red Shipping Lanes’ (CSIS, 22nd January 2024) <https://www.csis.org/analysis/global-economic-consequences-attacks-red-sea-shipping-lanes> accessed 5th February 2024.

[3] Ibid.

[4] Rishi Sunak, ‘PM Statement on strikes against Houthi military targets’ (Gov, 12th January 2024) <https://www.gov.uk/government/news/pm-statement-on-strikes-against-houthi-military-targets-12-january-2024accessed 5th February 2024.

[5] Ibid.

[6] Ibid.

[7] Ibid.

[8] Vivian Yee and James Glanz, ‘How One of the World’s Biggest Ships Jammed the Suez Canal’ (The New York Times, 19th July 2021) < https://www.nytimes.com/2021/07/17/world/middleeast/suez-canal-stuck-ship-ever-given.html> accessed 5th February 2024.

[9] CSIS, ‘The Global Economic Consequences of the Attacks on Red Shipping Lanes’ (CSIS, 22nd January 2024) <https://www.csis.org/analysis/global-economic-consequences-attacks-red-sea-shipping-lanes> accessed 5th February 2024.

[10] Ibid.

[11] CSIS, N10.

[12] Richard Partington, ‘What is the Red Sea crisis, and what does it mean for global trade?’ (The Guardian, 3rd January 2024) <https://www.theguardian.com/world/2024/jan/03/what-is-the-red-sea-crisis-and-what-does-it-mean-for-global-trade#:~:text=What%20is%20happening%20in%20the,of%20Africa%20since%20late%20November> accessed 5th February 2024.

[13] Valentina Romeo, ‘Red Sea crisis pushes up delivery time for European manufacturers’ (Financial Times, 1st February 2024) <https://www.ft.com/content/6c114551-9689-4a3c-b1cc-71790853c636> accessed 5th February 2024.

[14] Shariq Khan, ‘Oil drops as China demand concerns counter supply jitters’ (Reuters, 29th January 2024) < https://www.reuters.com/business/energy/oil-jumps-1-after-houthis-attack-fuel-tanker-red-sea-2024-01-29/#:~:text=NEW%20YORK%2C%20Jan%2029%20(Reuters,tensions%20in%20the%20Middle%20East. > accessed 5th February 2024.

[15] Yee, n9.

[16] Partington, n12.

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