“On 19 November, the Houthis hijacked a commercial ship in the Red Sea. They have since launched dozens of missile and drone attacks on commercial ships. Of these, 34 have resulted in reported damage to vessels” _ BBC, 2023.
International shipping disruptions, including the ongoing Red Sea and Suez Canal disruption, Panama Canal constraints, and Ukraine's war in the Black Sea, could reshape global maritime networks and reconfigure the world trading map, potentially leading to greater supply chain upheaval, which has several effects on different levels.
On an international level, a single attack on commercial shipping globally impacts international business, affecting ships built in Korea, crewed by Filipino seafarers, owned by German investment funds, inspected by Indian classification societies, registered under the Marshall Islands flag, insured in Norway, and fueled in Singapore.
On the level of trade microeconomics, Brad Martin, a US Navy Captain stated that: "Flow through the Mediterranean will likely continue unimpeded. Israel is probably in a better position for absorbing disruption than most of its neighbors. However, shipping and trade can become subject to diplomatic and political action, so economically damaging isolation could certainly occur on that front” (Aljazeera, 2024). However, as of mid-December, Israel’s only Red Sea Port, at Eilat, reported an 85 percent drop in activity since the attacks began (Aljazeera, 2024). Based on a rapid assessment published by UNCTAD in February 2024, monthly transits dropped by around 50% in the Panama Canal and 42% in the Suez Canal.
In 2023, 22 percent of global seaborne container trade is estimated to have transited through the Canal, including liquified natural gas carriers, oil tankers, liquified petroleum gas carriers, car carriers, and bulkers. However, the response was immediate where many transits have been transferred from the Suez to the Cape of Good Hope. The Gulf of Eden experienced a 70% decline in ship tonnage between December 2023 and February 2024, while vessel tonnage passing through the Cape of Good Hope increased by 60%, with 621 container ships rerouting.
It is important to note that the Panama Canal is particularly important for the foreign trade of countries on the West Coast of South America. In fact, approximately, 22% of the Chilean foreign trade, 22% of that of Peru, and 26% of Ecuador’s foreign trade is channeled through Panama.
Similarly, Egypt's Suez Canal, a significant foreign currency revenue source, has experienced a 40% drop due to the Red Sea crisis and attacks, potentially impacting Ethiopia and Sudan, and potentially causing negative spillover effects. The Suez Canal channels 31% of the foreign trade of Djibouti, 15% of Kenya, 12% of the Republic of Tanzania, 34% of Sudan, 31% of Yemen, and only 7% of German foreign trade.
As a result, trade trips have started rerouting to an older pathway: The Cape of Good Hope. With already existing shifts in the path of trade, maritime cargo travels have increased due to global trade shifts and globalization trends, with the Red Sea conflict and Ukraine war exacerbated. Grain to Egypt now comes from Brazil or the US, while Russian oil shipments go to India and China. Since the Suez Canal path cuts around 40% of the distance along the Cape of Good Hope, several rerouting effects have been displayed. To explain, increased distances in shipping markets lead to increased ton-mile demand, such as container shipping, oil tanker rerouting, and liquified natural gas-carrying vessels diverting away from the Suez Canal. Bulk trade has limited market impacts, but bulker ship capacity has been diverted. Grain and soybean flows have been affected, and the number of specialized car-carrying ships using the Red Sea has been cut by over half. Vessel prices and charter rates have also increased since December 2023.
On the level of international macroeconomics, The Suez gateway interruption is causing inflationary pressure due to soaring food and energy prices. Container shipping disruptions pose a threat to global supply chains, potentially leading to delayed deliveries, increased costs, and inflation. Current container freight rates are half the peak recorded during the COVID crisis, but sustained increases can drive up inflation. The crisis is also affecting global food prices, with disruptions in grain shipments from Russia, Ukraine, and Europe affecting consumers and lowering producer prices. The war in Ukraine has already shown the impact of longer distances and freight rates on food prices. Inflation rates in Europe reached a peak in October 2023, and interest rates have been increasing to combat inflation.