Houthi attacks in Red Sea deal heavy blow to global trade

The World Bank expects a decline in global economic growth to the lowest level in 30 years

Majalla

At least 50 affected countries, a 40% decline in Suez Canal revenues, and German car factories paused production. Al Majalla lays out the economic impact of Red Sea disruptions in numbers.

Houthi attacks in Red Sea deal heavy blow to global trade

Mohamed Sharki

last update on 17 Jan 2024

The global economy is growing impatient with the ongoing attacks launched by Houthis on global trade ships in the Red Sea.

The attacks have led to a severe decline in container shipping activity through the sea’s Gulf of Aden, Bab-el-Mandeb, and the Suez Canal, as more than 18 international shipping companies changed their trade route to go around South Africa's Cape of Good Hope. The move has raised the cost of shipping four-fold due to the longer distance along Africa’s western coast in the new route.

Automakers in Europe — particularly Germany — have notified customers of supply chain disruptions from China, Taiwan, and other East Asian countries due to delays in the arrival of some industrial and technological components.

Around 30% of ships have changed their traditional route via the Gulf of Aden, Bab-el-Mandeb, and the Suez Canal, through which about 20,000 cargo ships pass annually in normal times. This is out of a global car-go fleet of 105,000 vessels with a tonnage of at least 100 per vessel – the fleet transport-ed in 2020 about 11bn tons of various goods and materials overseas.

Maritime trade employs 1.3 million people on ships and docks. The more the conflicts, the bigger the shipping distances and costs – as happened during the Ukraine war and the ensuing wheat supply crisis.

UNCTAD said crude oil and refined products travelled longer distances in 2023 because Russia sought more distant, alternative markets, and the European Union also sought more distant, alternative energy suppliers.

Around 30% of ships have changed their traditional route via the Gulf of Aden, Bab-el-Mandeb, and the Suez Canal, through which about 20,000 cargo ships pass annually in normal times.

Shipping distances shortened in 2020 during the COVID-19 crisis but went back up last year, with grain shipments travelling longer distances under the Black Sea Initiative necessitated by the Ukraine war, while trade in containers carrying industrial materials from East Asian countries jumped.

Another challenge to global shipping is the "ageing" maritime transport routes, including straits, corridors, ports, and coasts.

Everyone still remembers what happened in the Suez Canal in 2021 when the Panama-flagged Ever Given Marine ship ran aground, blocking the canal for days.

This picture on July 7, 2021, shows a view of the Panama-flagged MV 'Ever Given' container ship sailing along Egypt's Suez Canal near the canal's central city of Ismailia.

Around 12% of international maritime trade traffic passes through the canal, which generates more than $8bn in foreign currency revenues for Egypt. It is the longest canal in the world (193km), links the Mediterranean and the Red seas, and facilitates the delivery of 15% of global merchandise, 30% of containers, and 8% of crude oil.

Long distances and high costs

Crises force longer-distance and more expensive maritime trade away from conflict zones. In Europe, fears of a supply crisis and a return to price inflation are growing — especially if the Red Sea conflict is protracted for months to come.

Trade fell 13% (in two months) along the closest trade route between Asia and Europe, built 150 years ago. The European Union decided to send warships to monitor the free movement of trade in the Gulf of Aden and the Strait of Bab-el-Mandeb in the Red Sea and to possibly participate in military strikes being carried out by Operation Guardian of Prosperity, led by the United States and the United Kingdom.

US President Joe Biden said, "The United States and our partners won't tolerate attacks on our personnel or allow hostile actors to imperil freedom of navigation."

At least 50 countries have been hit hard by trade disruptions in the Red Sea – including regional economies, with Suez Canal revenues falling by 40%.

At least 50 countries have been hit hard by trade disruptions in the Red Sea – including regional economies, with Suez Canal revenues falling by 40%.

Global economy records lowest growth

The World Bank doesn't rule out new blows to the global economy due to trade disruption. It expects a decline in global economic growth to the lowest level in 30 years – a rate of 2.4% by the end of this year – compared to the 2.9% outlook announced last quarter.

This will significantly curb global economic growth — particularly for industrialised countries that expected growth rates of at least 1.2%. China is expected to record its lowest growth rate since 1990, at nearly 4.5% in 2024; and this number could fall to 4.3% in 2025. Emerging and developing economies are expecting a collective 3.9% growth rate.

Meanwhile, US growth won't exceed 1.7% in a year of presidential elections, whose outcome may impact more than one regional and international conflict.

Eduardo Ramon

The spectre of inflation is the biggest global worry. Prices have begun to rise again since the end of last year after tireless efforts were made to curb inflation, especially the raising of interest rates – a policy that seems to have raised the cost of investment and loans without bringing prices back to pre-pandemic levels.

Concern mounts in Europe

European leaders fear any possible escalation or expansion of the Israeli war on Gaza, which is spilling over to the Red Sea due to Houthi attacks on ships and the uncalculated political and economic repercussions of an expanded conflict there.

This includes the possibility of higher energy prices, as happened during the 1973 Arab-Israeli war. Europe is wary of being dragged by Washington into a direct confrontation with Iran, which Washington describes as the real supporter of the Houthis in Yemen and Hezbollah in Lebanon.

EU economies are still reeling from the cost of Russia's war on Ukraine. On its part, Washington is gradually tiring of supporting Kyiv — especially after US lawmakers blocked sending more aid to the embattled country. It's a war whose cost could be borne by Europe alone in the event of a change of US administration at the end of this year.

Any expanded conflict in the Middle East will negatively impact Europe the most because they are geographically closest to the Arab world and its conflict zones.

Also, because of their diverse demographics due to an influx of immigration from war-torn countries, they also worry that anger over Israel's war on Gaza could spill over into their countries and spark tensions between its populations. Europe also understands that it will bear at least part of the cost of rebuilding the Gaza Strip after the guns fall silent.

Many Europeans, leaders and people alike, regret the knee-jerk support given to Israel after the 7 October Hamas attacks. They are now feeling the political, economic and social repercussions of the unequivocal backing of Israel at the start of the Gaza war.

The World Bank expects a decline in global economic growth to the lowest level in 30 years.

AFP — Military vessels are increasingly having to accompany civilian cargo carriers.

Maritime trade remains key

Global trade is expected to record 2.8% growth annually in the coming years, but the rate will still be lower than its previous levels of about 7% in the past decade; Middle East corridors will remain crucial to the East-West trade route.

Infographic: Maritime shipping: The backbone of global trade

According to an analysis by the Boston Consulting Group, while US trade with North American countries – Canada and Mexico will continue, trade with Southeast Asia is expected to skyrocket to $1.2tn over the next ten years, marking a key maritime trade shift towards Pacific routes.

China's trade will rise by $600bn, although it may lose some of its industrial competitiveness; it will expand with the global south. India's share in global trade will also strengthen in the next decade; India will seek better access to European markets. China's trade with the United States is likely to decline, and at the same time, EU trade with Russia will drop.

Given its crucial role in global trade, maritime wars may be waged in more than one sea — from Bab-el-Mandeb to the China Sea and the Strait of Taiwan.

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