The Houthis' war on trade is working

Rebels’ disruption to shipping has a ‘butterfly effect’ on global supply chains, causing companies to scramble, redirect, and reassess, with costs rising rapidly

The Houthis' war on trade is working

For the economy, fighter jets and fleets are deployed. For the economy, wars are fought. Bottom lines are very often red lines. Look at the United States in Iraq, for example.

The latest iteration is the US-British military response to the Houthis, which is in harmony with the wider US-Iranian ‘rules of engagement.’

Called Operation Guardian of Prosperity, it aims to end Houthi piracy in the Red Sea, which is proving to be very effective for the Yemen-based group.

Container ships, together with oil and gas tankers, have chosen to round Africa at the Cape of Good Hope since 19 November rather than brave Houthi missiles for the much shorter route through the Suez Canal.

When we think of economic sanctions, we tend to think of them as being imposed by major powers — especially the United States and its Western allies — to pressure and subjugate other countries, such as Iraq, Iran, and Russia.

Yet observers of the situation in the Bab-el-Mandeb Strait, and the Red Sea in general, would be forgiven for thinking that sanctions had been imposed by Iran, which supports the Houthis and provides them with weapons.

These ‘sanctions’ are not only on the US for its support of Israel in its war of extermination against Gaza but on the entire international community, irrespective of its stance vis-à-vis Israel.

Collateral damage

So far, the Houthis have succeeded in causing major disruption in world trade, which could be described as ‘collateral damage’.

This concept is familiar to great powers, who have long explained that every war has human or material repercussions — whether intentional or not.

For the economy, fighter jets and fleets are deployed. For the economy, wars are fought. Bottom lines are very often red lines.

At first glance, it can seem as if Iran's target is Egypt, not Israel, owing to the significant cost to the country of ships not using the Suez Canal.

Yet that would be to overlook the economic effects of this disruption that have yet to reveal themselves since the change of shipping route.

Has Iran managed to control a significant chunk of the world's $32tn annual trade through one of its militias, which, to date, has launched at least 35 attacks on commercial and military ships against major powers and their armies?

The butterfly effect

More than 50 years ago, scientists studying chaos theory and the dependence of systems on one another asked metaphorically whether the flap of a butterfly's wings in Brazil could set off a tornado in Texas several weeks later.

This idea, known as the 'butterfly effect', is that the world is so deeply interconnected that a small event in one location can cause an effect in a much more complex integrated system somewhere else.

In economics, this theory refers to the multiplier effect of small or topical changes, just like the dramatic scene we see in Bab-el-Mandeb and its impact on policies and economies worldwide.

Global trade has continued to decline in the first month of this year, after recording a decline of 1.3% last December.

Ships' insurance costs have risen up to 250%. For some shipments heading from North Asia to Europe, price rises of 600% have been recorded.

Ships' insurance costs have risen. Fears of being hit by a missile, such as Russia's Rubezh, the Chinese-designed Al-Mandab-1, or Iran's Ghadir and Sejjil, are very real — not just for the ship's crew, but for boardrooms worldwide.

Shipping rates have also been hiked by up to 250%. For some shipments heading from North Asia to Europe, price rises of 600% have been recorded.

In addition to the financial costs, there is an environmental cost to the huge route extensions in terms of carbon dioxide emissions, with at least 90% of ships having already changed course, according to British marine consultancy Drewry.

New routes and models

Russia's invasion of Ukraine reshaped many oil, gas, and grain trade routes, including most notably those through the Black Sea.

Similarly, the volume of trade through the hot 'red lane' from Houthi attacks has declined by 42% in the past two months, according to estimates from the United Nations' Conference on Trade and Development (UNCTAD).

This has led to calls for maritime transport maps to be redrawn, before things worsen and start to impact inflation, which most central banks have finally managed to get under control, helped by the US Federal Reserve and the flexibility of the US economy.

In the meantime, thousands of companies are on alert, especially in the retail sector, due to supply chain disruptions and delivery delays. This includes Amazon, IKEA, Tesla, Toyota, Hyundai, Kia, Volvo, Tesco, and Primark.

Countries that had been inching towards economic recovery and growth now face the spectre of inflation. This is due to the doubling of costs and the rising price of goods and materials, in part because of the additional shipping costs and time.

Companies such as Amazon, IKEA, Tesla, Toyota, Hyundai, Kia, Volvo, Tesco and Primark have been hit supply chain disruptions and delivery delays.

In particular, major car companies are having to plan around disruption to their production lines because of delays in the arrival of primary resources.

Industrial companies can suffer from cash flow shortages, according to Fitch, and this may require them to inject more capital due to slow deliveries of products.

In the UK, factories have been reporting higher production costs, which, if exacerbated, could change their business models.

Impact on oil

Oil companies like Shell, BP, and Qatar Energy are nimbly rearranging their global supplies of oil and gas to avoid market contractions due to increased demand in exchange for supply cuts.

Analysts fear that unrest could spill over into the Strait of Hormuz, through which more than 20 million barrels of oil were shipped daily in the first half of 2023 - equivalent to 27% of the world's seaborne oil trade.

In essence, the fear is of a 'Houthi butterfly effect'. This effect on trade and global supply chains is more significant than anything so far evidenced.

Even farmers have not been spared the effects of Houthi missiles. Food and grain prices have risen. Apples, citrus fruit, and more strategic commodities like rice, sugar, and coffee have all headed north on the graph.

The consequences will ultimately be borne by consumers, especially in countries that are poorer, weaker, and further from the source of production.

Diverting trade from the Bab-el-Mandeb and the Suez Canal has revived trade elsewhere in the world, not least at the Cape of Good Hope, where navigation has increased by 160% per day.

The consequences will ultimately be borne by consumers, especially in countries that are poorer, weaker, and further from the source of production.

US Secretary of State Antony Blinken's tour in West African countries, especially Nigeria, Ivory Coast, Angola, and Cape Verde, is the best evidence of the transfer of strategic weight to the continent's Atlantic shores.

We may witness new Western military bases there to preserve "maritime security" if the Red Sea crisis continues for months before safe passage is re-established, as many shipping experts and companies expect.

This poses the question of whether the US really wants to free global trade from Bab-el-Mandeb's current impasse.

Effect on China

China exports up to 95% of what it produces (more than $3.5tn in goods in 2022, surpassing even the US), so its economic interests are tied to secure shipping lanes in the Red Sea.

It is not in an enviable diplomatic position at a time when some of its ships have resorted to using signs to declare their national affiliation.

India is not much better. About 80% of its trade — estimated at more than $15bn a month — passes through Bab-el-Mandeb to the European Union, the east coast of the United States, and parts of Africa and the Middle East.

More than two months after the Houthis began attacking ships in response to Israel launching its war on Gaza, what has actually been achieved on the ground?

The effects are successive blows to the world's companies, the accumulation of excess costs, and renewed inflation in a fragile global economy.

And the costs have not yet finished mounting.

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