How the Red Sea Conflict Is Crimping Global Trade

The USS Mason, an Arleigh Burke-class destroyer which reportedly shot down a suspected Houthi drone flying in its direction on Jan. 10, passes a dock in Virginia in 2021. (Steve Helber/Associated Press)

[Stay on top of transportation news: Get TTNews in your inbox.]

LONDON — The attacks on commercial ships in the Red Sea by Yemen’s Iran-backed Houthi rebels have rerouted most of the trade normally flowing through the crucial maritime artery for consumer goods and energy supplies, a shift that’s delaying shipments and raising transport costs.

The impact struck home Jan. 12 when electric car maker Tesla said it had to shut down its factory outside Berlin from Jan. 29 to Feb. 11 because of delays in supply chains, and as U.S.-led airstrikes hit what the Navy said were Houthi missile and drone launch sites in Yemen.

Oil, natural gas, grain and everything from toys to electronics typically travel through the waterway separating Africa and the Arabian Peninsula en route to the Suez Canal, where 12% of the world’s trade passes.

Some of the world’s largest container shipping companies and oil giant BP have been sending vessels on longer journeys that bypass the Red Sea. In response to the growing impact to global trade, the United States and a host of other nations have created a new force to protect ships.

Why They’re Attacking Ships

The Houthis are Iranian-backed rebels who seized most of northern Yemen and the country’s capital of Sanaa in 2014. The following year, a Saudi-led coalition entered the conflict, seeking to restore Yemen’s internationally recognized government to power.

The Houthis have sporadically targeted ships in the region, but the attacks have increased since the start of the Oct. 7 Israel-Hamas war. They have used drones and anti-ship missiles to attack vessels and in one case used a helicopter to board and seize an Israeli-owned ship and its crew.

They have threatened to attack any vessel they believe is either going to or coming from Israel. That’s now escalated to apparently any vessel, with containerships and oil tankers flagged to countries like Norway and Liberia being attacked or drawing missile fire.

Red Sea’s Importance

The Red Sea has the Suez Canal at its northern end and the narrow Bab el-Mandeb Strait at the southern end, leading into the Gulf of Aden. It’s a busy waterway with ships traversing the Suez Canal to bring goods between Asia and Europe and beyond.

In fact, 40% of Asia-Europe trade normally goes through the area, including a huge amount of oil and diesel fuel for import-dependent Europe. So do food products like palm oil and grain and anything else brought over on containerships, which is most of the world’s manufactured products.

In all, about 30% of global container traffic and more than 1 million barrels of crude oil per day typically head through the Suez Canal, according to global freight booking platform Freightos Group.

How It’s Affecting Trade

Huge shipping container companies are avoiding the Red Sea and sending their ships around Africa and the Cape of Good Hope. That adds what analysts say could be a week to two weeks to voyages. Insurance and fuel costs have risen.

The number of containers passing through the Red Sea fell by more than half in December, to around 200,000 from 500,000 in November. That is 66% lower than the pre-pandemic 2017-2019 average, according to the trade indicator compiled by Kiel Institute for the World Economy in Germany.

Image

Sea Viper missiles are fired by British forces in the Red Sea on Jan. 10. (UK Ministry of Defence via AP)

The cost of a standard 40-foot container from China to northern Europe has jumped from $1,500 to $4,000. But that is still far from the $14,000 seen during the pandemic.

The delays contributed to a 1.3% decline in world trade in December, reflecting goods stuck on ships rather than being offloaded at ports. But “noticeable consequences for consumer prices in Europe are scarcely to be expected, since the share of freight costs in the value of high priced goods, such as consumer electronics, is a fraction of a percent,” said Julian Hinz, director of the Research Center Trade Policy at Kiel.

However, analysts at JPMorgan Chase & Co. say that the cost increase could slow the recent decline in inflation: “While these cost increases are coming off low levels, they will reinforce the fading of recent deflationary dynamics for goods prices.”

Effect on Oil Prices

Crude prices rose around 4% on news of the U.S.-led air strikes. International benchmark Brent traded at just over $80 per barrel Jan. 12. That is still down from about $84 on the eve of the Oct. 7 Hamas attack on Israel.

“While this puts upwards pressure on global oil prices, it is unlikely to represent a serious energy supply shock for now,” Simone Tagliapietra, an energy analyst at the Bruegel think tank in Brussels, said on X.

That could change if the Hamas-Israel and Houthi conflicts escalate and lead to trouble at the Strait of Hormuz at the southern end of the Persian Gulf, with Tagliapietra adding, “That would have massive implications for global energy markets.”

Global Response

The U.S. is leading a security initiative to protect ships in the Red Sea that includes the United Kingdom, Bahrain, Canada, France, Italy, Netherlands, Norway, Seychelles and Spain. The Houthis have no navy to impose a cordon, relying on harassing fire and only one helicopter-borne assault so far.

The Jan. 12 strikes killed at least five Houthi troops and wounded six, the rebels said, without elaborating on what was targeted. It remained unclear how extensive the damage from the U.S. strikes were, though the Houthis said at least five sites, including airfields, had been attacked.

Associated Press writers Jon Gambrell in Dubai, United Arab Emirates, and Tara Copp and Lolita C. Baldor in Washington contributed to this report.