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The Red Sea Houthi rebel attacks on ships are adding another shock to global trade for consumers and suppliers alike. After pandemic-related supply chain jams, delays were caused by the Russian-Ukraine war. The Houthi rebels in Yemen are attempting to stop Israel’s offensive against Hamas in Gaza, which is now causing more trade delays across the globe.
The Houthi rebels, an armed political and religious group, have declared themselves to be an “axis of resistance” backed by Iran. This particular group considers Israel to be its main enemy and attempts to target Israeli ships with drones and missiles. Houthi rebels are causing this disruption in against cargo ships in the waters that connect Asia with Europe and the United States.
The Red Sea is one of the most important arteries in the global shipping systems, with one-third of all container traffic flowing through it. Thus, disruption could have a serious ripple effect, causing higher costs throughout the world economy. Forty percent of Asia-Europe trade transits through this sea, and moving to the alternate route from the Suez Canal and around the tip of Africa could cost $1 million more in round trips and additional fuel costs. In addition to this, Flexport CEO Petersen has warned that avoiding the canal for one year would cause higher costs and lead to an increase in inflation of 1 to 2 percent.
The cost of shipping a standard 40-foot container from Asia to northern Europe has increased from less than $1,500 in mid-December to nearly $5,500. Getting Asian cargo containers to the Mediterranean is even costlier: almost $6,800, an increase of $2,400 in mid-December, according to the freight booking platform Freightos. This shipping container increase has caused some companies that import from India, like Urban Outfitters, a clothing subsidiary of Free People, to ship parcels by air rather than by sea. However, many companies are unable to do this with products because the cost itself thought the sky would be too high to put furniture and household goods onto planes.
Changing the way we ship will affect the average consumer in several ways, including longer wait times and higher prices. Higher prices and longer weight times may cause dissatisfied customers to be more inclined to buy locally than from more giant conglomerates that have to ship long distances. The change in shipment from through the canal to around the Horn of Africa could increase shipping time from 8.5K nautical miles (26 days) to 11.8K nautical miles (36 days). The change in miles and days not only increases the fuel expenses but also the wages of staff and the depreciation of these ships.
It is anticipated that Europe will feel the effects of these attacks before the United States; this is because CFR Fellow Zongyuan Zoe Liu stated that the Red Sea is the only route to the Suez Canal, which links some of the largest European consumers of tradable goods to their Asian suppliers and attempting to find a new route is not economically feasible. Luckly, as of early January 2024, these attacks have yet to produce any significant price increases for consumers, especially in energy markets. The price of crude oil remains lower than the October average even though it has recently flared after some of the significant strikes.
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