This is Armchair Economics with Hamish McRae, a subscriber-only newsletter from i. If you’d like to get this direct to your inbox, every single week, you can sign up here.
The Red Sea is the most important shipping route for global trade, and it is in effect closed.
About 12 per cent of the world’s total sea transport, and 30 per cent of its container trade, goes through the 21-mile-wide Bab al-Mandab Strait at the south and the Suez Canal at the north. Ships can go around Africa via the Cape of Good Hope instead, but that adds another seven to 10 days passage, with all the additional costs involved.
The reasons behind this disruption have been widely reported. Since October, Iran-backed Houthi rebels who control a large part of Yemen have been attacking any ships that they say have links with Israel. The United States is assembling a naval task force to try to ensure safe passage, but it is not yet clear how effective this will be, and how quickly it can re-establish confidence among the ship owners.
So far it has failed to do so. It is true that carriers that are prepared to take the risk, and pay the additional insurance costs, can still make the transit. But more than half of the ships which would normally go through the Suez Canal are now heading south around Africa.
Two of the largest container shipping groups, Maersk and Hapag-Lloyd, which together account for almost a quarter of the global container shipping fleet, have suspended operations through the Red Sea – and found that their shares jumped as a result. A reward for their caution? Not exactly, but rather a demonstration that the financial markets think that shipping rates will continue to climb and that will benefit their margins. The container groups would of course like the route to reopen, but can live with it being closed.
But what about world trade, and hence the world economy? Much depends on how long the disruption lasts. We learned in March 2022 what happens when a ship blocks the Suez Canal. The Ever Given, a Chinese-owned container ship, was stuck for six days, leading to a back-up and a blip in the price of many items, including food.
This time, what matters is how long it is before safe passage is re-established. It is very hard to make a judgement given the fast-moving military situation, but the prudent assumption must be that the closure or partial closure will last several weeks. What then?
There are short-term and medium-term effects. In the short term, there will be some increase in prices, and some goods will become temporarily unavailable for a few weeks. It is impossible to be precise about the scale of the increases, and for a while it may be possible to absorb some of the additional costs. But a common-sense judgement suggests an increase of about 2 per cent in goods and energy prices, which in turn would translate to 0.5 per cent in inflation at a consumer level.
The disruption shows up in surprising ways. There are reports of higher prices expected in New Zealand, which you might imagine would not be much affected. In the US, there are stories that prices are already climbing. Several cruise operators diverted their ships away from the Red Sea back in October. That’s a decision that looks prescient, given what has happened since then, but it means no visits to the Red Sea ports of Jordan and Egypt.
All this is short-term. There is inevitably some economic damage, but so far at least, it is on a smaller scale than the disruption that followed the Russian invasion of Ukraine. We will feel this gradually through the spring, as the expected decline in inflation will take a little longer to come through. Might it be the extra blow that tips the world economy into a recession in the second half of the year? That is impossible to know, but the disruption has come at an already difficult time as the world adjusts to higher interest rates.
Look ahead, and there is a further element. The world is gradually retreating from the extreme globalised economy that grew up in the first two decades of this century. The buzzword of offshoring has been replaced by reshoring, nearshoring, friendshoring and so on. This is one more blow to globalisation, one more argument for trying to make stuff at home, or when that is impracticable or impossible, finding some way of reducing the risk of global conflict damaging one’s business. Many people will welcome this. There is plenty of push-back against globalisation. But there are costs in terms of higher prices for staple products and a smaller variety of goods in the shops.
There is a further twist to this story, and a disturbing one. It is that the Red Sea is not the only global sea route under threat. Close by, in the Strait of Hormuz, there have been threats by Iran to disrupt the Middle East’s oil and gas exports. And on the other side of the world, the Panama Canal is threatened by drought and is operating far below its normal capacity. Shipping carries some 80 per cent of world trade. And world trade is in serious trouble.
One of the things that has always surprised me has been the scale of the opposition to world trade. Of course it is totally understandable that anyone whose job is displaced by foreign competition should be dismayed, even infuriated, by it. But trade is one of many forces that affect the job market. Changing technology and the shifts in consumer preferences are even more important, and people only choose a foreign product if they think it is better than the domestic one.
True, enormous power is now held by companies such as Apple and Microsoft, but their products work very well. Samsung has shown that other countries can develop effective rival mobile phones – and in that instance, Korea is a smaller economy than the UK, so in theory at least we should have been able to devote the resources to have developed companies that could do so.
As it is, Arm Holdings, based in Cambridge, designs the chips for the vast majority of the world’s smartphones. We make the money by selling the idea of how to make the product, or rather how to make the critical element of the product, instead of physically manufacturing it. So anyone using a smartphone is in effect endorsing globalisation. I find it frustrating they don’t realise that.
It is possible that there will be some positives from the current disruption to world trade, and in saying that I know I am looking for a silver lining in some very dark clouds.
The main general positive element will be that people will realise how much they depend on others in far-distant countries for their daily well-being. There may also be a benefit to domestic producers, who find demand rises as a result of “reshoring”.
But most of all, I hope it will make us think about the complexity of the world shipping industry, and the way in which goods are sent around the world in such a seamless manner, and that it will increase our respect for the people who run what is an astoundingly complex industry – often under dangerous and difficult circumstances.
This is Armchair Economics with Hamish McRae, a subscriber-only newsletter from i. If you’d like to get this direct to your inbox, every single week, you can sign up here.
login
who are we?
contact us
qosheapp
Toi Staff
Gideon Levy
Belen Fernandez
Andrew Mitrovica
Mort Laitner
Rami G Khouri
Ali Fathollah-Nejad
Nikkei Editorial
visit website
