Global trade disruption

Shipping routes can increase vulnerability

Two unrelated events in different parts of the world point to one thing in common — climate change and geopolitical tensions have the potential to severely impair global trade and shipping. Two continental shipping passages, the Suez and Panama canals, are suffering from obstructions to trade traffic. This has brought back concerns about supply-chain woes and risks to the global economy in the coming year. Amid the risk of attacks by Houthi rebels from Yemen, who have stepped up attacks in response to the war in Gaza, major shipping companies have announced plans to reroute vessels away from the Suez Canal and the Red Sea. Instead, ships will navigate around the Cape of Good Hope, a much longer but safer route. According to a statement by US Central Command, there have been about 15 attacks on commercial shipping vessels by Houthi rebels since October 17. An Indian-flagged ship carrying crude oil was attacked.
 

Turmoil in the Red Sea can practically render the Suez Canal unusable, a route that facilitates 12 per cent of global trade and around 20 per cent of India’s trade flows. As a result, freight and shipping costs will increase, rendering both imports and exports more expensive. The ocean freight rate, for instance, between Shanghai and the UK has increased from $2,400 to $10,000 for a 40-foot container in just a week. Vessels still operating on this route are now facing exorbitantly high war-risk insurance premiums. Continued tensions surrounding the Gulf of Aden can impact India’s trade flows. In the case of oil imports, though the prices have inched up, there is a silver lining. India sources its oil mainly from West Asia, and this is shipped via the Persian Gulf and the Strait of Hormuz. This is not the first time that a crisis has hit the shipping traffic from the Suez Canal. Two years ago, one of the world’s largest container ships got stuck sideways in the canal, causing trade between Asia and Europe to come to a halt.
 

The Panama Canal, another important trade route, has been impacted by drought conditions coupled with the El Nino effect. It is completely reliant on freshwater from nearby lakes, and cannot run on ocean water because it lies above the sea level. The channel, connecting the Pacific and Atlantic Oceans, is operating at only 55 per cent of its normal capacity. Blockage in the Panama Canal has also exacerbated supply-chain disruptions. Given the disruption on shipping routes, it is important to recognise that it is the criticality of a handful of so-called “choke points” upon which global trade and navigation depend. This time it is the Suez Canal, but other choke points can also become vulnerable. Smooth trade flows in the future may require international cooperation for effectively managing the major straits and canals during periods of natural emergency and political crisis. Intermodal freight transport is another possible option, but air cargo capacity is limited and costs substantially more. It is also not suitable for shipping bulk commodities such as crude oil. With no short-term end to the attacks in sight and reversing climate change being a slow process, both problems do not have any easy and immediate solution.