What is Red Sea, how tensions are affecting global economy?
Tensions are soaring in Red Sea as US, UK and Yemen are exchanging air strikes almost every day, disrupting the global shipping affecting the global economy.
What is Red Sea, and why is it vital for global economy?
Red is a water inlet of the Indian Ocean connecting Europe with Asia and Africa via Suez Canal. It is connected to the Mediterranean Sea by the Suez Canal in the north and to the Indian Ocean by the Bab el Mandeb strait in the south.
Red Sea holds significant geo-economic importance due to several factors:
- Strategic Location: The Red Sea serves as a critical maritime route connecting Europe, Asia, and Africa. Its strategic location makes it a vital artery for international trade, facilitating the transportation of goods, energy resources, and commodities between major global markets.
- Trade and Shipping: Its major thoroughfare for maritime trade, particularly for the transportation of oil and natural gas from the Gulf region to markets in Europe and Asia. The Suez Canal, which connects the Red Sea to the Mediterranean Sea, is one of the world’s busiest shipping lanes and a crucial link in global trade networks. According to an estimate, about 15% of global trade passes through Red Sea, and over 1 trillion USD worth of goods a year.
- Military and Security Considerations: The Red Sea’s strategic location has military implications, with major powers and regional actors seeking to assert influence and ensure maritime security for safeguarding shipping lanes, combating piracy, and addressing security threats in the region.
Why Houthis are attacking ships in Red Sea?
Houthis are basically an armed group in Yemen who controls most parts of the country, including the capital Saana. In response to Israel’s attacks on Gaza and the failure of international community to prevent it, Houthis announced their support for Palestine and attacks vehicles in Red Sea bound for Israel or ships having link with the US or UK due to their support of Israeli aggression in Gaza.
On November 19, 2023 Houthis hijacked the commercial ship in Red Sea and since then, they have hijacked two dozens more by targeting them through drones, speed boats, and missiles.
How did the US and UK respond to Houthi attacks in Red Sea?
In order to safeguard their shipping vessels in Red Sea, which is crucial for their economy, the US and UK formed a military coalition which has 20 countries according to Pentagon including Canada, Australia, Germany, Japan, and Bahrain (only country from Middle East).
After forming this coalition, the US and UK carried their first airstrike on Yemen on January 11, which Houthis described as “barbaric”. There have been several strikes since then.
Also Read: US-UK launch joint military attacks on Houthis, what has happened so far?
President Joe Biden said they were in “direct response” to the attacks on Red Sea ships, which “jeopardised trade, and threatened freedom of navigation”.
UK Prime Minister Rishi Sunak said the action was “necessary and proportionate” to protect global shipping.
How does these political tensions in Red Sea affecting global trade?
With major shipping firms diverting vessels away from the Suez Canal due to security concerns , the dynamics of international trade have been significantly disrupted.
According to the Organisation for Economic Co-operation and Development (OECD), the ramifications of the crisis in the Red Sea are substantial. The Paris-based group estimates that the recent doubling of seaborne freight rates could inflate import price inflation across its 38 member countries by nearly 5 percentage points if the situation persists.
This inflationary pressure could add 0.4 percentage points to overall price rises within a year, significantly impacting consumer purchasing power and global economic stability.
The rerouting of ships around the southern coast of Africa, known as the Ba bel Mandab strait, has increased journey times by 30% to 50%, effectively reducing the capacity of the global shipping market.
Tiemen Meester, Chief Operating Officer at Dubai-based logistics firm DP World, underscores the challenges faced by European imports, citing significant delays and higher costs resulting from network inefficiencies.
How the tensions in Red Sea have affected companies and global shipping?
The attacks by Yemen’s Houthi fighters in the Red Sea have sent ripples across industries, causing widespread disruptions in companies’ supply chains and operational processes. Consequently, numerous shipping companies have been compelled to reroute their vessels, resulting in significant alterations and delays in global trade dynamics.
Automobile Industry: Several major players in the automobile industry have reported adverse impacts from the disruptions caused by the Red Sea attacks:
- Geely, China’s second-largest automaker, anticipates delays in electric vehicle (EV) deliveries, affecting its sales.
- Michelin, the French tire manufacturer, experienced halts in production at four of its Spanish factories due to delays in raw materials delivery.
- Suzuki’s production plant in Hungary faced interruptions, leading to delays in manufacturing as a result of changes in shipping routes.
Energy Sector: The energy industry has also felt the repercussions of the Red Sea attacks:
- BP temporarily halted all transits through the Red Sea, reflecting concerns about the safety of shipping routes.
- Shell suspended all shipments through the Red Sea indefinitely, signaling a cautious approach to navigating the crisis.
Logistics and Retail: Companies operating in logistics and retail sectors have encountered challenges in managing their supply chains and operations:
- DHL advised customers to closely manage inventories, acknowledging the potential impact of disruptions on logistics.
- Retail giants like Adidas, Danone, and Ikea have reported increased transit times and shipping delays, prompting adjustments in supply chain management strategies to mitigate adverse effects on deliveries and costs.
Other Industries: A wide array of industries, including mining, home appliances, chemicals, and electronics, have grappled with the consequences of the Red Sea crisis:
- BHP Group, the Australian mining giant, noted disruptions forcing freight service providers to explore alternative routes.
- Electrolux, the Swedish home appliance maker, established a task force to identify priority deliveries and alternative routes to mitigate disruptions.
- Logitech, a computer peripheral maker, anticipates profit margin pressures due to higher transport costs resulting from the Red Sea crisis.
The cumulative impact of these disruptions extends beyond individual companies, posing challenges to global supply chains, inflationary pressures, and economic stability.
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