Economics Newsletter: The Red Sea Crisis
As Houthi attacks continue to destabilize the Red Sea, cautious freight carriers have opted for a lengthier journey around Africa’s Cape of Good Hope. While this route is safer, it is also costly and has various implications for global shipping.
The Red Sea route accounts for roughly 40% percent of the Asia-Europe goods trade. The “Good Hope” detour is estimated to increase the length of shipping by roughly 11 days. This has increased freight rates and caused some supply chain disruptions, specifically in Europe. Tesla, for example, claimed it would have to suspend production at its only European factory in Germany.
If sustained, the Red Sea crisis could have more severe implications. Allianz economists note that three months of sustained, higher freight costs could potentially drive the eurozone into a contraction in 2024. The potential dangers of a shipping crisis are not only limited to Europe, however. Longer routes reduce overall shipping capacity. Subsequently, ships have less time to transport goods along other global shipping routes, such as those between the U.S. and Asia. As the graph below shows, global freight rates have increased substantially over the last few weeks. The Drewry World Container Index is currently 144% above December’s average. The Freightos Baltic Index recorded that the average cost of global container shipping doubled from December 22 to January 12.
Firms (particularly automakers) are eyeing the situation carefully, but many note that the size and scope of the disruption is not nearly as large as that of the COVID pandemic. Moreover, many producers believe they are better prepared for supply chain disruptions, having learned from previous incidents. While this might be true, the potential spillover effects of an untreated crisis should not be ignored.
Reade Ben is a policy analyst at the Manhattan Institute.
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