Commercial Shipping and Seabourne Trade Policy Handbook: The Red Sea Crisis
Category: International Trade
By: Emmanuel Wa-Kyendo,
The Houthi’s are Yemeni political actors. The Houthis, and Somali pirates have been launching direct kinetic attacks on shipping assets. The Houthi’s are understood to be allies if not proxies of Iran. They use Iranian weapons and take some level of political direction from Iran. The Houthi’s explain that their attacks are designed to offer relief to their allies Hamas by placing pressure on Israel and it’s supporters to stop Israeli military operations in Gaza. China and Russia have not condemned the attacks. As the UN Security Council adopted a resolution condemning Houthi attacks, China and Russia abstained.
As such, there is some reason to believe that these attacks, and the political posture of Hamas amount to a coordinated approach to place pressure on western policy in the region. What follows is an exploration of the current and potential effects of this disruption of international trade on economic welfare of the world in general and the East African region in particular. Affected parties will be assessing costs and gains, choosing sides, or remaining neutral and or silent for as long as they find it tenable. This report will identify who these partners may be and how their welfare might be affected.
I Global Shipping and Maritime Chokepoints
How Does Global Shipping Provide the Needs of the People of the World?
There are goods for which transportation by air or by road is unviable. The attributes of these goods that prevent their transportation by land and by air include their respective rates of decay and size. It is simply not economical to transport crude oil by air. Grains and fruits and other agricultural products, for example, are better transported in bulk where the operators can achieve economies of scale. Other classes of goods that lend themselves to this calculus include industrial tools, industrial inputs, and white goods.
What is not always apparent is that these disruptions also have downstream effects for manufacturers. The effects of delay have a horizon that extends beyond the departure and arrival of specific goods from port to port. The risks posed by disruptions to shipping also include delay in production schedules, pressures on the returns on factor inputs, and employment.
Goods transported across the globe include both intermediates and final goods. The volume of intermediate goods traded across the globe is a testament to comparative advantage and specialization. Disruptions at major passageways incur financial costs to ship oeprators and their clients who are waiting for the arrival of these goods. Shipping Lowers the Cost of Transportation and Opens the World to Consumers and Producers.
The international chamber of shipping estimates that shipping takes just 0.3 pence of a British £2.50 cup of coffee in the United Kingdom, US$5 from the US$100 cost of a Nike shoe, and British 20pence off a British £5 bottle of wine. This is just one way to assess the benefits that global shipping confers on consumers and producers the world over.
- Who is Involved in Shipping?
Ship owners purchase and own ships. They do not necessarily operate these ships. Ships are operated by charterers. Charteres plan the shipping routes and fuel the ships. Ship brokers liaise between charterers and ship owners. They are a fulcrum on which the market for ships is discovered and exploited.
They bring owners and charterers together, negotiate rates and secure deals. Ship managers are charged with the care of fleets of ships. Manning agents meet the labor and human capital needs of the variors actors involved in shipping. Bunker operators supply fuel for ships. Flag and port states are home to the institutions that regulate the shipping industry. Finally, global policy making on shipping is mediated by two specialized United Nations institutions namely the United Nations International Labour Organization and the International Maritime Organization.
The global shipping industry demands increasing specialization at the individual and institutional level. Today, the markets for factor inputs and final goods are threatened by significant perturbations emanating from geopolitical tensions. Rising insurance costs reveal that the industry is both complex and brittle.
- What Types of Shops Carry Globally Traded Goods?
90% of world trade is facilitated by seabourne transportation. The types of ships operated are classified by the cargoes they transport, and or the types of operations in which they are engaged. The types of ships operated include bulk carriers, container ships, tankers, ferries or roll on roll off (RO-RO) ships, Cruise ships, Offshore Vessels and Special Purpose Ships. Bulk Carriers are merchant ships while design is socialized for the transportation of bulk cargo.
- Bulk Carriers
Bulk Carriers are the workhorse of the global merchant fleet. Their long flat decks with large cargo holds, sometimes cargo cranes, are equipped to carry cargo that is bulky or whose transportation costs exhibit economies of scale. These goods include iron ore, coal and grain. Bulk carriers bear loads destined for manufacture inputs, and consumption as animal feeds and as food for human beings. Bulk carriers operate contract by contract, searching for new contracts on the open market only once current contracts are fulfilled.
- Container Ships
Container ships carry manufactured goods in container sizes called 20 or 40 foot equivalent units. The capacity of container ships is measured in tons equivalent units or TEUs. The average capacity of containers has expanded from 6,500 TEUs in the year 2002 to 24,000 TEU in the year 2022. The containers are borne while stacked high, visibly, upon the upper decks of container ships. The contents of these containers carry both perishable and non perishable products and can also be refrigerated. Container ships operate in liner services, so called for their efficiency that is based on the regularity of the routes set and the mechanization of the loading and offloading process.
The international chamber of commerce reports that the cost of shipping a washing machine from China to Northern Europe can be as low as US$ 10. At 30g C02 per tonne nautical miles, the environmental cost of container ships is also relatively low compared to the typical heavy goods vehicle whose emissions are about 140g CO2/tonne nautical miles. Were a truck to carry a single container for 200 kilometres, its emissions would match that of a container that has travelled from China to Northern Europe.
- Oil and Chemical Tankers
Oil and chemical tankers and gas carriers bear the cargo for which they are named. As oil and gas are not found on every country on the globe, the oil and gas tankers allow suppliers to move crude and refined oil, and gas where the markets are located around the globe. While Large Crude Carriers can bear loads of up to 350,000 tones of crude oil from their sources to nations where they are refined, Product Tankers carry loads of about 35,000 tones of petroleum products including diesel, gas oil, lubricating oil and petrol. Chemical tankers are built to carry other chemical cargoes.
Tankers bear liquid cargoes that are critical to delivering the lifestyles, and levels of welfare that define modern civilization. Specially designed to carry risky, yet highly valuable and highly sought after industrial and commercial products, the costs of disruption of these transports can have far reaching effects when passed on to consumers.
Roll on Roll off ships and their variants including pure care and truck carriers (PCTC) help transport vehicles over short, medium and long distances. PCTCs help car manufacturers move newly manufactured vehicles from the factory to their destination markets.
- What are Chokepoints and Why Are They Important to Global Trade?
This map illustrates the important primary and secondary choke points of global seaborne trade. Presently, Bab El Mandeb, and potentially the Straight of Hormuz are the politically contested trade chokepoints. Disruptions to shipping at Bab El Mandeb choke point have implications on revenues enjoyed by Egypt owned Suez Canal. The Houthis are Yemeni based political actors leading the attacks against what they have called Israeli and western shipping. Yemen’s geographic location grants the Houthis the position to disrupt trade at a a relatively low cost. The U.S. led Operation Prosperity Guardian is an effort to counter these disruptions through a political and military response.
How Serious is the Threat?
Operation Atalanta formerly known as the European Union Naval Force (EU NAVFOR) Somalia is the name of an enduring EU counter piracy naval operation. This operation was launched on December 8th, 2008 and has maintained an existence to this very day. The objectives of this UN and EU mandated operation are to protect WFP and AMISOM and other vulnerable shipping, to deter and disrupt piracy and robbery at sea, to monitor fishing activities off the coast of Somalia and to support the EU and other international organizations efforts to secure maritime security and to expand the capacities of other actors to do the same.
95% of the volume of sea trade conducted by EU member states passes through the Suez Canal, the red sea and the Bab El Mandeb choke point. 20% of global trade or US$ 4.2 trillion passes through the Gulf of Aden. The Yemeni coastline is situated along the Gulf of Aden. As such, operation Atalanta is rightly regarded as a crucial contribution to maritime security. In 2023, operation Atalanta had a budget of Euro€ 5.1 million.
By August 24th, 2022, Operation Atalanta reported that piracy related events had seen a sharp decline and that since the year 2019, there had been no attacks. In response, om 1st January 2023, the shipping industry had removed the High-Risk Area (HRA) designation from the Indian Ocean. Operation Atalanta had affirmed its continued vigilance that would manifest in the form of periodical threat assessments provided to Company Security Officers who planned to make passages through the areas of the Indian Ocean close to the East African coastline and the Gulf of Aden.
By the 15th December, 2023, Operation Atalanta recommended that Israeli related ships sailing off the Yemeni coast in the red sea opt for night transit, minimize reporting on the Automatic Identification System (AIS) – public information that can presumably be used by pirates and aggressors to track down ships. It was also recommended that ships take measures including fire drills before approaching Yemeni coast, keeping crew members away from ship walls while in transit, minimize occupancy of the navigation deck and register with the Maritime Security Centre Horn of Africa.
The organization also reported that the likely attack scenarios would involve drone and missile attacks and boarding and hijacking attempts. Operation Atalanta offered that the Houthis have demonstrated considerable determination to carry out these attacks and escalate the political pressure on Israel and its allies.
Abhijit Singh, the head of the Maritime policy initiative at the Observer Research Foundation (ORF) opined that the Somali pirates were taking advantage of the relative absence of naval assets in the Gulf of Aden to conduct attacks. In response to aggression by the Houthis, the naval assets in question had shifted their attention to the Red Sea.
A threat circular by Ambrey reports that the Houthis had expanded their attacks from Israeli vessels to vessels bound for Israel and then to vessels belonging to companies that support Israel. It is not evident that the Houthis are particularly careful in their selection of what ships they should attack. For example, the Houthis and their Iranian allies have attacked ships that no longer belong to Israel. The result of all these activities has been a rising risk premium on war risk insurance.
What is the Significance the Suez Canal to Seaborne Trade?
The previous chart illustrates that transit calls at the Suez Canal have fallen from a seven-day moving average of 77 ships per day on 5th November 2023 to a seven-day moving average of 55 ships a day on 4th January, 2024.
The previous chart illustrates that the transit trade volume at the Suez Canal also fell from a 7-day moving average of 5.22 million tons on 5th November 2023 to a 7 day moving average of 3.30 million tons on 4th January, 2024. This data is provided by the international monetary fund port watch data base.
The data shows that the top 3 traded industries with goods passing through the Suez Canal were petroleum, chemical and non-metallic mineral products, mining and quarrying and agriculture.
According to the same data base, in the period 2019 to 2022, 29.9% of vessels were tanker vessels. The top traded industry passing through the canal was the petroleum, chemical and non-metallic mineral products. In all, the Suez Canal and the Bab el-Mandeb strait register 19.3 thousand and 19.09 thousand transit calls annually.
The choke point with the highest number of transits calls in the world is the Taiwan Strait with 125.17 thousand transit calls on average every year. The strait of Hormuz on the Arabian Gulf, the Bosporous strait and the Gibraltar strait each register 29.80 thousand, 32.67 thousand and 43.12 thousand transit calls annually. The Bosporous Strait, the Gibraltar Strait are both vital to European and Mediterranean trade. The Strait of Hormuz carries a significant tally of global petroleum trade. The pattern in the average annual number of transit calls per global choke point is suggestive of the relative importance of shipping within Asian, European and North American hubs that does not pass through the Suez Canal. In terms of average annual transit calls, only four choke points out of 13 are less important than the Suez Canal and the Bab El Mandeb strait.
What is the Significance of Shipping in Global Trade?
The chart above shows that the tonnage of goods shipped around the world has grown from 3.3 million in the year 1976 to 10.99 million in the year 2021. Between the years 2011 and 2021, dry cargo accounted for the most important share of growth in volume of goods traded by shipping.
It is only in the 5 year period between 1981 and 1986 that the world saw a drop in the tonnage of goods traded worldwide. Since the year 1986, the world has seen growth in the tonnage of goods shipped worldwide.
In the 5 years spanning 2016 and 2021, the volume of crude oil shipments fell by -7%. In that same period, the volume of dry goods expanded by 12%.
In the year 2021, the developing economies seaborne trade balance was -65 million tons. It is assumed that discharged goods are destined for import and contribute to a negative seaborne trade balance while loaded goods are destined for export and contribute to a positive seaborne trade balance. The developing world discharged more goods than it loaded. Furthermore, Asia’s seaborne trade balance was negative 2.48 billion tonnes as it discharged more goods than it loaded. This is reflective of the fact that while Asia as a whole, and China in particular are major global exporters, these regions are not resource rich. As such, they must import raw materials and manufacture inputs and then export manufactured goods.
Asia and Europe are more reliant on imports of raw materials from across the world than the rest of the world. This is due to a combination of factors including the fact that Asia and Europe both feature important manufacturing footprints, are relatively wealthy, whole resource poor. The United States is a net importer. It’s domestic economy is many times greater in size than the value of its global trade. Globalization is reliant on merchant shipping and seaborne trade. Disruptions to passage in of goods through choke points can exact considerable costs.
II: Understanding the Cost of Disruptions to Global Shipping
The Direct Costs of Disruptions to Shipping
On March, 23, 2021, the Ever Given, an ultra large container ship, ran aground at the Suez Canal. The effects of this incident on global supply chains were felt for many months that followed. In sum, 90% of all consumer goods are transported by sea. Some of these goods are components making their way around the world as factor inputs for final products. The physical reality of the interconnectivity global supply chains is sensitive to disruption at choke points.
An average of 52 ships make the 200 km Suez Canal passage daily[i]. The cost of chartering a ship to cross the world can be as high as USD 100,000, daily[ii]. The Ever Given blocked the canal for a total of 6 days. This is equivalent to about 312 ships daily. In actual fact, about 400 ships were prevented from making the crossing. Using the average estimated charge of $100,000 to charter a ship and an estimated range of 312 ships to 400 ships delayed, the cost total costs of delays to operators can be estimated to have been between US$ 187.2 million to US$ 240 million.[iii] This estimate of the direct costs of delays is made by assuming that stranded ships waited for the canal to be unblocked before making passage.
What were the Direct Costs Incurred by the Suez Canal Operator?
Writing for Greco, a specialist in Insurance and Risk Management, Marta Vasic estimates that the passage through the Suez Canal costs ship operators about US$ 300,000 USD[i]. A back of the hand estimate places the Suez Canal losses to sums between US$ 93.6 million to $120 million, daily, or just about half a billion US$ a week due to the blockage caused by the Ever Given. Allianz, an international financial services provider itself estimated that total losses amounted to US$ 10 billion USD a week. It is not clear how these losses would be distributed among actors including ship operators, canal operators, the operators of the Ever Given in particular, and insurers of the canal and all ship operators affected. The Suez Canal authority itself estimates that the costs to parties involved was just over US$ 1 billion This seems to come close to the estimated cost of transiting through the canal multiplied by the estimated number of ships whose operations were affected.
In addition to revenue losses incurred by the canal operators, the cost of damage to the canal was estimated at about Euro € 460 million. This would be irrelevant in the present scenario pitting Houthis against shippers and the guarantors of maritime security. Finally, the cost of disruptions to supply chains should also be factored into both the effects of the Ever-Given accident and the present-day maritime crisis in the red sea. In the case of the Ever-Given accident, supply chain related costs were about Euro € 250 million to Euro € 400 million[i]. This means that the crisis cost the Suez Canal Operators and the affected supply chain about Euro € 74,404 every minute.
In total, Vasic article estimated that the direct costs of the accident were Euro€1 billion. If Houthi actions caused Suez Canal operations to grind to a halt, perhaps the total direct costs of disruptions would amount to about US$ 131.43 million a day.
As per GRECO Insurance’s own estimations, 400 ships whose operations were disrupted incurred waiting or diversion costs between Euro € 50 million and Euro € 100 million. When the cost of traffic fluctuations is included – considering that downstream transportation networks comprising trucks and railroad stocks are limited, even in Europe – the costs amounted to Euro € 1 billion.
The Value of Freight and the Cost of Disruption
The Ever-Given accident disrupted 30% of the world’s container traffic. Estimates by the International Chamber of Shipping (ICS) and other bodies places the value of freight passing through the Suez Canal at US$ 3 Billion to US$ 9 billion a day[i][ii]. This would mean that in the 7 days of its occurrence, the Ever-Given accident delayed freight valued between US$ 21 billion to US$ 63 billion. It is important to note, however, that the relationship between cost of this delay to the value of freight is not linear.
The complexity of global value chains means that while the supply of certain items like toilet paper may have been little affected, missing components for items like white goods ie washing machines would have resulted in the failure to complete the manufacture of certain goods. For example, COVID19 related disruptions of the semiconductor trade caused the production of automotive vehicles to grind to a halt. As such, it can be quite difficult to estimate the cost of these disruptions to global supply chains.
The Effects of Disruptions on Particular Ships and the Global Economy
An NBER working paper by economists David Hummels and George Schuar estimated that time delays to shipping exact a cost of goods carried that was between 0.6% and 2.3% of the value of those goods aboard a given ship[1]. Hariesh Manaadiar with Shipping and Freight resource estimates that the value of goods carried aboard the Ever Given was between US$ 500 million and US$ 600 million. That would mean that by disrupting passage at the Suez Canal, the Ever Given lost US$ 49,000 to US$ 59,000 every minute.
Do Alternatives to Shipping Exist?
The capacities of road and rail connections between Asia and Europe are limited. Flight paths over Russia are currently restricted to Western European carriers and cargo as the latter have imposed sanctions on the former over its invasion of Ukraine. Furthermore, any expansions provided by, say, Bridge and Road Initiative (BRI) investments are too far into future horizons to make fore viable near-term alternatives.
GRECO analysts believe that with 12% of global trade value or 30% of global freight passing through the Suez Canal, an extension of the Evergreen crisis by a few more days would have seen an escalation of negative consequences for the global economy.
The Drewry World Container Index WCI provides a proxy for the evolution in the freight rates of 40 foot containers by tracking the spot rates and short term contract rates on 40-foot containers. On 5th October, 2023, the WVI was US$ 1,389.5. By 25th January, it had risen to US$ 3,964.18. This represents a 185% surge in spot rates for 40 foot containers[i].
Container news, a news journal, reported that charter rates for large box ships had experienced surges that were between 29% and 53% higher in 2024 than they had been at the same period in the year 2019. For example, Linerlytica calculated that at US$ 35,000 a day, rates for a 8,000 TEU ship were 45% higher than they were in the year 2019[ii].
III: Complexity of Seabourne Trade and Sealane Security as a Public Good
This chart is an illustration of the complexity involved in global shipping. The chart shows, for example, that 47% of global shipbuilding in the year 2022 occured in China. The chart also shows that 17% ships are owned in Greece and 17% of ships involved in maritime trade are registered in Liberia and that the Phillipines and Russia contribute 13% and 10% seafarers involved in merchant shipping in the year 2021[i].
According to an UNCTAD study, 31% of the volume of Djibouti’s foreign trade is delivered through the Suez Canal. That is, 6% the volume of Djibouti exports and 31% of the volume of that nations imports are transported through the Suez Canal. For Kenya, 15% of Kenya’s trade volumes or 12% of the volume of Kenyan exports and 15% of the nations imports are made through the Suez Canal. 10% of the volume of Tanzanian trade or 8% of it’s exports and 11% of the volume of the nations imports were made through the Suez Canal.
34% of Sudans trade volumes or 28% of the nations export volumes and 36% of the nations import volumes are dependent on the Suez canal. For it’s part, the Red Sea Crisis has struck off 40% of Egypts revenues from the Suez Canal. In the fiscal year 2022 – 2023, the Suez Canal contributed US$ 9.4 billion or 2.3% of Egyptian GDP. Relative to it’s own economy, only 7% German trade is dependent on the Suez canal.
Kenya and Tanzania alone make up 57% of the EAC GDP. In relative terms, a greater share of Kenyan and Tanzanian trade is dependent on the Gulf of Aden and the Suez Canal choke points. It stands to reason, therefore, irrespective of their capacities to respond, the East African Community should show more concern about the red sea crisis than does Germany.
Conclusion: The Importance of Seaborne Trade Will Only Grow
The tonnage of goods transported through seabourne platforms is set to grow in the coming years. By the year 2019, 11 billion tons of goods were transported by ship, annually. The value of this rrade was US$ 14 trillion. This chart illustrates that by the year 2030, the total weight of goods transported through seaborne trade channels will approach 17 billion tonnes. All these are indications that the opportunity cost of inatention, lack of concern and lack of resolve against any politically motivated disruptions to seabourne trade will have negative implications on economic actors on both the supply and the demand side of this question.
COVID19, skirmishes, reshoring and friend shoring are exerting new pressures on strained shipping industry. The Ever given and the accident in which it was involved are both emblematic of these trends. The Ever Given was an extremely large ship, difficult to navigate, often loaded high with containers. The height of the container stacks leaves these ships vulnerable to winds whose drag can cause them to drift. This is what caused the Ever Given to run aground at the canal. The cost of waiting for winds to slow before making the cross can also be quite high. Ship operators, captains and crews face pressures to keep costs low as consumers expect low prices on these goods. These means that Operators may disincentivize caution. Where risk is generated by political contingencies, it is the risk premiums that cause operators to transfer incentives towards a different kind of caution for their ship captains and crews. That is, the operators move change their itineraries to pass south around the African continent rather than through the Suez Canal.
The globalized world is reliant on the merchant shipping network. When major chokepoints are disrupted, the costs inflicted on the shipping industry in particula and global value chains and supply chains in general can be difficult to estimate, but significant. Charter costs and costs of passage, and insurance costs are just three direct and indirect costs that help explain the costs of disruptions. The value of goods on specific ships and the value of goods that make passage through specific chokepoints also help ground the conversation on the costs of disruptions to global shipping. The difficulty in estimating these costs can also be ascribed to the lengthy process of making and disputing insurance claims. Changes in the markets for chartering ships, containers, paying for passage, insurance, and commodities futures also comprise bellweathers of the costs of disruptions to shipping.
Recommendations
Seaborne Trade, Demand Side Dynamics
Demand for shipping is driven by demand for access to foreign markets by households, firms and governments. On the import side of the question, demand for shipping services is driven by the exploitation of comparative advantages. That is, consumers, in pursuit of the highest quality products at the lowest prices expand their consumption choice by seeking foreign markets. International trade raises welfare because choice expands disposable income. Consumers seek foreign markets in order to access both intermediate goods that they matyuse as production inputs and finished goods for final consumption.
As such, seaborne trade provides access to global markets for final consumers who import final goods, producers who must import intermediates for production, and exporters who seek foreign markets in which to trade their wares. It is through seaborne trade that domestic economic activities are connected to global value chains and supply chains. In this way, households, firms and governments as consumers of import and export services all benefit from seaborne trade.
The alternatives to transportation by sea are road, air and rail. In many cases, road and rail are also complementary modes of transportation. That is, in many cases, goods must be transported by land to get to their final destination in a retail space, or factory floor, or other form of storage for future consumption or production. Were they to be transported by land, goods that move from East Asia to West Asia and Africa would face significant administrative and geographic challenges. Transportation by sea presents economies of scale per container that a freight train or a caravan of trucks could not possibly match. What takes a single bulk carrier to carry would require many more freight trains and lorries.
The geography of seaborne trade is further complicated by the fact that many nations around the world are landlocked. In Africa, 16 out of 54 countries are landlocked. Within the East African Community and the Horn of Africa region, 5 nations are landlocked. Their demand for seaborne trade will not abate. It is in the interest of many nations around the world and the East African Community to ensure that policies induce growth in expansion of export service capacity and efficiency and that sea lanes remain open, safe and secure. Safety and security of sea lanes is a global public good.
Seaborne Trade, Supply Side Dynamics
The supply side of shipping transportation is driven by demand for access to foreign markets. The demand for access to foreign markets is itself driven by the search for utility, production specialization and increased factor returns promised by comparative advantage. East Africans import complex products not produced in the region from foreign markets. A combination of public and private sector actors invested in port facilities and inland transportation infrastructure in order to earn factor returns by meeting East African demand for logistics services. Further upstream of this market, these actors interact with shipbuilders, ship owners, ship operators, insurance brokers and various liaison and customs services of many nationalities. For example, few nations can build ships like the Netherlands and South Korea. These ships are purchased and owned by firms from all over the world. A ship can be registered in a nation like Togo and be owned by a Greek firm. That same ship may be leased to a Spanish operator and crewed by Filipino seamen. Futhermore, that ship may be insured by a Swedish insurer and its goods destined for multiple clients in different nations. The sector is highly specialized. In order for specialization in seabourne trade to persist, safety and security must endure. In the high seas, safety and security are global public goods. This sector cannot be defined in terms of a single national identity. This is true down to the unit of a single ship. The loss of a single ship cannot be accounted for as the loss of a single country. The cost of shipping is also quite sensitive to political and criminal risks like the politically motivated closure of a given global maritime chokepoint or pirate attacks on ships and their cargo. Put together, these facts suggest that it is in the interest of every state to regard the safety and security of seabourne trade as their responsibility.
The actions of the Houthis have been taken with the explicit political aim of placing pressure on Israel in order that they may relent in their military engagements in Palestine. Their preferred method of placing pressure is to attack Israeli owned ships and shipments destined for Israel. They have also widened their scope to include the seabourne properties and sea transportation vehicles owned and operated by nations that are supporting Israel. Without placing a moral judgment on the actions, the data suggests that it is near impossible to ascribe discrete political identity to a single ship. Importantly, regardless of rhetoric, single actors will succeed in internalizing benefits of politically or criminally motivated actions against seabourne trade while externalizing its costs. This means that the Houthis and pirates off the Somail coast can gain the benefits of attacking global shipping without directly incurring the cost of their actions. Actors isolated from global supply chains have an incentive to disrupt said supply chains. While the costs of these actions to beneficiaries of global supply chains can be especially high, the cost to these actors are low. Global public goods in safety and security increase the cost of unwanted, politically or criminally motivated actions against global supply chains.
[i] (UNCTAD, 2024)
[i] (MicroMacro, n.d.)
[ii] (Linerlytica, 2023)
[1] (Hummels & Schaur, 2012)
[i] (International Chamber of Shipping, 2021)
[ii] (Vasic, A World Loss Event – Ever Given, 2022)
[i] (Vasic, 2022)
[i] (Vasic, A World Loss Event – EVER GIVEN, 2022)
[i] (International Monetary Fund, 2024)
[ii] (Societe Commerciale de Reassurance (SCOR), 2022)
[iii] (Societe Commerciale de Reassurance (SCOR), 2022)
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Commercial Shipping and Seabourne Trade Policy Handbook: The Red Sea Crisis
| Post date: Wed, May 29, 2024 |
| Category: International Trade |
| By: Emmanuel Wa-Kyendo, |
The Houthi’s are Yemeni political actors. The Houthis, and Somali pirates have been launching direct kinetic attacks on shipping assets. The Houthi’s are understood to be allies if not proxies of Iran. They use Iranian weapons and take some level of political direction from Iran. The Houthi’s explain that their attacks are designed to offer relief to their allies Hamas by placing pressure on Israel and it’s supporters to stop Israeli military operations in Gaza. China and Russia have not condemned the attacks. As the UN Security Council adopted a resolution condemning Houthi attacks, China and Russia abstained.
As such, there is some reason to believe that these attacks, and the political posture of Hamas amount to a coordinated approach to place pressure on western policy in the region. What follows is an exploration of the current and potential effects of this disruption of international trade on economic welfare of the world in general and the East African region in particular. Affected parties will be assessing costs and gains, choosing sides, or remaining neutral and or silent for as long as they find it tenable. This report will identify who these partners may be and how their welfare might be affected.
I Global Shipping and Maritime Chokepoints
How Does Global Shipping Provide the Needs of the People of the World?
There are goods for which transportation by air or by road is unviable. The attributes of these goods that prevent their transportation by land and by air include their respective rates of decay and size. It is simply not economical to transport crude oil by air. Grains and fruits and other agricultural products, for example, are better transported in bulk where the operators can achieve economies of scale. Other classes of goods that lend themselves to this calculus include industrial tools, industrial inputs, and white goods.
What is not always apparent is that these disruptions also have downstream effects for manufacturers. The effects of delay have a horizon that extends beyond the departure and arrival of specific goods from port to port. The risks posed by disruptions to shipping also include delay in production schedules, pressures on the returns on factor inputs, and employment.
Goods transported across the globe include both intermediates and final goods. The volume of intermediate goods traded across the globe is a testament to comparative advantage and specialization. Disruptions at major passageways incur financial costs to ship oeprators and their clients who are waiting for the arrival of these goods. Shipping Lowers the Cost of Transportation and Opens the World to Consumers and Producers.
The international chamber of shipping estimates that shipping takes just 0.3 pence of a British £2.50 cup of coffee in the United Kingdom, US$5 from the US$100 cost of a Nike shoe, and British 20pence off a British £5 bottle of wine. This is just one way to assess the benefits that global shipping confers on consumers and producers the world over.
- Who is Involved in Shipping?
Ship owners purchase and own ships. They do not necessarily operate these ships. Ships are operated by charterers. Charteres plan the shipping routes and fuel the ships. Ship brokers liaise between charterers and ship owners. They are a fulcrum on which the market for ships is discovered and exploited.
They bring owners and charterers together, negotiate rates and secure deals. Ship managers are charged with the care of fleets of ships. Manning agents meet the labor and human capital needs of the variors actors involved in shipping. Bunker operators supply fuel for ships. Flag and port states are home to the institutions that regulate the shipping industry. Finally, global policy making on shipping is mediated by two specialized United Nations institutions namely the United Nations International Labour Organization and the International Maritime Organization.
The global shipping industry demands increasing specialization at the individual and institutional level. Today, the markets for factor inputs and final goods are threatened by significant perturbations emanating from geopolitical tensions. Rising insurance costs reveal that the industry is both complex and brittle.
- What Types of Shops Carry Globally Traded Goods?
90% of world trade is facilitated by seabourne transportation. The types of ships operated are classified by the cargoes they transport, and or the types of operations in which they are engaged. The types of ships operated include bulk carriers, container ships, tankers, ferries or roll on roll off (RO-RO) ships, Cruise ships, Offshore Vessels and Special Purpose Ships. Bulk Carriers are merchant ships while design is socialized for the transportation of bulk cargo.
- Bulk Carriers
Bulk Carriers are the workhorse of the global merchant fleet. Their long flat decks with large cargo holds, sometimes cargo cranes, are equipped to carry cargo that is bulky or whose transportation costs exhibit economies of scale. These goods include iron ore, coal and grain. Bulk carriers bear loads destined for manufacture inputs, and consumption as animal feeds and as food for human beings. Bulk carriers operate contract by contract, searching for new contracts on the open market only once current contracts are fulfilled.
- Container Ships
Container ships carry manufactured goods in container sizes called 20 or 40 foot equivalent units. The capacity of container ships is measured in tons equivalent units or TEUs. The average capacity of containers has expanded from 6,500 TEUs in the year 2002 to 24,000 TEU in the year 2022. The containers are borne while stacked high, visibly, upon the upper decks of container ships. The contents of these containers carry both perishable and non perishable products and can also be refrigerated. Container ships operate in liner services, so called for their efficiency that is based on the regularity of the routes set and the mechanization of the loading and offloading process.
The international chamber of commerce reports that the cost of shipping a washing machine from China to Northern Europe can be as low as US$ 10. At 30g C02 per tonne nautical miles, the environmental cost of container ships is also relatively low compared to the typical heavy goods vehicle whose emissions are about 140g CO2/tonne nautical miles. Were a truck to carry a single container for 200 kilometres, its emissions would match that of a container that has travelled from China to Northern Europe.
- Oil and Chemical Tankers
Oil and chemical tankers and gas carriers bear the cargo for which they are named. As oil and gas are not found on every country on the globe, the oil and gas tankers allow suppliers to move crude and refined oil, and gas where the markets are located around the globe. While Large Crude Carriers can bear loads of up to 350,000 tones of crude oil from their sources to nations where they are refined, Product Tankers carry loads of about 35,000 tones of petroleum products including diesel, gas oil, lubricating oil and petrol. Chemical tankers are built to carry other chemical cargoes.
Tankers bear liquid cargoes that are critical to delivering the lifestyles, and levels of welfare that define modern civilization. Specially designed to carry risky, yet highly valuable and highly sought after industrial and commercial products, the costs of disruption of these transports can have far reaching effects when passed on to consumers.
Roll on Roll off ships and their variants including pure care and truck carriers (PCTC) help transport vehicles over short, medium and long distances. PCTCs help car manufacturers move newly manufactured vehicles from the factory to their destination markets.
- What are Chokepoints and Why Are They Important to Global Trade?
This map illustrates the important primary and secondary choke points of global seaborne trade. Presently, Bab El Mandeb, and potentially the Straight of Hormuz are the politically contested trade chokepoints. Disruptions to shipping at Bab El Mandeb choke point have implications on revenues enjoyed by Egypt owned Suez Canal. The Houthis are Yemeni based political actors leading the attacks against what they have called Israeli and western shipping. Yemen’s geographic location grants the Houthis the position to disrupt trade at a a relatively low cost. The U.S. led Operation Prosperity Guardian is an effort to counter these disruptions through a political and military response.
How Serious is the Threat?
Operation Atalanta formerly known as the European Union Naval Force (EU NAVFOR) Somalia is the name of an enduring EU counter piracy naval operation. This operation was launched on December 8th, 2008 and has maintained an existence to this very day. The objectives of this UN and EU mandated operation are to protect WFP and AMISOM and other vulnerable shipping, to deter and disrupt piracy and robbery at sea, to monitor fishing activities off the coast of Somalia and to support the EU and other international organizations efforts to secure maritime security and to expand the capacities of other actors to do the same.
95% of the volume of sea trade conducted by EU member states passes through the Suez Canal, the red sea and the Bab El Mandeb choke point. 20% of global trade or US$ 4.2 trillion passes through the Gulf of Aden. The Yemeni coastline is situated along the Gulf of Aden. As such, operation Atalanta is rightly regarded as a crucial contribution to maritime security. In 2023, operation Atalanta had a budget of Euro€ 5.1 million.
By August 24th, 2022, Operation Atalanta reported that piracy related events had seen a sharp decline and that since the year 2019, there had been no attacks. In response, om 1st January 2023, the shipping industry had removed the High-Risk Area (HRA) designation from the Indian Ocean. Operation Atalanta had affirmed its continued vigilance that would manifest in the form of periodical threat assessments provided to Company Security Officers who planned to make passages through the areas of the Indian Ocean close to the East African coastline and the Gulf of Aden.
By the 15th December, 2023, Operation Atalanta recommended that Israeli related ships sailing off the Yemeni coast in the red sea opt for night transit, minimize reporting on the Automatic Identification System (AIS) – public information that can presumably be used by pirates and aggressors to track down ships. It was also recommended that ships take measures including fire drills before approaching Yemeni coast, keeping crew members away from ship walls while in transit, minimize occupancy of the navigation deck and register with the Maritime Security Centre Horn of Africa.
The organization also reported that the likely attack scenarios would involve drone and missile attacks and boarding and hijacking attempts. Operation Atalanta offered that the Houthis have demonstrated considerable determination to carry out these attacks and escalate the political pressure on Israel and its allies.
Abhijit Singh, the head of the Maritime policy initiative at the Observer Research Foundation (ORF) opined that the Somali pirates were taking advantage of the relative absence of naval assets in the Gulf of Aden to conduct attacks. In response to aggression by the Houthis, the naval assets in question had shifted their attention to the Red Sea.
A threat circular by Ambrey reports that the Houthis had expanded their attacks from Israeli vessels to vessels bound for Israel and then to vessels belonging to companies that support Israel. It is not evident that the Houthis are particularly careful in their selection of what ships they should attack. For example, the Houthis and their Iranian allies have attacked ships that no longer belong to Israel. The result of all these activities has been a rising risk premium on war risk insurance.
What is the Significance the Suez Canal to Seaborne Trade?
The previous chart illustrates that transit calls at the Suez Canal have fallen from a seven-day moving average of 77 ships per day on 5th November 2023 to a seven-day moving average of 55 ships a day on 4th January, 2024.
The previous chart illustrates that the transit trade volume at the Suez Canal also fell from a 7-day moving average of 5.22 million tons on 5th November 2023 to a 7 day moving average of 3.30 million tons on 4th January, 2024. This data is provided by the international monetary fund port watch data base.
The data shows that the top 3 traded industries with goods passing through the Suez Canal were petroleum, chemical and non-metallic mineral products, mining and quarrying and agriculture.
According to the same data base, in the period 2019 to 2022, 29.9% of vessels were tanker vessels. The top traded industry passing through the canal was the petroleum, chemical and non-metallic mineral products. In all, the Suez Canal and the Bab el-Mandeb strait register 19.3 thousand and 19.09 thousand transit calls annually.
The choke point with the highest number of transits calls in the world is the Taiwan Strait with 125.17 thousand transit calls on average every year. The strait of Hormuz on the Arabian Gulf, the Bosporous strait and the Gibraltar strait each register 29.80 thousand, 32.67 thousand and 43.12 thousand transit calls annually. The Bosporous Strait, the Gibraltar Strait are both vital to European and Mediterranean trade. The Strait of Hormuz carries a significant tally of global petroleum trade. The pattern in the average annual number of transit calls per global choke point is suggestive of the relative importance of shipping within Asian, European and North American hubs that does not pass through the Suez Canal. In terms of average annual transit calls, only four choke points out of 13 are less important than the Suez Canal and the Bab El Mandeb strait.
What is the Significance of Shipping in Global Trade?
The chart above shows that the tonnage of goods shipped around the world has grown from 3.3 million in the year 1976 to 10.99 million in the year 2021. Between the years 2011 and 2021, dry cargo accounted for the most important share of growth in volume of goods traded by shipping.
It is only in the 5 year period between 1981 and 1986 that the world saw a drop in the tonnage of goods traded worldwide. Since the year 1986, the world has seen growth in the tonnage of goods shipped worldwide.
In the 5 years spanning 2016 and 2021, the volume of crude oil shipments fell by -7%. In that same period, the volume of dry goods expanded by 12%.
In the year 2021, the developing economies seaborne trade balance was -65 million tons. It is assumed that discharged goods are destined for import and contribute to a negative seaborne trade balance while loaded goods are destined for export and contribute to a positive seaborne trade balance. The developing world discharged more goods than it loaded. Furthermore, Asia’s seaborne trade balance was negative 2.48 billion tonnes as it discharged more goods than it loaded. This is reflective of the fact that while Asia as a whole, and China in particular are major global exporters, these regions are not resource rich. As such, they must import raw materials and manufacture inputs and then export manufactured goods.
Asia and Europe are more reliant on imports of raw materials from across the world than the rest of the world. This is due to a combination of factors including the fact that Asia and Europe both feature important manufacturing footprints, are relatively wealthy, whole resource poor. The United States is a net importer. It’s domestic economy is many times greater in size than the value of its global trade. Globalization is reliant on merchant shipping and seaborne trade. Disruptions to passage in of goods through choke points can exact considerable costs.
II: Understanding the Cost of Disruptions to Global Shipping
The Direct Costs of Disruptions to Shipping
On March, 23, 2021, the Ever Given, an ultra large container ship, ran aground at the Suez Canal. The effects of this incident on global supply chains were felt for many months that followed. In sum, 90% of all consumer goods are transported by sea. Some of these goods are components making their way around the world as factor inputs for final products. The physical reality of the interconnectivity global supply chains is sensitive to disruption at choke points.
An average of 52 ships make the 200 km Suez Canal passage daily[i]. The cost of chartering a ship to cross the world can be as high as USD 100,000, daily[ii]. The Ever Given blocked the canal for a total of 6 days. This is equivalent to about 312 ships daily. In actual fact, about 400 ships were prevented from making the crossing. Using the average estimated charge of $100,000 to charter a ship and an estimated range of 312 ships to 400 ships delayed, the cost total costs of delays to operators can be estimated to have been between US$ 187.2 million to US$ 240 million.[iii] This estimate of the direct costs of delays is made by assuming that stranded ships waited for the canal to be unblocked before making passage.
What were the Direct Costs Incurred by the Suez Canal Operator?
Writing for Greco, a specialist in Insurance and Risk Management, Marta Vasic estimates that the passage through the Suez Canal costs ship operators about US$ 300,000 USD[i]. A back of the hand estimate places the Suez Canal losses to sums between US$ 93.6 million to $120 million, daily, or just about half a billion US$ a week due to the blockage caused by the Ever Given. Allianz, an international financial services provider itself estimated that total losses amounted to US$ 10 billion USD a week. It is not clear how these losses would be distributed among actors including ship operators, canal operators, the operators of the Ever Given in particular, and insurers of the canal and all ship operators affected. The Suez Canal authority itself estimates that the costs to parties involved was just over US$ 1 billion This seems to come close to the estimated cost of transiting through the canal multiplied by the estimated number of ships whose operations were affected.
In addition to revenue losses incurred by the canal operators, the cost of damage to the canal was estimated at about Euro € 460 million. This would be irrelevant in the present scenario pitting Houthis against shippers and the guarantors of maritime security. Finally, the cost of disruptions to supply chains should also be factored into both the effects of the Ever-Given accident and the present-day maritime crisis in the red sea. In the case of the Ever-Given accident, supply chain related costs were about Euro € 250 million to Euro € 400 million[i]. This means that the crisis cost the Suez Canal Operators and the affected supply chain about Euro € 74,404 every minute.
In total, Vasic article estimated that the direct costs of the accident were Euro€1 billion. If Houthi actions caused Suez Canal operations to grind to a halt, perhaps the total direct costs of disruptions would amount to about US$ 131.43 million a day.
As per GRECO Insurance’s own estimations, 400 ships whose operations were disrupted incurred waiting or diversion costs between Euro € 50 million and Euro € 100 million. When the cost of traffic fluctuations is included – considering that downstream transportation networks comprising trucks and railroad stocks are limited, even in Europe – the costs amounted to Euro € 1 billion.
The Value of Freight and the Cost of Disruption
The Ever-Given accident disrupted 30% of the world’s container traffic. Estimates by the International Chamber of Shipping (ICS) and other bodies places the value of freight passing through the Suez Canal at US$ 3 Billion to US$ 9 billion a day[i][ii]. This would mean that in the 7 days of its occurrence, the Ever-Given accident delayed freight valued between US$ 21 billion to US$ 63 billion. It is important to note, however, that the relationship between cost of this delay to the value of freight is not linear.
The complexity of global value chains means that while the supply of certain items like toilet paper may have been little affected, missing components for items like white goods ie washing machines would have resulted in the failure to complete the manufacture of certain goods. For example, COVID19 related disruptions of the semiconductor trade caused the production of automotive vehicles to grind to a halt. As such, it can be quite difficult to estimate the cost of these disruptions to global supply chains.
The Effects of Disruptions on Particular Ships and the Global Economy
An NBER working paper by economists David Hummels and George Schuar estimated that time delays to shipping exact a cost of goods carried that was between 0.6% and 2.3% of the value of those goods aboard a given ship[1]. Hariesh Manaadiar with Shipping and Freight resource estimates that the value of goods carried aboard the Ever Given was between US$ 500 million and US$ 600 million. That would mean that by disrupting passage at the Suez Canal, the Ever Given lost US$ 49,000 to US$ 59,000 every minute.
Do Alternatives to Shipping Exist?
The capacities of road and rail connections between Asia and Europe are limited. Flight paths over Russia are currently restricted to Western European carriers and cargo as the latter have imposed sanctions on the former over its invasion of Ukraine. Furthermore, any expansions provided by, say, Bridge and Road Initiative (BRI) investments are too far into future horizons to make fore viable near-term alternatives.
GRECO analysts believe that with 12% of global trade value or 30% of global freight passing through the Suez Canal, an extension of the Evergreen crisis by a few more days would have seen an escalation of negative consequences for the global economy.
The Drewry World Container Index WCI provides a proxy for the evolution in the freight rates of 40 foot containers by tracking the spot rates and short term contract rates on 40-foot containers. On 5th October, 2023, the WVI was US$ 1,389.5. By 25th January, it had risen to US$ 3,964.18. This represents a 185% surge in spot rates for 40 foot containers[i].
Container news, a news journal, reported that charter rates for large box ships had experienced surges that were between 29% and 53% higher in 2024 than they had been at the same period in the year 2019. For example, Linerlytica calculated that at US$ 35,000 a day, rates for a 8,000 TEU ship were 45% higher than they were in the year 2019[ii].
III: Complexity of Seabourne Trade and Sealane Security as a Public Good
This chart is an illustration of the complexity involved in global shipping. The chart shows, for example, that 47% of global shipbuilding in the year 2022 occured in China. The chart also shows that 17% ships are owned in Greece and 17% of ships involved in maritime trade are registered in Liberia and that the Phillipines and Russia contribute 13% and 10% seafarers involved in merchant shipping in the year 2021[i].
According to an UNCTAD study, 31% of the volume of Djibouti’s foreign trade is delivered through the Suez Canal. That is, 6% the volume of Djibouti exports and 31% of the volume of that nations imports are transported through the Suez Canal. For Kenya, 15% of Kenya’s trade volumes or 12% of the volume of Kenyan exports and 15% of the nations imports are made through the Suez Canal. 10% of the volume of Tanzanian trade or 8% of it’s exports and 11% of the volume of the nations imports were made through the Suez Canal.
34% of Sudans trade volumes or 28% of the nations export volumes and 36% of the nations import volumes are dependent on the Suez canal. For it’s part, the Red Sea Crisis has struck off 40% of Egypts revenues from the Suez Canal. In the fiscal year 2022 – 2023, the Suez Canal contributed US$ 9.4 billion or 2.3% of Egyptian GDP. Relative to it’s own economy, only 7% German trade is dependent on the Suez canal.
Kenya and Tanzania alone make up 57% of the EAC GDP. In relative terms, a greater share of Kenyan and Tanzanian trade is dependent on the Gulf of Aden and the Suez Canal choke points. It stands to reason, therefore, irrespective of their capacities to respond, the East African Community should show more concern about the red sea crisis than does Germany.
Conclusion: The Importance of Seaborne Trade Will Only Grow
The tonnage of goods transported through seabourne platforms is set to grow in the coming years. By the year 2019, 11 billion tons of goods were transported by ship, annually. The value of this rrade was US$ 14 trillion. This chart illustrates that by the year 2030, the total weight of goods transported through seaborne trade channels will approach 17 billion tonnes. All these are indications that the opportunity cost of inatention, lack of concern and lack of resolve against any politically motivated disruptions to seabourne trade will have negative implications on economic actors on both the supply and the demand side of this question.
COVID19, skirmishes, reshoring and friend shoring are exerting new pressures on strained shipping industry. The Ever given and the accident in which it was involved are both emblematic of these trends. The Ever Given was an extremely large ship, difficult to navigate, often loaded high with containers. The height of the container stacks leaves these ships vulnerable to winds whose drag can cause them to drift. This is what caused the Ever Given to run aground at the canal. The cost of waiting for winds to slow before making the cross can also be quite high. Ship operators, captains and crews face pressures to keep costs low as consumers expect low prices on these goods. These means that Operators may disincentivize caution. Where risk is generated by political contingencies, it is the risk premiums that cause operators to transfer incentives towards a different kind of caution for their ship captains and crews. That is, the operators move change their itineraries to pass south around the African continent rather than through the Suez Canal.
The globalized world is reliant on the merchant shipping network. When major chokepoints are disrupted, the costs inflicted on the shipping industry in particula and global value chains and supply chains in general can be difficult to estimate, but significant. Charter costs and costs of passage, and insurance costs are just three direct and indirect costs that help explain the costs of disruptions. The value of goods on specific ships and the value of goods that make passage through specific chokepoints also help ground the conversation on the costs of disruptions to global shipping. The difficulty in estimating these costs can also be ascribed to the lengthy process of making and disputing insurance claims. Changes in the markets for chartering ships, containers, paying for passage, insurance, and commodities futures also comprise bellweathers of the costs of disruptions to shipping.
Recommendations
Seaborne Trade, Demand Side Dynamics
Demand for shipping is driven by demand for access to foreign markets by households, firms and governments. On the import side of the question, demand for shipping services is driven by the exploitation of comparative advantages. That is, consumers, in pursuit of the highest quality products at the lowest prices expand their consumption choice by seeking foreign markets. International trade raises welfare because choice expands disposable income. Consumers seek foreign markets in order to access both intermediate goods that they matyuse as production inputs and finished goods for final consumption.
As such, seaborne trade provides access to global markets for final consumers who import final goods, producers who must import intermediates for production, and exporters who seek foreign markets in which to trade their wares. It is through seaborne trade that domestic economic activities are connected to global value chains and supply chains. In this way, households, firms and governments as consumers of import and export services all benefit from seaborne trade.
The alternatives to transportation by sea are road, air and rail. In many cases, road and rail are also complementary modes of transportation. That is, in many cases, goods must be transported by land to get to their final destination in a retail space, or factory floor, or other form of storage for future consumption or production. Were they to be transported by land, goods that move from East Asia to West Asia and Africa would face significant administrative and geographic challenges. Transportation by sea presents economies of scale per container that a freight train or a caravan of trucks could not possibly match. What takes a single bulk carrier to carry would require many more freight trains and lorries.
The geography of seaborne trade is further complicated by the fact that many nations around the world are landlocked. In Africa, 16 out of 54 countries are landlocked. Within the East African Community and the Horn of Africa region, 5 nations are landlocked. Their demand for seaborne trade will not abate. It is in the interest of many nations around the world and the East African Community to ensure that policies induce growth in expansion of export service capacity and efficiency and that sea lanes remain open, safe and secure. Safety and security of sea lanes is a global public good.
Seaborne Trade, Supply Side Dynamics
The supply side of shipping transportation is driven by demand for access to foreign markets. The demand for access to foreign markets is itself driven by the search for utility, production specialization and increased factor returns promised by comparative advantage. East Africans import complex products not produced in the region from foreign markets. A combination of public and private sector actors invested in port facilities and inland transportation infrastructure in order to earn factor returns by meeting East African demand for logistics services. Further upstream of this market, these actors interact with shipbuilders, ship owners, ship operators, insurance brokers and various liaison and customs services of many nationalities. For example, few nations can build ships like the Netherlands and South Korea. These ships are purchased and owned by firms from all over the world. A ship can be registered in a nation like Togo and be owned by a Greek firm. That same ship may be leased to a Spanish operator and crewed by Filipino seamen. Futhermore, that ship may be insured by a Swedish insurer and its goods destined for multiple clients in different nations. The sector is highly specialized. In order for specialization in seabourne trade to persist, safety and security must endure. In the high seas, safety and security are global public goods. This sector cannot be defined in terms of a single national identity. This is true down to the unit of a single ship. The loss of a single ship cannot be accounted for as the loss of a single country. The cost of shipping is also quite sensitive to political and criminal risks like the politically motivated closure of a given global maritime chokepoint or pirate attacks on ships and their cargo. Put together, these facts suggest that it is in the interest of every state to regard the safety and security of seabourne trade as their responsibility.
The actions of the Houthis have been taken with the explicit political aim of placing pressure on Israel in order that they may relent in their military engagements in Palestine. Their preferred method of placing pressure is to attack Israeli owned ships and shipments destined for Israel. They have also widened their scope to include the seabourne properties and sea transportation vehicles owned and operated by nations that are supporting Israel. Without placing a moral judgment on the actions, the data suggests that it is near impossible to ascribe discrete political identity to a single ship. Importantly, regardless of rhetoric, single actors will succeed in internalizing benefits of politically or criminally motivated actions against seabourne trade while externalizing its costs. This means that the Houthis and pirates off the Somail coast can gain the benefits of attacking global shipping without directly incurring the cost of their actions. Actors isolated from global supply chains have an incentive to disrupt said supply chains. While the costs of these actions to beneficiaries of global supply chains can be especially high, the cost to these actors are low. Global public goods in safety and security increase the cost of unwanted, politically or criminally motivated actions against global supply chains.
[i] (UNCTAD, 2024)
[i] (MicroMacro, n.d.)
[ii] (Linerlytica, 2023)
[1] (Hummels & Schaur, 2012)
[i] (International Chamber of Shipping, 2021)
[ii] (Vasic, A World Loss Event – Ever Given, 2022)
[i] (Vasic, 2022)
[i] (Vasic, A World Loss Event – EVER GIVEN, 2022)
[i] (International Monetary Fund, 2024)
[ii] (Societe Commerciale de Reassurance (SCOR), 2022)
[iii] (Societe Commerciale de Reassurance (SCOR), 2022)
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