By Garra - 22/01/2024 in Garra International

How does the crisis in the Red Sea impact global trade?

The world’s largest shipping companies have been pausing shipments through the Red Sea following attacks by Houthi rebels from Yemen along the trade route.

As a result, global trade fell in December, according to the German institute IfW Kiel. The drop, of 1.3%, was driven by a significant reduction in shipments in the Red Sea.

According to the data, the number of containers passing daily through the Red Sea fell by 60%, from 500,000 in November to 200,000 last month. The route is central to trade between Asia and Europe, via the Suez Canal and the Mediterranean.

Iran-backed Houthi rebels launched 25 attacks on commercial vessels in the Red Sea since November, in response to Israel’s bombardment of Gaza. The attacks have escalated in the past week.

They have forced shipping lines to suspend passage through the trade route and reroute their vessels. Such detours, around the Cape of Good Hope at the southern tip of Africa, add about 6,000 kilometers to journeys – and ten days, according to the Dutch bank ING.

The estimate is that rerouting a ship costs about USD 1 million in extra fuel for each round trip between Asia and Europe. Insurance costs have also been increasing, raising overall transportation costs and generating fears of a new global inflationary shock.

Rhys Davies, from the consultancy Flint Global, told The Guardian that freight costs were clearly affected by the tensions in the Red Sea, but the impact on inflation would likely be limited.

Although global freight costs have risen sharply in recent days due to the attacks, they remain significantly lower than two years ago. The Shanghai Containerized Freight Index, the most used for maritime freight rates for imports from China worldwide, is down by more than half.

With the prospect of longer transportation times, however, there may be a negative impact on delivery times at UK ports and major European centers such as Rotterdam, Antwerp, and Hamburg.

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