From: allin

Global Trade Disruptions and Their Economic Impact

Recent events in the Red Sea have led to significant global trade disruptions, affecting shipping routes and raising concerns about potential economic impacts. These attacks highlight the fragility of the global supply chain and raise questions about the future of international commerce and geopolitics.

Red Sea Attacks: A Maritime Chokepoint in Crisis

The Houthi movement has been attacking commercial ships in the Red Sea using drones and missiles [00:08:02]. These actions are claimed as revenge for Israel’s military campaign in Gaza, with the Houthis stating they will cease attacks once food and medicine are allowed to freely enter Gaza [00:08:15]. Some analysts suggest these attacks are also a power play for increased legitimacy in the region [00:08:28].

International allies, including the UK, Canada, and France, are reportedly preparing to deploy naval vessels to the area to deter further strikes [00:38:33].

Impact on Shipping and Trade

The attacks have significantly interrupted one of the world’s busiest trade routes [00:08:50]. All five of the world’s largest shipping conglomerates have paused transfers through the Red Sea [00:08:54]. This forces ships to reroute around the Cape of Good Hope, adding thousands of extra miles to journeys from Asia to Europe [00:08:58].

According to Ryan Peterson, founder of Flexport:

  • Approximately 30% of all ocean container traffic, primarily from Asia to Europe, flows through the Suez Canal and Red Sea [00:11:03].
  • Rerouting around the southern tip of Africa adds an estimated 20% to 25% to the journey length, effectively cutting shipping capacity by 20% to 25% for containers on these routes [00:11:23].
  • The Bab-el-Mandeb Strait, a narrow chokepoint, sees about 12% of global oil and 8% of liquefied natural gas transit through it [00:11:39]. This area has historically been a critical maritime chokepoint for thousands of years [00:12:03].
  • The firing of missiles by Yemeni rebel forces spikes insurance costs and endangers crew lives, making it impossible for ships to operate without insurance [00:12:42].
  • While not as impactful as the COVID-19-era shipping disruptions (which saw a 20% capacity reduction combined with a 20% demand increase), freight prices for ocean freight from Asia to Europe have already seen a 3x increase compared to a month or two ago [00:13:11].

Peterson believes the Suez Canal is too valuable to civilization for this disruption to last for an extended period [00:13:49]. However, David Sacks notes that despite being called “rebels,” the Houthi group, a Shia group in Yemen, controls most of Yemen [00:14:14]. They are aligned with Iran [00:14:33] and have stated their actions are in solidarity with Palestinians [00:14:44]. While they claim to only target ships transacting with Israel, many Western ships without such ties have been targeted [00:15:15].

The US has announced “Operation Prosperity Guardian” to restore trade flow in the Red Sea, which may involve military action against the Houthis [00:15:31]. However, the Houthis have survived nearly a decade of Western-sponsored attacks by Saudi Arabia [00:15:56], indicating that a quick resolution is not guaranteed [00:16:11]. An escalation of this conflict could expand the Middle East conflict beyond Gaza and directly involve the US [00:16:19].

Economic Repercussions

The continuing blockade of the Red Sea could have significant global economic implications:

  • Inflation: Retailers have experienced deflationary environments due to lower ocean freight prices [00:17:30]. A sustained increase in freight prices could lead to renewed inflation, particularly in Europe [00:17:38].
  • Regional Disparity: The impact on Europe is expected to be much greater than on the United States [00:18:13]. Rerouting around Africa adds an 8% increase in transit time for Asia-to-East Coast US routes, compared to a 20% increase for Europe [00:18:50]. The Panama Canal is also operating at two-thirds capacity due to drought, further complicating routes to the US East Coast [00:18:24].
  • Geopolitical Pressure: The disruption is not good for China, which relies on quick shipments to Europe [00:19:06]. Saudi Arabia’s largest port, Jeddah, is also impacted [00:19:23]. This could pressure Middle Eastern countries, including Saudi Arabia, the UAE, and Qatar, to align with international efforts to resolve the conflict due to their long-term economic development plans [00:20:56].
  • Asymmetric Warfare: The Houthi attacks highlight an asymmetric warfare problem: cheap drones or missiles costing thousands of dollars can effectively shut down tens of millions of dollars in commerce because insurance companies will not cover ships in dangerous zones [00:33:28]. This lack of risk tolerance in the global trading system means that even minor threats can cause the entire system to shut down [00:34:28].
  • Emboldenment: The success of these attacks could embolden other groups to undertake similar actions, leading to more widespread disruptions globally [00:34:52].

David Sacks stresses that the ongoing conflict in Gaza directly affects the Houthis’ actions, as they will not stop until Israel’s war in Gaza ceases [00:24:30]. The Israeli public largely supports continuing the war until Hamas is eliminated [00:29:08], making a quick ceasefire unlikely [00:29:55]. This creates a “Black Swan” potential for 2024, where the Israel-Hamas war could spiral into a larger regional conflict, potentially leading to an oil shock [00:25:24].