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Red Sea Crisis: A Turbulent Voyage for Global Trade

In the crucible of escalating regional tensions, the Red Sea has become a battleground, and the repercussions are resonating globally. The crisis, ignited by the spillover of Israel’s conflict with Hamas and exacerbated by the Houthi movement’s targeting of vessels, has sent shockwaves through international trade routes.

As major container shipping companies temporarily suspend services, naval forces engage in combat, and economies grapple with soaring shipping costs, the Red Sea crisis emerges as a pivotal moment with far-reaching consequences. This article delves into the complexities of the situation, explores its impact on global trade, and examines the diplomatic efforts underway to navigate these treacherous waters.

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Red Sea crisis, driven by the regional spillover of Israel’s conflict with Hamas has disrupted global trade, affecting shipments from India and the world. The Houthi movement, has intensified its focus on targeting vessels in the Red Sea, leading to disruptions in key maritime trade routes. Initially focused on Israel-linked ships in support of Palestine, the Houthis later declared American and British ships to be targets as well.

In response to heightened attacks by Houthi militants, major container shipping companies, including Maersk, Hapag-Lloyd, CMA CGM, and MSC, temporarily suspended services in the Red Sea. This route is vital for traffic through the Suez Canal in Egypt, and the disruptions prompted increased naval deployments by the US, UK, and allies in the region. The suspension of global shipping flows has led to concerns about the free movement of trade.

Recent Houthi attacks, including a successful deployment of an anti-ship ballistic missile, have compelled hundreds of ships to avoid the Suez Canal and sail an additional 4,000 miles around Africa, thereby burning fuel, increasing costs and adding at least 10 days of additional travel. In the first two weeks of January, around 150 ships used the Suez Canal compared to 400 during the same period last year. This has impacted approximately 53% of worldwide container trade. The Bab al-Mandab strait, facilitating around 13% of global trade by volume, is also under threat, further complicating maritime security.

Naval forces from the US, UK, and France have engaged in combat against Houthi-launched missiles and drones. However, the high cost of weaponry involved in these operations, such as expensive anti-aircraft missiles, is straining the budgets of nations committed to maintaining stability in the region. Moreover, it has not yet significantly deterred Houthi attacks in the region.

There is a growing realization that Western armed forces need to adapt their acquisition strategies to counter more cost-effective threats. Experts suggest integrating a range of weapons, including economical air defense systems, to address the rising costs associated with current military operations.

Impact on Economy

The impact on shipping costs is evident, with the cost of a 20-foot shipping container from India to Europe, the eastern coast of America, and the UK rising from US$ 600 to US$ 2,000 since the onset of the Red Sea attacks. The escalated expenses for container shipments to Saudi Arabia, Yemen, and Egypt, attributable to extended shipping routes necessitated by their geographical proximity, have led to a significant surge in freight rates.

The broader consequence of the Red Sea crisis is a substantial increase in shipping costs globally, particularly seen in a 173% rise in transporting a 40-foot container from Asia to Northern Europe since the attacks began. This surge also extends to vessel insurance costs, which have doubled or even tripled in some cases. The resulting inflationary impact is expected to gradually permeate into the global economy, potentially worsening an already fragile recovery.

As outlined by the Global Trade Research Initiative, the anticipated effects on India’s trade are detailed below:

Elevated costs for low-value, high-volume commodities: The escalation in transportation expenses is poised to render Indian exports of chemicals, plastics, and petrochemicals more costly in European markets. These products, characterized by slender profit margins, pose challenges for firms in accommodating additional shipping costs. Notably, commodities of high value, low volume, and substantial margins, such as diamonds, jewellery and pharmaceuticals, can be transported via air to mitigate the impact.

Impact on time-sensitive exports: The export of Basmati rice faces potential repercussions due to the degradation in quality resulting from prolonged transit times and heightened freight expenses. Delays are compelling buyers of textiles and manufactured goods to favour air cargo, particularly for seasonal fashion items, in order to avert missed sales opportunities stemming from late deliveries. Indian consignments requiring transit via the Red Sea are experiencing heightened shipping urgency contingent upon buyers’ inventory levels.

Disruption to the composite nature of manufacturing: Indian manufacturing facilities engaged in the production of electronics, automobiles, and machinery are reliant on components sourced from Europe, Korea, Japan, and other regions. The delayed arrival of a single component has the potential to necessitate a complete halt in production processes, as the entirety of components is imperative for assembly, particularly in the automotive sector. Prolonged shipping delays pose a threat to India’s manufacturing sector and the broader global trade system, thereby precipitating a reduction in trade volumes.

Impact on oil imports: Notably, 55% of India’s crude oil imports are sourced from Iraq, Saudi Arabia, UAE, and Kuwait. The supply routes for these countries remain unaffected, utilizing unobstructed passages through the Persian Gulf and select routes in the Red Sea. However, Russia, a critical supplier accounting for one-third of India’s crude oil imports, faces severe disruptions, given its reliance on the conflicted Suez Canal route.

International Response and Diplomacy

Most Indian exporters, including those dealing with merchandise and basmati rice, have resorted to taking longer routes around the Cape of Good Hope, thereby increasing shipment costs.

The Indian government has established an inter-ministerial group, anchored in the Commerce Ministry, to monitor the Red Sea crisis. The ministry has asked the Department Of Financial Services (DFS) under the Ministry of Finance to maintain credit flow to exporters amid disruptions in the Red Sea route that could potentially impact over 80% of the exports going to Europe.

Despite disruptions, India’s exported inventories can sustain for a month, mitigating serious impacts on exports and imports. However, the evolving situation in the Red Sea requires constant vigilance.

The Indian government is actively exploring measures to support exporters, including discussions with the Export Credit Guarantee Corporation Ltd to lower interest rates for those affected by increased insurance costs. Additionally, alternative routes and strategies to reduce container costs are being considered to address the challenges posed by the crisis.

A coalition of countries, including the US, UK, Germany, Italy, Denmark, the Netherlands, Bahrain, Belgium, Canada, Japan, Australia, and New Zealand, issued an ultimatum against Houthi attacks. The joint statement labeled the attacks as “illegal, unacceptable, and highly destabilizing,” hinting at possible actions without specifying details. The international community emphasizes the need for an immediate halt to the assaults and the release of wrongfully held ships and crews, holding the Houthis accountable for any further disruptions.

The Red Sea crisis, driven by regional conflicts, has far-reaching consequences on global trade, impacting maritime routes, military strategies, and economies. India’s proactive measures and international diplomatic efforts are crucial in navigating these challenges and ensuring the resilience of the global trade system. Constant vigilance and collaborative actions remain essential to address the evolving situation in the Red Sea.

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