Effects of Red Sea Crises on Global Trade

History contains two important events which changed the course of global sea trade.

The first is discovery of the Cape of Good Hope in 1488, laying the first foundations of a sea connection between the west and the east. However, it is true that operations on this route required a very difficult, long and arduous sea voyage with relatively primitive ships of the time.

Trade ships of the time, who had to hug the gigantic African continent which had to be surmounted by circumnavigating its entire perimeter, followed a challenging route for their operations in all aspects, including inclement weather, sea pirates and long travel times.

The second event fundamentally changing the course of sea trade and rewriting rules of the game was completion of the Suez Canal which connected the Mediterranean to the Red Sea in 1869.

Thereafter, sea trade was plied in safer, closer and less dangerous waters.

Thanks to a small canal tying the east and the west together, trade ships could now navigate from the Mediterranean into the Red Sea and from there to the Arabian Sea, allowing them to reach more destination in a shorter time and in safer conditions.

However, there still were some periodic dangers on new trade route.

The sea trade in this area was deeply affected by political, military and economic crises and instabilities in countries bordering the Mediterranean entrance of the Suez Canal and the following Red Sea, including Egypt, Saudi Arabia, Sudan, Eritrea, Djibouti, Yemen and Somali.

Crises in the geography of the Suez Canal and the Red Sea have been going on since existence of humankind.

One of the most prominent reasons for this was the fact that, since earlies ages, states ruling this region had always desired to connect the Mediterranean to the Red Sea, even if not for trade purposes.

Attempts to Open a Canal Since Early Ages and a Short History of the Suez Canal

In the antiquity, when the region was under the rule of Pharaohs, a canal opened by incentive of Ramesses the Second was later flooded by sand and became unusable.

Later, this canal was repaired in multiple occasions during periods of Roman and Islamic rule and used for passage of small canal ships.

At the end of 16th century, the Portuguese discovery of new trade routes and their control of the Indian Sea threatened eastern territories of the Ottomans, which resulted in Sokullu Mehmet Pasha (Mehmet Sokolovic) and Kılıç Ali Pasha conducting studies to open a new canal, but to no avail.

Immediately after that, Egypt was occupied by Napoleon, and extensive efforts were started to reopen the canal built by the Ancient Egyptians.

In fact, plans were made to reroute the canal to avoid damaging certain historic artefacts in the region.

However, after the French engineer Le Pere uncovered the fact that the waterbed height at the southern end of the canal was 10 metres higher than the northern end, Napoleon cancelled the project on the understanding it would not meet the construction costs.

Finally, construction of a canal allowing professional scale passage of trade ships was started by a French company commissioned by Said Pasha, the Egyptian Governor, after the region completely came under Ottoman rule.

The canal was completed in 1869, during governorship of İsmail Pasha, opening a new dimension in global sea trade.

However, stability of the region was disrupted again as control of Egypt passed to the British in 1882.

While the Ottoman Empire conducted two military operations in 1915 and 1916 to recapture the region, they were unsuccessful.

After that, control of the region was held by Egypt, under the three different titles of the Egyptian Sultanate, the Egyptian Kingdom and the Republic of Egypt, who are ultimately the same state.

The Suez Canal in Recent History and Crises on the Red Sea

After five attempts to build and becoming unusable on three occasions, overcoming many periodic dangers due to countless political crises and instabilities in the region, the Suez Canal and its trade on the Red Sea was recently interrupted again due to an error which could be deemed technical.

However, this particular crisis, coinciding with Covid-19 pandemic of 2021 when the World needed the global supply chain the most, in a period of strict economic policy and at a time the sea trade connection between the east and the west almost entirely depended on this region, caused deep effects across the world.

The reason of the accident was Ever Given, a Golden Class container ship, chartered for operations by Taiwanese Evergreen Marine, and owned by Japanese Shoei Kisen Kaisha.

The ship was Panama flagged, with a length of 399 metres and a width of 58, still capable of reaching speeds of 42.2 km/h. This enormous ship could be managed by a minimum crew of 25. It could carry 20,124 container in a single voyage.

As one of the largest container ships in the world, Ever Given was a young ship which had just entered service on 25 September 2018.

On 23 March 2021, around 07:40 in the morning, this colossal ship, almost loaded up to capacity, was passing through the Suez Canal on route to Rotterdam Port when it lost its ability to navigate due to strong wind and dust storm, running aground crosswise the passage, completely closing the canal to ship passage.

At first look some people might think this is a simple matter, but considering the fact that 12% of global economic movements at the time moved through this canal and almost 50 container ships passed through the canal per day, it becomes clear how large the economic dimensions of the disaster could grow even with one day of delay.

According to Lloyd's List every hour the ship could not be dislodged the global trade loss was $ 400 million. Moreover, $ 9 billion of goods were delayed for each passing day.

The damage reached an enormous scale. In addition to all these, the sudden blockage of the canal rendered other cargo ships unable to pass the canal. Supply chain was deeply impacted.

Companies waiting for their goods on other ships had to accept delays in delivery due to blockage of the canal. Serious problem arose between suppliers and buyers.

Furthermore, more than 20,000 containers stuck on Ever Given caused a container supply crisis in the eastern and western Europe. For a period of time companies could not find containers to ship their goods.

Those who could find containers had to deal with deadlines almost twice as long and a 35% rise in freight prices.

Sea trade was almost deadlocked.

The canal staying blocked even for one week deeply shocked global trade. Egypt alone suffered damages of $ 950 million in this period of time.

Putting those being affected in commercial terms aside, one week of canal blockage led the sovereign state of the region into a deep economic crisis.

Demanding compensation of their damages and being rejected, Egypt seized the ship and all its commercial cargo.

After a settlement of $ 540 million was reached with Evergreen the ship finally could set off to Rotterdam on 13 June 2021.

As it is clearly evident in the example detailed above, even one week of crisis on the Suez Canal was enough to deeply impact 12% of global economy, drive a country into economic crisis, and result in seizure of a ship.

In December 2023 Houthis, a Zaydi group existing in Yemen since 1994 and controlling one of the most critical choke points of the Red Sea, started to attack American and European trade ships passing through the region claiming these acts as repercussion for Israel's operations in Gazza during the conflict between Israel and Hamas.

In response to serious effects of these attacks and even complete halt in the passages, a coalition led by the United States of America navy and supported by Britain, Germany, South Korea, Singapore, Bahrain, Canada, Denmark, the Netherlands, Norway, Seychelles, Greece, Australia, Sri Lanka and New Zealand was formed.

The coalition announced start of the Operation Prosperity Guardian on 18 December 2023 on the Southern Red Sea and Gulf of Aden axis.

It was stated purpose of the coalition and the operation was to restore safety of sea trade in the region.

The operation continues since its start on 18 December 2023, while the Operation Poseidon Archer by collaboration of American and British forces was also started in the same region on 12 January 2024.

In addition to these two main contributors, the operation was also supported by Australia, Bahrain, Canada and the Netherlands.

Similar to the Operation Prosperity Guardian, this second operation is also ongoing.

While the economic damage caused only by one week of blockage by a commercial ship is evident, the currently ongoing crisis having political, military and commercial dimensions and ongoing since 6 months has pushed the scale of its consequences to levels which are hard to estimate.

Even in the period up to date, voyages between the east and the west has to navigate the Cape, having to travel an additional 3,550 km, increasing operation times by 1.5.

In addition the extended route and passage of commercial ship becoming almost impossible in the region has caused a minimum 35% increase in freight prices across the globe.

Particularly, the Mediterranean countries whose economies are focused of foreign trade have been deeply wounded by this crisis.

As LNG ships also started to avoid the Suez Canal, rises have also been seen in global natural gas prices.

In comparison to December 2022, the number of ships electing to pass through the Red Sea has been decreased more than half in December 2023.

In the voyages from the east to the west freight prices display direct rises between 122% to 256% for certain regions.

The Egyptian economy alone declared a loss in excess of $ 5 billion in their Canal revenues throughout this process.

According to experts, if this situation persists even for one year, a price increase of 2% can be expected in all supplier based goods across the globe.

In addition to all these challenges, the large scale drought experienced at the Panama Canal led to use of the Cape of Good Hope also for the sea trade between China and eastern coast of America, thus increasing sea traffic at the Cape and extending ship operation times by +3 days.

Tangible Losses in Global Trade due to the Crisis

Price Increase in Empty Containers	+ 30%
Freight Price Increase	+ 35%
40’ Container Compound Index	$ 3,964.00
Ratio of the Route in Global Trade Volume	12%
Value of Cargo Passing the Red Sea Annually	$ 1 trillion
Increased Travel Distance due to Navigation of the Cape of Good Hope	+ 3,550 km
Increase in Freight Times	+ 15 days (Average)
Increase in Personnel Costs per Ship	+ 20%
Increase in Transport Costs	x 3 times
Average Rate of Increase in Consumable Prices	+ 4%

Adil Can Kavcar

26.05.2024