Conflict and climate cast a shadow on maritime trade
Attacks on merchant vessels in the Red Sea and a drought in the Panama Canal are raising questions about the future of maritime trade.
On February 19, the crew of Rubymar—a merchant vessel registered in the United Kingdom—abandoned ship near the Bab al-Mandab strait that connects the Red Sea to the Gulf of Aden.1 The ship, which was transporting 41,000 tons of fertilizer from the United Arab Emirates to Belarus, had sustained damage a day earlier from a missile fired by the Houthis, an armed group holding sway over large parts of Yemen.2 Unfortunately, this was no isolated incident; since November 19, 2023, there have been close to 60 attacks by the Houthis on merchant ships passing through the Red Sea.3 These attacks haven’t ceased even after the launch of Operation Prosperity Guardian, an effort by the United States and its allies to protect this key shipping route.4
Ships are vital for international trade, with maritime transport accounting for close to 80% of the global trade in goods.5 Yet, transporting goods across the world hasn’t been easy in the last few years. The global spread of COVID-19 was the first major disruption. Then came the Russia-Ukraine conflict, which dealt a blow to shipments of foodgrain from Ukraine via the Black Sea.6 As if that was not enough, conflict has now come to the Red Sea. Worryingly, it’s not just a tiny virus or mighty missiles that have jolted global trade routes. Climate events are also taking a toll: Drought has reduced water levels in the Panama Canal, thereby leading to declining shipping transit through the waterway.7
Red Sea attacks are more than a minor interruption
According to the United Nations Conference on Trade and Development (UNCTAD), about 12% to 15% of global trade in 2023 passed through the Suez Canal, a key trade route linking Asia and Europe.8 The attacks on merchant ships, however, have dealt a blow to this free flow of goods, with major shipping companies announcing either a complete halt to voyages through the canal or minimizing the number of vessels taking the route.9 Research by UNCTAD suggests that between November 2023 and January 2024, transits through the Suez Canal have fallen by close to 40% (figure 1).10 And liquified natural gas carriers have stopped plying this route since January 16.11
As ships avoid the Suez Canal and opt for a longer route via the Cape of Good Hope, travel time has risen by at least 10 days.12 For those ships that opt to continue transit via the Suez Canal, the cost of insurance, which now includes war risk premiums, has also increased.13 Either option has caused the cost of maritime trade to rise. Analysis of data from the Shanghai Containerized Freight Index suggests that container shipping spot rates from Shanghai have more than doubled since November 2023.14 The Freightos Baltic Container Index, which covers spot rates for 40-feet containers on 12 key global trade routes also shows a similar jump (figure 2).15
Delays and rising costs are especially worrying for Europe, a major importer of consumer goods from Asia and energy from the Middle East. A few retail majors have already cautioned about delays, while some automakers have briefly suspended production due to a lack of key components.16 While some of these issues are likely to be resolved as businesses plan for longer shipping times, higher costs of goods if passed on to consumers will push up prices. Goods inflation, which had troubled Europe and other parts of the world in 2021 and 2022 has eased over the past year.17 Yet, such gains against inflation may prove temporary if these supply disruptions continue for a prolonged period, especially if that comes at a time when economic growth rebounds in Europe.
Vulnerable emerging and developing nations could be hit too in the near term. The price of wheat destined for East Africa from Europe, Russia, and Ukraine will increase as these ships typically route through the Suez Canal.18 For Egypt, the current crisis couldn’t have come at a worse time. The country raked in US$9.4 billion of revenue from the Suez Canal in the last fiscal year, much-needed earnings for an economy grappling with high fiscal deficit and debt levels; it had to tap funds from the International Monetary Fund in 2022.19 Yet, with the transit of ships declining, revenue from the canal has fallen by about 40% so far.20
Climate deals a blow to the Panama Canal
Far away from the Middle East, another major route for global maritime trade is also facing a grave challenge. The Panama Canal, which links the Atlantic Ocean to the Pacific, typically sees about 5% of global maritime trade—close to US$270 billion in cargo value—transit through its famed waterways.21 Yet, since last year, the canal has been hit severely by a drought, made worse by global warming and El Niño weather patterns.22 The canal’s waterways are fed by artificial freshwater lakes—the most important one being Gatun Lake—that are dependent on rainfall. A prolonged dry season has led to lower water levels in Gatun Lake, putting the canal itself in jeopardy.
To deal with this, the Panama Canal Authority has imposed restrictions on the number of ships that can pass every day: From the usual 36 transits per day, capacity has been cut to 24. Additional cuts may come in April depending on the trajectory of rains.23 There are restrictions on the size of the vessels and the amount of cargo as well, since both factors influence the total volume of water displaced by ships. With both container ships and energy carriers impacted by these restrictions, transit data indicates a 41% decline since end-2022 (figure 3) and a dip of 49% since the last peak in December 2021.24
Troubles in the Panama Canal couldn’t have come at a worse time for international trade. Typically, ships avoiding the Panama Canal would have been routed through the Suez Canal, even though it involves longer travel. For example, if ships opt for the Suez Canal instead of the Panama Canal, the travel time between Shenzhen (China) and Florida (United States) rises by about six days, or 17%.25 Yet, with shipping in the Red Sea facing grave risks, vessels may instead prefer even longer routes; travel time is therefore set to increase even further. Shipping companies are also exploring a train corridor linking the Atlantic side of Panama to the Pacific one; this would involve dropping cargo in one port and shipping it via rail.26
Reduced transit has dented toll revenue for the Panama Canal by about US$100 million per month since October 2023. The impact would have been higher had it not been for toll hikes by the Panama Canal Authority.27 For now, the decline in revenue is not enough to put the economy or fiscal sustainability in danger,28 but much depends on how long these restrictions last. The bigger worry is for major exporters and importers in the region who use the canal. For example, 40% of all US container traffic flows through the Panama Canal, linking the East Coast of the United States to Asia and the West Coast to Europe.29 The canal also accounts for more than 20% of the trade volumes of Ecuador, Peru, and Chile.30 Port activity along the route has already been impacted, especially in Panama, Nicaragua, Ecuador, Peru, El Salvador, and Jamaica.31
Conflict and climate may be here to stay
At the beginning of the new millennium, if economists had warned that conflict and climate would make matters difficult for global trade, it would have raised quite a few eyebrows. At that time, international trade had emerged as a poster boy of global growth, transforming the fortunes of not only developed nations but also emerging ones like China and India. Yet, events since early 2022 suggest it won’t be right to assume that goods can move as freely across the world as they used to. The Russia-Ukraine conflict jolted the trade in grain—critical to developing nations—and sanctions on Russia changed the dynamics of energy trade.32 And now, an armed group from a nearly forgotten conflict has brought a dynamic trade route to its knees.
Will conflict then continue to weigh on maritime trade? The answer lies in the global response to the problem. Nearly a decade back, pirates off the coast of Somalia were a nuisance to merchant vessels. Yet, the world reacted unitedly as naval powers coordinated to protect vessels and shipping companies employed armed guards.33 Piracy has dropped sharply since then. Armed guards, however, are not enough to fend off missiles and armed drones. Worse, unlike a decade back, global coordination is missing as Russia and the West face off over the conflict in Ukraine, while geopolitical tensions in the Middle East rise. No wonder then that efforts to protect merchant vessels traversing the Suez Canal haven’t had much success so far.
Climate change and environmental impact have increased the challenges facing maritime trade. For the Panama Canal, worries about changing climate patterns aren’t new.34 In 2019 too, the Panama Canal Authority had to deal with severe dry weather. Finding a long-term solution is, however, difficult as the artificial freshwater bodies feeding the canal are also major sources of water for key cities in the country. Researchers have also hinted that dry weather and erratic climatic conditions in the region are linked to rapid deforestation in the Amazon.35 And with these climate events intensifying, there are doubts whether the canal will be as big a facilitator of international trade as it used to be.
Delays and longer shipping routes are already having a detrimental impact on the environment due to the greater use of fuel. To reduce travel times, ships often increase their speed, thereby leading to even higher fuel use. On the other hand, damaged ships leave their own trail of environmental destruction. The MV Rubymar has left a long oil slick and there are fears that its large cargo of fertilizer will cause immense harm to marine life in the area.36
A reduced role for maritime transport in global trade?
Maritime transport has played a key role in the spread of international trade, especially connecting factories in Asia and Latin America to consumers in Europe and the United States. Similarly, a wide array of commodities and energy products regularly traverse the seas to different parts of the world. Yet, this efficient system of shipping goods has suddenly hit roadblocks, forcing businesses to explore alternate means of transport. Some shipping companies are already tapping rail networks in Panama to transport goods from one side (Pacific) to the other (Atlantic).37 Similarly, demand for rail transport connecting ports on the West Coast in the United States to the northern part of the country is also rising.38 Far away from the Americas, companies are exploring land routes between Asia and Europe through Russia; those hesitant to transit through Russia due to the conflict in Ukraine are looking at the corridor through Kazakhstan to Turkey.39 Air cargo volumes for certain goods are also up between parts of Asia and Europe.40
Yet, all these are small dents to the current share of maritime transport in global trade. Whether land or air routes take a greater share of maritime trade depends on how long the current conflicts last, especially in the Red Sea. Much also depends on whether trade policy, geopolitical realignments, and diversification of global supply chains increase nearshoring, thereby cutting demand for long maritime routes.41