Red Sea Shipping Disruptions: Estimating Economic Effects

Red Sea Shipping Disruptions: Estimating Economic Effects

May 8, 2024
Red Sea Shipping Disruptions: Estimating Economic Effects
Attacks by the Yemen-based Ansar Allah (Houthi)
tracking databases. They are also based on specific
movement in the Red Sea and Gulf of Aden since
assumptions and simplifications—which may not capture
November 2023 have disrupted a critical maritime passage
the complexity and dynamics of the situation. Forecasts are
for global supply chains, creating bottlenecks at the Suez
also subject to considerable uncertainty that can affect their
Canal and Bab al-Mandab Strait—one of the world’s most
accuracy and reliability, including about what actions the
significant trade chokepoints—and forcing vessels into
Houthis might take and what the shipping industry and
longer and more costly journeys around Africa. These
other countries might do to protect ships in the Red Sea.
shipping disruptions compound ongoing challenges to the
global economy created or exacerbated by the COVID-19
Figure 1. The Red Sea and Middle East Region
pandemic, Russia’s war against Ukraine, conflict and
tension in the Middle East, and a drought that has
substantially scaled back shipping through the Panama
Canal, another key artery of global trade flows. Members of
Congress may have an interest in monitoring the situation
to help inform potential U.S. economic policy responses.
The Suez Canal—which connects the Red Sea with the
Mediterranean Sea and links Europe, Africa, and Asia—
handled approximately 12% to 15% of global trade volumes
in 2023. This strategic passage is also significant to trade in
specific products; by some estimates, it has handled 25% to
30% of all container shipping, 12% of seaborne oil, 8% of
seaborne liquified natural gas, and 8% of the grain trade in
recent years. The disruptions to the safe use of this
waterway have highlighted the vulnerability of global
supply chains to ocean-based security threats.
Preliminary information suggests that the global economic

effects of the Houthi attacks on ships have been limited thus
Source: Congressional Research Service (CRS).
far, although they have rippled across various industries and
Measuring the effects of an evolving crisis and isolating
countries differently, primarily via trade linkages (e.g.,
them from those of the other unfolding regional and global
delays and shortages). Potential remains for greater near-
developments, however, is a challenging task. For example,
term risks and challenges to the economies of Europe, the
customs records, from which official trade statistics are
Middle East, and the Horn of Africa. As two analysts from
derived, may be affected by shipping disruptions. Issues
the St. Louis Fed noted in February 2024, “[w]hile
such as these could complicate efforts to timely and
geopolitical conflict often takes place in relatively narrow
accurately assess the trade and economic effects of the
geographic areas, the global nature of the market for
disruptions (e.g., imports/tariff revenue recorded in April
international shipping services could act as a channel
that would have been recorded in February had it not been
through which local shocks are amplified and transmitted to
for the rerouting of ships).
the rest of the global economy.”
Estimating the Impact
The attacks have increased shipping costs and affected
The economic backdrop to the current disruptions is
humanitarian flows of food, fuel, and medicine into in these
different than the situation three years ago when, in the
regions. If prolonged, disruptions to Red Sea shipping could
midst of the pandemic, a container ship became grounded in
contribute to global inflationary pressures and exert a drag
the Suez Canal (see textbox). In 2021, there was a surge in
on the global economy. Ultimately, the overall impact of
global demand for physical goods that resulted, in part,
the crisis will depend on its duration and the extent to
from economic stimulus programs and a sharp shift in
which its fallout is contained, and on the responses of all
spending from services to consumer durables, while
stakeholders, including governments, shipping companies,
pandemic-induced constraints on production and
and international organizations.
transportation continued to restrict supplies.
Challenges of Economic Forecasting
Some analysts assess that if the current situation does not
Projections of the economic impact are based on limited
escalate into a wider conflict, near term effects of the
data that includes a mix of statistical indicators from
shipping disruptions may be limited to a marginal, overall
government agencies, business and consumer surveys,
reduction in global economic growth and a minor uptick in
financial market variables, and real-time ship and port
global inflation. Disruptions, in their view, have been
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Red Sea Shipping Disruptions: Estimating Economic Effects
priced in by markets—that is, actual and potential
Other estimates project that a prolonged conflict with
ramifications of the disruptions are reflected in current
shipping costs staying at current levels through 2024 could
prices. These analysts expect that the inflationary impact of
add up to 0.7 p.p. to global inflation this year. Many
higher freight costs will be largely contained given the
analysts conclude that a worsening of the situation,
relatively minor share of maritime trade costs in total input
especially if it turns into another protracted regional conflict
costs, the ability of firms’ profit margins to absorb rises in
or threatens global energy markets, could have potentially
input prices, and ample ship availability. The World Trade
serious knock-on effects, which could extend beyond the
Organization (WTO) also has noted that weak consumer
short term, on the economies of Europe, Africa, and the
demand and backup inventory are helping to mitigate
Middle East and their major trading partners.
inflationary pressures resulting from transport delays.
The cost and impact of the disruptions on the environment
could also be significant. According to some observers,
rerouting vessels to the Cape of Good Hope is increasing
Red Sea Shipping Disruptions vs. 2021 Suez Canal
carbon emissions, and damaged ships threaten the
Blockage: A WTO Assessment
surrounding marine ecosystem—home to one of the world’s
Some analysts estimate that the temporary blockage of the Suez
most biodiverse coral reefs.
Canal in March 2021 by the grounded container ship Ever Given
cost world trade between $6 bil ion and $10 bil ion and reduced
Considerations for Congress
annual trade growth by 0.2 to 0.4 percentage points (p.p.).
For Members of Congress, the Red Sea shipping
While the Red Sea disruptions differ significantly from the 2021
disruptions can raise questions about whether and how to
event, the WTO assessed that there are similarities that may
facilitate the smooth, predictable flow of trade, improve the
enable analysts to draw certain conclusions. In particular, the
resilience of domestic and global supply chains for critical
WTO concluded that the impact of the Red Sea attacks might
products, and/or limit trade dependencies on certain
be more limited than initial y expected due to several factors,
countries and regions. The situation presents the United
including: (1) continued use of the Suez Canal despite
States and its allies with questions about the manner and
reductions in traffic; (2) relatively smal delays from rerouting
extent to which government policy can or should alter
ships around the Cape of Good Hope; (3) containment of
existing production and supplier arrangements. It may also
maritime freight rates since the start of the attacks; (4)
present them with an opportunity to assess if and how the
moderate consumer demand and adequate inventories; (5)
disruptions, especially if they worsen, have the potential to
relative stability of global energy markets; and (6) greater
affect or undermine China’s efforts to reshape global trade
availability of shipping capacity today compared to 2021, when
and solidify its centrality in global supply chains.
the COVID-19 pandemic was causing disruptions.
Source: Adapted from World Trade Organization,
Congress may consider the costs and benefits of adopting
Global Trade Outlook and Statistics, April 2024.
legislation that attempts to alter shipping routes for
imported goods or reallocate resources within the economy
toward developing domestic production of imported goods.
The short-term economic impact will vary across countries
These policies could affect the cost of goods and services
and industries, but many analysts expect it to be more
for U.S. consumers, alter U.S. and global trade flows, and
pronounced in Europe, the Middle East, and the Horn of
impact the competitiveness of U.S. businesses. Congress
Africa. Around 40% of Asia-Europe trade and over 95% of
also may examine other tools and legislative approaches,
ships traveling between the two regions normally go
such as encouraging the Administration to coordinate new
through the Red Sea. In addition, maritime fees constitute a
significant share of some countries’ budgets and foreign
international efforts to promote the safe passage of
merchant ships in the Red Sea and/or enhance the capacity
exchange reserves (e.g., Egypt). Disruptions also jeopardize
of alternative modes of transportation, particularly for
the movement of critical food and supplies in countries like
critical supplies.
Djibouti, a key node for East African trade and a hub for
humanitarian assistance bound for Africa. Some countries
Congress may also consider whether to reinforce U.S.
situated at strategic junctures along the Asia-Europe route,
support for global trade arrangements and agreements with
such as Madagascar, could gain from the Red Sea
like-minded trading partners, while also encouraging
disruptions through increased demand for bunkering and
“nearshoring”—the shifting of manufacturing and
restocking services.
production operations to neighboring or nearby countries
rather than distant offshore locations—or the use of a more
According to a January 2024 study by Allianz, one of the
world’s largest insurers,
diverse foreign supplier base for U.S. firms to increase
increased seaborne freight rates
resilience (e.g., in initiatives such as the Indo-Pacific
stemming from the attacks could push up prices globally by
Economic Framework for Prosperity). Congress may also
about 0.5 p.p. and potentially reduce gross domestic
explore whether the use of U.S. and multilateral tools (e.g.,
product (GDP) growth by 0.9 p.p. in Europe, 0.6 p.p. in the
humanitarian assistance and trade financing/capacity
United States, and 0.4 p.p. globally in 2024. Similarly, in
building) could help address the economic needs of those
February 2024, the Organization for Economic Cooperation
negatively impacted by the Red Sea shipping disruptions,
and Development (OECD) estimated that if these higher
while helping U.S. workers and firms remain competitive.
costs persist, they could increase short-term import price
inflation across its 38 members (including the United
Andres B. Schwarzenberg, Specialist in International
States) by nearly 5 p.p., potentially adding 0.4 p.p. to
overall inflation “after about a year.” Excess container ship
Trade and Finance
capacity, the OECD noted, should moderate cost pressures.
IF12657
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Red Sea Shipping Disruptions: Estimating Economic Effects

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