Photo by william william on Unsplash
Over the past few months, Yemen’s Houthi rebels have launched targeted attacks on Israeli ships in the Red Sea, inflicting a crisis within the area, to demonstrate solidarity with Hamas. The Red Sea is home to about 12% of global trade flows and 30% of global container traffic. Over time, the conflict has escalated with the United States (US) and the United Kingdom (UK) launching retaliatory strikes against these forces. However, these forces have inflicted severe impacts to the world, such as on the economic front with international trade and digital infrastructure. Socially, the disruption to trade could lead to a threat on food security. Globally, it has led to retaliation as well from major powers like the US and the UK. This essay seeks to discuss the detrimental impacts of the Houthi rebels' attacks in the Red Sea.
Firstly, with direct attacks on ships passing across the Red Sea, the immediate impact has been an avoidance of such shipping routes, which inflicts a hefty economic cost on both firms and possibly consumers. Around $200 billion in trade has approximately been diverted as a result of these attacks. The Red Sea is one the world’s most important shipping routes because it is much shorter and faster, leading to lower shipping costs. The route is also a key link between Europe and Asia. As this crisis develops, ships have had to move via an alternative route. One alternative route is the route along the Panama Canal. Yet, the Panama Canal is also a problematic route because of droughts caused by El niño that have led to water levels dropping to record lows. This has already led to daily traffic in the Panama canal dropping by 40% as compared to the previous year. As such, ships have had to take a longer route which involves passing through the Cape of Good Hope along Africa. This new route increases voyage distances by 40%, raising shipping costs. A variety of firms have been impacted by this, from a range of energy firms, to retail firms.
Energy firms impacted include BP, Shell and Qatar Energy, as these firms have reported that they have stopped sending ships along the Red Sea, which means increased shipping costs for these firms. Jan Hoffman, a trade expert at the United Nations Conference on Trade And Development (UNCTAD) estimates a drop of about 42% in trade flows in the area over the past 2 months. As shipping costs increase, costs of inputs increase for energy firms and such costs can be passed on to consumers of oil and gas, which might lead to increased prices of oil and gas. As of now, costs have yet to rise significantly, because supplies are still yet to be impacted. Though, if such a conflict in the Red Sea persists, it could eventually lead to increased energy costs as supplies dwindle. With these supply shocks, it will lead to elevated input costs for firms, and it could in due course result in cost-push inflation for consumers.
Consumers stand to suffer a lot as well, because they might not only struggle with rising prices but they might also have to grapple with the situation of goods not reaching on time. British Retail Chain, Marks and Spencer, have already reported that its spring clothing collection and its home goods collection that is due to be released in February and March will be delayed. Even Tesla has had to stop operations in its factory near Berlin because of shipment delays. The good thing is, however, the disruptions caused by the pandemic had already forced firms to relook at their supply-chain capabilities. As such, though the crisis is a challenge towards international trade, in the short term, impacts are not expected to be as severe, since firms are now more well-equipped to handle these crises, and the overall negative impact is still much lesser than what occurred during the pandemic. In the long-term though, such disruptions could still inflict catastrophic damages.
Socially though, it could have a severe impact as well, especially due to the impact on food security. For the retail goods sector, delayed delivery of items would not lead to these items’ value being affected. However, vessels delivering foodstuffs have a larger issue. Such food items are usually perishable and lengthier shipping durations is expected to lead to these items expiring. Even if they do not expire, the freshness of goods like fruits or meat are impacted by longer shipping durations. As such, both the quantity and quality of food products will be affected. Some instances of exporters being affected are Italian exporters of Kiwi and Citrus fruits and also Euro Fruits, a major fruit exporter in Europe. Farmers are also going to suffer, as they cannot delay their harvests and with some of their harvesting season coming at this time, they are forced to sell at this time, and at lower prices, because of the high shipping costs that exporters have to bear. As such, farmers will suffer from the sale of food exports, and more importantly, the quantity and quality of food exported will be affected, massively challenging food supplies and food security.
In terms of digital telecommunication infrastructure, the crisis in the Red Sea has also inflicted damage on it as well. As Houthi forces launch attacks in the red sea, many are already concerned that it would damage internet cables submerged in water. Such worries arose when maps of the internet cables in the Red Sea were circulated in a Houthi-linked telegram channel. It is estimated that 17% of the world’s internet traffic is carried across underwater fibre pipes. Much of the internet capacity in Europe and Egypt could be affected if Houthi forces can damage or meddle with the cables that are at a depth of 100 metres. Disruption in internet capacity could also have dire implications on the transmission of financial data. As such, apart from trade, damages to telecommunications infrastructure could occur and they could potentially be catastrophic, considering the digitalised world we live in.
Globally, and multilaterally, the attacks have also changed how countries and major powers respond. Notably, the US announced the formation of a multilateral coalition to counter the Houthis. Though, not everyone in the coalition held their end of the bargain as only the US and the UK ended up launching joint strikes against Houthi forces in Yemen. These strikes were meant to show how the US are willing to protect commercial ships in the Red Sea, and were also part of its retaliatory attacks against the drone attacks by a coalition of Iran-backed groups on 3 Americans at a US base in Jordan. The US is expected to target the whole group of the Iranian-backed militias across the middle east. Back in 2016, these air strikes were successful as Houthi forces backed down. This time however, it does not seem likely that the Houthi would back down anytime soon, and it might instead lead to greater escalation. The air strikes were not very popular among Middle-Eastern countries like Iraq and Syria. Escalation will definitely not reflect well for the world, as it could signal a widened conflict along the Middle-East and it would result in plenty of economic and social costs to the world.
In conclusion, the rise of the Houthis and the attacks they have launched have inflicted a rather profound impact on relations between countries in the world, the world’s economy and society. Yet, it is too early to determine the extent of its impact. This is so as we do not know how much the conflict will escalate with the US and UK’s involvement. Also, the economic impact as of now is still manageable as supply chains have been quite resilient. Though, if the conflict persists, the strain on the economy could be profound as supplies of goods are delayed over lengthier periods of time.
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