World Trade in Red Yet Again
Trade is the bread and butter for maintain equilibrium in the world. A stable trade of goods ensures that consumers get what they want at a price they accept. At the same time, governments and companies gain by ensuring that smooth trade is building relations between the countries and allowing businesses to prosper. Any moment of trade not going well is a worrying sign for the world. As we enter 2024, trade could again be diving into a red. This could be attributed to market dynamics, government relation and any other extrinsic factor that could impact trade. Shipment is the most important facet of trade and having efficient and timely shipments make or breaks the trade in terms of on time delivery, consumer prices and shipment cost.
The global trade is in for a dive into the red zone as the ship containers in the Red Sea are being attacked by Houthi militants. The attack is ongoing owing to Yemen based Iran backed Houthi attacking any container that is passing through the Red Sea in support of Palestinian group. This can be attributed to the ongoing Israel Hamas conflict that has been ongoing since October. While Houthi militants claim to be disrupting the containers that have ties with Israel, but they have been unbiased in attacking any shipping container passing by. This brings us to wonder how the world trade is getting affected and what lies ahead in future?
1. Suez Canal and Red Sea get blocked: The route from Asia to Europe via Suez Canal accounts for 12% of global trade and 40% of container volume. This is significant as it forms the lifeline of trade for the globe and specially for Europe. The alternate route is via Cape of Good Hope which will easily take 10–16 days more than the usual duration adding to shipment cost which will eventually impact the consumers as well.
2. The American Pain: North America has always had an alternate source of shipment route via the Panama Canal. Given the frequent disruptions in the Red Sea region, Panama Canal has always been a blessing for North and South America. However, this time around, Panama Canal is disrupted as well owing to drought and Red Sea-Suez Canal linkage was the torch bearer for trade with the US as well. The increase in cost of shipments for top retailers in US is going to impact the consumers even more.
3. Conflict vs Peace: While US has sent its warships to the Red Sea region to block the Houthi militants, but the civilian lives are at stake here as well as the shipping container comprises of hundreds of staff members. This is causing the forces to take a less retaliatory approach and subsequently delaying the dismissal of Houthi. On top of that, blockages in Suez Canal have often been aided by middle eastern countries as well. In this case, this help is most likely not going to come owing to their soft allegiance to Palestine.
What does the future hold?
1. Potential rise in prices: The steep increase in shipments and the delay in shipments is going to create more demand for the products as the summer season looms. To offset the costs, manufacturers will increase the retail prices. The consumer will be the direct affected party over a period as the same was evident during Covid and when Suez Canal got blocked owing to a ship being stuck for 6 days.
2. Dictation of trade by Middle East: With ongoing Israel Hamas conflict, this could end up being a master stroke for middle eastern regions as they look to establish their presence in the world order. They can be the make or break for facilitating trade through the Red Sea.
3. New in sourcing strategies: With such frequent disruptions, it is likely that the next decade will see a lot of major European countries and US set up more manufacturing sites in their home area and rely less on other continents for sourcing products. The one-time cost will be high, but the dependency and cost volatility will reduce significantly.
