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The Red Sea: how fragile global trade is.

The threats from the Houthis in the Red Sea persist: the crisis continues to heavily impact global transport and trade, with significant repercussions on the world economy.

Eight months, two naval missions and dozens of missiles later, the crisis in the Red Sea continues. The Houthis continue to threaten the world’s commercial fleet, so much so that last month the traffic of container ships, bulk carriers, oil tankers and methane tankers through the Bab el-Mandeb Strait was down by almost 70% compared to November.

The cost of commercial freight, which exploded in the uncertainty of the first weeks of the crisis, has now settled at a much higher value than in the recent past: transporting a container from Shanghai to Genoa costs over 2.5 times more, and also routes not directly affected by the crisis have seen costs increase by 50% or more. The more time passes, the more it seems that the crisis is destined to last a long time.

Who are the Houthis and why this crisis?
The ongoing trade and transportation crisis in the Red Sea is the consequence of Houthi attacks on commercial ships transiting the region. The term Houthis refers to the Ansar Allah movement, also known as Ansarullah (or from the Arabic “partisans of God”), an armed and political group active in northern Yemen.
Founded in the 1990s, the movement is mainly made up of Zaydis, a minority branch of Shiite Islam.

The Houthis have historically opposed the United States and Israel, intensifying their activities after the American invasion of Iraq in 2003. Over the years they became protagonists of an open conflict with the regime of the president and dictator of Yemen from 1990 to 2012, Ali Abdallah Saleh.

In 2015 they took control of important regions of Yemen, leading the country towards civil war. Backed by Iran, the Houthis are fighting against Saleh’s internationally recognized government backed by a coalition led by Saudi Arabia.

Over the years, there has never been a stable peace despite mediation efforts. With the outbreak of the Israel-Hamas war in October 2023, the Houthis began missile launches against Israel and systematic attacks against ships off the coast of Yemen, in the Red Sea, in a sign of solidarity with the Palestinians.

What is the economic impact of this crisis?
Europe and the Middle East are the regions that could suffer the greatest impact, for several reasons. Egypt, whose economy depends significantly on revenues from passages through the Suez Canal, is already
suffering heavily.

The Suez Canal is the shortest shipping route between Asia and Europe, with around 12% of global maritime trade passing through it, and represents a key source of foreign exchange earnings for Cairo, contributing $9.4 billion to the national budget in fiscal year 2022/23, approximately 2.3% of the country’s GDP.

According to the government in Cairo, revenues from the management of the Canal have decreased by more than 50% since the outbreak of the crisis. In addition to problems in balancing the accounts, this crisis represents a problem due to the lack of inflow of dollars.

As far as Europe is concerned, the main problems depend on some factors, which are more fully exposed here. In summary, it concerns (1) the risk of seeing the Mediterranean excluded from the main trade routes in favour of the route that passes through the Cape of Good Hope; (2) the increase in transportation costs; (3) the fact that these increases could translate into a more general increase in inflation.

Beyond this particular case, this crisis represents yet another shock for the world economy in a few years, with an impact in particular on the energy and logistics sectors. Since the outbreak of the pandemic in 2020, we can record, in succession, the grounding of the Evergiven container ship in the Suez Canal, the Russian invasion of Ukraine, the conflict in Gaza and the Houthi attacks up to the Iranian attack on Israel, all in a growing context of competition between great powers, the USA and China, which leads to the fragmentation of the global economy. Such a scenario requires a strong adaptation of companies to unexpected events and greater regionalization chains of value.

Furthermore, these shocks do not only have a cyclical effect, but risk slowing down growth for a prolonged time. The most significant data, as indicated by the International Monetary Fund, is a decisive increase precisely from the pandemic onwards – compared to the previous three decades – in the volatility of commodity prices (starting with gas,
oil and coal).

However, again according to the International Monetary Fund, the growth prospects for 2024 are improving compared to what was hypothesized six months ago (3.2% against 3%) and remain stable also for 2025. The future, however, is still uncertain and an escalation in the Middle East could cause a negative impact of up to 0.5% on global growth.

What was the international reaction?
Amid the initial uncertainty, at the end of last year, the United States and its Western allies first tried to use regional partners (first and foremost Egypt, the country most involved in the crisis) to try to find a negotiated solution. However, the Houthi leadership has always clearly refused any attempt to moderate its demands, which remain those of an end to the current conflict between Israel and Hamas and the lifting of the
siege by Israeli forces.

The United States waited until the end of December to begin responding in a military manner, first with attacks aimed at the group’s maritime actions (such as the attempted boarding of some commercial ships) and then, at the beginning of January, actively launching the military operation Prosperity Guardian, in which the United Kingdom and 11 other countries participate. Since mid-February, the EU has also launched its own operation, Aspides (“shield” in Greek). The mission, led by Italy and Greece, involves the active participation of Italian, French, German, Greek and Belgian military assets.

Despite the joint efforts of the navies of two dozen countries, however, the operations have not yet succeeded in achieving their goal of restoring freedom of navigation along the strait. Although Houthi attacks have significantly reduced over the last month, commercial companies are still reluctant to resume transit along the Red Sea at full speed. In short, the Houthis only needed to use means that were not excessively expensive to constitute a credible and lasting threat to those operating in the region, putting 12% of world trade at risk. (ISPI) – (123rf)

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