When I asked insurance expert Carolina Klint of brokers Marsh McLennan about the Red Sea shipping crisis ahead of this week’s World Economic Forum in Davos, Switzerland, she joked that only a crystal ball could predict how it would evolve.
She followed up with a point that put what’s at stake in context of a world divided by sanctions lines for most of this century. “It’s almost like [imposing] sanctions on Europe,” she said.
International freedom of navigation has been a first-rank principle for so long that it is hard to think of a time when it has been so disrupted. That was the case before the US and UK launched air strikes against targets across Yemen late last week, and it remains the outlook from today.
The world’s “chokepoints” have always posed a risk to global trade.
It is well known there are two vital canals, Panama and Suez, and three great bottlenecks: Malacca Strait, Bab Al Mandeb and the Black Sea approaches through Turkey. The third is unusual in that the Montreux Convention of 1936 grants powers to Ankara to restrict naval movement through the Bosphorus.
The right of free movement is unalloyed in the Red Sea, with the global economy having been built up on this foundational pillar. But the deterioration in the situation in the littoral states beyond the entrance to the Red Sea has caught the world off guard.
To ask why the US and UK stepped in last week triggers fundamental issues for those nations. The answer is that it was perfectly predictable, given the dozens of attacks on international shipping since November, that they would do so.
Washington and London would have otherwise lost credibility just as they had in 2013, when US president Barack Obama pulled back from strikes on Syria following alleged chemical weapons attacks by the regime of President Bashar Al Assad against its own citizens. For its part, UK Parliament rejected its government’s plan to launch attacks on Syria.
The Houthi decision to launch 27 – and counting – missile and drone attacks against ships in the narrow waterway cannot be seen in isolation. It came as Israel fought its way through Gaza, leading to global and regional calls for a ceasefire that have been unheeded. To put the interests of world trade into a balance with the grief and anger over Gaza is one of the most iniquitous situations ever faced.
The air strikes have opened new divisions, with escalation threatening to trump deterrence. With the Israel-Gaza war having just passed 100 days, the rise in tensions is only creating more bloodshed.
For Yemen, a new inflection point is at hand. Hopes had risen in Yemen that the civil war that has raged since the collapse of the National Dialogue Conference in 2014 could be resolved through mediated dialogue with neighbouring Saudi Arabia. No one is closing any doors on that process, but the maelstrom is raging all around those talks.
For Washington and its allies, the preoccupation with the interruption of world trade is explainable through figures. The 10 countries that backed the US-UK strikes in Yemen issued a joint statement defending the “free flow” of international commerce.
Germany’s IFW Kiel Institute for the World Economy estimated last week that overall global trade had dropped 1.3 per cent since the start of the Houthi attacks. Its figures show that a fifth of the global container trade passes through the strait. The current volume of container traffic going through the area is 70 per cent below the pre-crisis level.
The impact of all this is to revive fears of inflation that had been on the wane in the developed world. A container shipped will now cost $4,000, up from $1,500 just a few months ago. With more pressures, many are asking if the price could approach the 2021 levels of $15,000. Transit via the alternative Cape of Good Hope takes anywhere between one week to three weeks longer.
The situation both before and after the strikes remains a test of credibility for the US and UK. The world trade system that they were so instrumental in establishing faces its biggest test.
The instability in the Red Sea and Gulf of Aden are by no means contained. On the opposite seaboard, there are ominous developments in Sudan, Eritrea, Djibouti and Somalia. A string of pearls along the western coastline of the Red Sea could be up for grabs, as instability and competition feed off each other on the Horn of Africa side.
Hanging over all this is the credibility of US-led action after facing and flunking so many tests this century. Credibility not only requires economic strength but also military power to show a “constancy of response” that former US defence secretary Robert Gates often cited as the key to international deterrence.
Two years ago, a study from the Rand Corporation cited these factors as ultimately key to the US national competitiveness. The report warned of “intersecting dangers” that were obstructing the US’s ability to take decisive international action.
In the days and weeks ahead, a return of shipping to the Red Sea and the turning of the page in the Israel-Gaza conflict is a decisive litmus test for US credibility that is on the line.
