The attacks—which involve advanced equipment such as drones and missiles largely made possible by Iran’s backing—have provoked a response from the U.S. and UK militaries, raising fears of the conflict metastasizing. Access to one of global shipping’s most critical arteries now seems more perilous, inviting questions on the viability of maritime trade in the region. The CSIS Scholl Chair in International Business and Middle East programs break down the geopolitical underpinnings of the ongoing attacks as well as the eventuality of a protracted conflict and analyze their meaning for global trade.
Q1: Why are the Houthis attacking commercial shipping lanes in the Red Sea?
A1: The Houthis portray their attacks on ships in the Red Sea as an act of solidarity with Palestinians. They hope that the costs of the trade disruptions will encourage Western governments to pressure Israel into accepting a ceasefire in Gaza. But they are also seizing the opportunity to bolster their popularity in Yemen. After a decade of conflict, Yemenis are experiencing profound economic and humanitarian crises, and the Houthis are struggling to provide basic services. These attacks shift the attention away from domestic challenges and allow the Houthis to depict themselves as being on the frontlines of a regional war against Israel and the United States, in defense of the Palestinian cause. Finally, the Houthis lack legitimacy on the global stage; the Yemen-based group is trying to attract international attention and demonstrate that larger actors cannot simply ignore them.
Q2: How are shipping companies responding?
A2: The significantly heightened risk of attack has caused shipping companies to reconsider transiting the Suez Canal via the Red Sea. Between December 15 and 19, 13 shipping operators announced suspensions of their trips to and from Israel or their voyages transiting the Red Sea
Cargo insurance plays an outsized role in the decision to risk transiting the Red Sea. Analysts tracking cargo insurance have seen a sharp increase in insurance rates for Red Sea and Bab al-Mandab voyages. These rates, which—according to Ali Ahmadi, an executive fellow at the Geneva Centre for Security Policy—are typically 0.6 percent of the value of the cargo on a ship, are now up to 2 percent. An additional war risk premium is also added by cargo insurers, further increasing the price of taking the Suez Canal route. Container vessels—and, to a lesser extent, car carriers—have been rerouted with the most frequency. Container vessels are a subset of all cargo ships that carry goods in shipping containers. These ships often hold higher value—and therefore incur higher insurance costs—than bulk carriers or hydrocarbon tankers.
Maersk, one of the world’s leading shipping companies, is one of many firms that have chosen to indefinitely suspend their Red Sea routes. On December 14, 2023, Maersk reported that a near-miss incident involving their vessel, Maersk Gibraltar, had caused them to temporarily pause all passages through the Bab-al Mandab Strait. Five days later, they instructed their ships to reroute around the Cape of Good Hope. When Operation Prosperity Guardian (OPG) was launched, Maersk chose to continue journeys through the Red Sea and toward the Suez Canal. However, OPG failed to deter a December 30 attack on another Maersk vessel, the Maersk Hangzhou. Since then, Maersk has again diverted all Suez-bound ships around the Cape of Good Hope until further notice.
For Europe-Asia voyages, a diversion to the Cape of Good Hope increases shipping time by 30 to 50 percent. Not only does this have immediate economic impacts, but it creates medium-term logistics issues for individual shipping firms. Maersk is beginning to release preemptive ship diversions that stretch several months into the future. In one example, the Maersk Moscow 409E—which is scheduled to sail from the Netherlands to Malaysia starting March 12—has already received a diversion order to the Cape of Good Hope. The new expected date of arrival in Indonesia is April 8, 2024, which is nearly 17 days longer than usual.
The Red Sea crisis has not halted trade through the Red Sea region entirely. Presumably, ships with low cargo value, and a higher tolerance for risk, have deemed the trip worth making. Live data from MarineTraffic continues to show a sizeable—though much less than normal— amount of cargo vessels and tankers sailing through the Bab al-Mandab Strait into the Red Sea and through the Suez Canal.
Q3: What are the macroeconomic consequences of the conflict?
A3: The Red Sea crisis is directly responsible for cargo shipping delays and price increases in the short term. While the attacks on vessels are tied to the ever-changing conflict in the Middle East—and therefore difficult to predict in the medium to long term—delays and cost increases are highly likely to continue into the following months as shipping firms begin to plan for a protracted conflict.
According to International Monetary Fund data as of January 22, 2024, the seven-day rolling average of Bab al-Mandab passages has dropped to 46 percent compared to the same period last year. Suez Canal passages are at 63 percent compared to the previous year, while Cape of Good Hope passages are up 70 percent. The increase in ship diversions increases fuel and labor costs while decreasing the average amount of cargo traffic reaching its destination.
Egypt’s Suez Canal revenues have taken a hit due to ship diversions. As of January 12, 2024, revenues are down 40 percent in comparison to 2023 levels. Worse yet for the Egyptian economy, canal fees are paid in foreign currency, which the government has struggled to obtain due to rapidly growing inflation.
