The American-led Naval Coalition of 12 countries guarding maritime trade in the strategic Red Sea has not deterred Iranian-backed Houthi rebels in Yemen from threatening international trade. Last week, the coalition warned that if the Yemen-based militant group did not halt its attacks on merchant vessels, they would be forced to act. Two days later, the destroyer USS Laboon shot down a Houthi drone in international waters of the southern Red Sea near “multiple commercial vessels,” according to US Central Command.
The warning followed a US military vessel shooting down Houthi anti-ballistic missiles targeting a Maersk ship just before the end of last year. The Houthis attacked the ship again the next day, using fast boats in an apparent attempt to hijack or sink the vessel. US helicopters responded by firing at the Houthi fast boats, sinking them and killing their crew members.
It seems the Houthis are determined to continue with their efforts in support of Palestinians against Israeli aggression in Gaza. Since November, they have been targeting not only Israeli ships but also any vessels heading for Israeli ports. That led to surging ocean freight rates, triggering warnings of inflation and delayed goods.
The Red Sea waterway from Bab Al- Mandeb Strait to the Suez Canal is vital to global trade, connecting the Mediterranean Sea to the Indian Ocean. It is used for shipping fuel, food and consumer goods from Asia and the Middle East to Europe. It accounts for 12 per cent of global trade, including 30 per cent of all container movement, according to Egypt’s State Information Service.
Major shipping companies like the leading Danish shipping line Maersk, the German Hapag-Lloyd and MSC, and the French CMA-CGM had rerouted their vessels to the longer and costlier Cape of Good Hope. But they went on using the Red Sea route after the naval coalition was announced. Now, some of these major shipping groups have suspended Red Sea trips again.
Since the Houthi attacks started, major shipping companies have already diverted more than 200 billion dollars in trade away from the Red Sea route. Using alternative routes like the Cape of Good Hope around the southern tip of Africa costs some USD two million more for a vessel trip, both in extra fuel, insurance and other charges. Moreover, delays of between a week and 20 days lead to more damage in supply chains.
Maritime freight rates are on track to rise again starting on 15 January due to previously announced increases. Some carriers have announced rates above USD 6,000 per 40-foot container for Mediterranean shipments starting mid-month, with surcharges ranging from USD 500 to 2,700 dollars per container. All these surcharges are destined to be added to the consumer price, feeding inflationary pressures. This all comes while central banks are about to end monetary tightening (raising interest rates) to avoid strangulating the economy. Inflation started to ease last year, and markets already factored in the start of monetary easing earlier this year. But Houthi threats to global trade and subsequent price increases put central banks in an awkward position.
Cutting interest rates early might lead to the return of the higher inflation the world has suffered since late 2021. Central banks failed to see what was coming and considered that “transitional” inflation. They cannot risk repeating the mistake by cutting interest rates while the Houthi threat continues.
Like maritime shipping companies, the whole world bet on the US, UK and 10 other countries vowing to protect shipping through the Red Sea waterway. Now, as the Houthi rebels are defying this joint naval endeavour and continue to target Israeli interests in support of Palestinians, that sense of security has floundered.
American efforts to contain the conflict in occupied Palestine, preventing it from widening to include other fronts are not guaranteed to succeed. Meanwhile, the Houthis are likely to continue their attacks and threats to ships crossing the Red Sea. That is why markets, and the global economy as a whole, should brace for greater pressures to come in this New Year. It seems the only hope for stability is to stop the war on Gaza, a goal staunchly opposed by Israel and its allies in the US, the UK and elsewhere.
* A version of this article appears in print in the 11 January, 2024 edition of Al-Ahram Weekly
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