World trade under fire

The attacks on ships in the Red Sea are causing freight costs to rise and disrupting the supply chains of some companies.

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Bernd Weidensteiner, Dr. Christoph Balz

Commerzbank Economic Research

January 19 2024

The attacks by Houthi rebels on ships in the Red Sea are causing freight costs to rise and affecting the supply chains of some companies. However, there is little threat of a renewed surge in inflation, as transportation costs only make up a very small proportion of product costs. Unlike three years ago, there is no combination of a government-fueled surge in demand and insufficient production capacity. However, the current problems are likely to serve as an argument for making Europe less dependent on supplies from Asia, which would cause prices to rise in the long term.

Houthis attack ships ...

The Houthi attacks on cargo ships in the Red Sea have some fearing new problems for supply chains and a new surge in inflation. This is because the shelling of ships by the Yemeni rebels has already caused freight costs to rise significantly and the first companies are having to reduce their production due to a lack of parts.

After all, the Red Sea, which provides access to the Suez Canal from Asia, is one of the world's most important shipping routes and is affected by these attacks. According to IMF Port Watch, around 11% of global maritime trade flows through the Suez Canal, and the proportion is even higher for European-Asian trade.

... pushes up freight costs, ...

Due to the threat to their ships, shipping companies are now avoiding the route through the Red Sea. According to IMF Port Watch, at the beginning of 2024, the volume of transport in transit at the entrance to the Red Sea (the Bab el-Mandeb Strait) – and therefore in the area of the Houthi attacks – had fallen by roughly half compared to the previous year