HOUTHI attacks on civilian vessels, strategies to reroute ships, and the need for a 40-nation strong military alliance to guard 15% of the world’s maritime traffic sounds like the kind of emergency that ought to bring trade to its knees. Yet, the Suez Canal has been here before. What’s more, the stretch of water joining Europe to the Indian Ocean will face such crises again and again, forcing shippers to be ready at any moment.
From its commencement in November 1869, the artificial waterway through Egypt has been at the center of drama. French mail ship Péluse had the ignominious honor of being the first to block the Suez Canal on the opening night of operations due to pilot error. Unlike its younger, and shorter, counterpart in Panama, this maritime highway has suffered almost exclusively from man-made troubles.
The first Suez Crisis kicked off in 1956 when Cairo decided to nationalize the canal and kick out foreign investors. Israel invaded, with the backing of France and Britain, and the waterway was shut for around six months. A decade later, the Six-Day War put it out of operation for eight years until a pause in hostilities between Israel and Egypt.
During that time, Asia-Europe trade returned to its 19th century pattern of taking the long path around southern Africa, or overland through India, Central Asia, and the Middle East. Britain’s control of both routes was the primary reason it opposed construction of the Suez Canal in the first place, although the superpower finally relented when it became clear the project was going ahead anyway.
While the canal proper is 193 kilometers, the 2,500-kilometer passage from the northern entrance at Port Said to the southeastern Bab-el-Mandeb Strait at the Gulf of Aden, should be considered a single entity from a logistical and strategic perspective. That’s because the narrow Gulf of Suez opens out into the Red Sea before a 20-kilometer-wide pinch point at The Gate of Tears, as the Bab-el-Mandeb is also known. Once a vessel is at “the gate,” or in the Red Sea, there’s no escape, making it vulnerable to attack from anyone with a speedboat and machine guns, or missiles and drones.
That’s what’s happening now, with Houthis operating along the Red Sea’s eastern coast. Two decades ago, Somali pirates to the southeast terrorized mariners and held crews hostage to extract cash.
Maritime operators are now acting to protect crews and limit risks. BP Plc, A.P. Moller-Maersk A/S, Hapag-Lloyd AG, and Euronav NV have paused sailing through the Red Sea or rerouted past Cape Horn on Africa’s southern tip. Evergreen Line canceled its service to Israel because of the war. Although the Suez Canal is not shut, and the main hostilities are 2,000 kilometers away, the cessation of traffic puts the current troubles on par with what happened in the previous two crises. And just as back then, we don’t know how long the interruptions will last.
The blockage of the waterway when container carrier Ever Given got stuck in 2021 caused acute pain, while the current drought that’s choked shipping in Panama is more like a chronic annoyance. This Red Sea crisis is somewhere in between, and such uncertainty is precisely what shipping companies are adapting to.
Thankfully, they’re far better equipped to cope than they were five decades ago.
For a start, the balance of global trade has shifted toward Asia, with China, India, and Southeast Asia all being important consumption economies in addition to their long-standing role in production. While the ratio of global goods loaded in Asia climbed from 31.9% in 1969 to 38.5% in 2019, the proportion of cargo dropped off in the region expanded from 7.9% to 54.7% over the same period, according to the United Nations Conference on Trade and Development. In other words, intra-regional trade is bigger than ever, reducing the relative importance of long-distance journeys.
Moving a single container from Shanghai to Rotterdam may take longer as a result of the detour away from Suez. But the development of larger ships, along with ports that can efficiently load and unload vessels, expands the capacity to get more cargo across the world quicker, on aggregate, than was possible 50 years ago. More importantly, technology including satellite communications, GPS systems, and cloud computing allows clients and freight operators to plan, track, and reroute in real time.
These advances, coupled with a growing understanding that the entire Red Sea region is an unstable maritime route, will force shippers to plan accordingly. The Suez should still be used, when it’s safe, as the time and cost savings are of great benefit. But knowing there’s a 19th century backup plan is enough assurance that the global economy won’t crash at the next sign of mayhem.
BLOOMBERG OPINION
