How Houthi attacks on ships in Red Sea are disrupting global trade

Amna Nawaz:

One of the world's top trading routes, the Suez Canal, is essentially closed for business to many shipping companies. That's because Houthi militia in Yemen have been attacking ships in response to Israel's war in Gaza.

John Yang takes a look at the implications for international commerce.

John Yang:

Amna, normally, about 12 percent of global trade passes through the Red Sea and the Suez Canal. But now the world's biggest shipping companies are detouring thousands of miles and going around the Cape of Good Hope at Africa's southern tip. That's adding fuel cost and time.

It's also a major route for oil and gas shipments, so prices edged up this week after BP and some tanker groups said they were suspending use of that route.

Ryan Petersen is the founder and CEO of Flexport, a supply chain management company.

So, Ryan, from your point of view, what's the biggest effect of this, of essentially shutting down this shipping route?

Ryan Petersen, Founder and CEO, Flexport: Thanks for having me on.

It is a much longer way around, the Cape of Good Hope. It adds about 20 percent to the journey for a container. And 30 percent of all container traffic flows through the Suez, until this week. So that's a huge diversion, a huge extra time spent.

Now, it's not so much that it's the time alone that matters, but what that represents is a 20 percent decrease in supply of ships, right? Because to serve the same service frequency, you need more ships. So that's a 20 percent decrease in supply of shipping capacity.

And, well, the laws of supply and demand tell you that means the price is going to go way up for shipping ocean freight, which is a huge percentage of everything that you buy. This is especially for the European markets trading with Asia, but it's going to have an impact on the U.S. East Coast too. A lot of trade coming from Asia to the East Coast goes through the Suez, out Gibraltar and over to the East Coast across the Atlantic.

John Yang:

Now, supply chains have been going through a lot in the past few years, with the pandemic and recovering from that.

How big a deal is this to the supply chain? And how resilient are they, do you think?

Ryan Petersen:

It's a pretty big deal.

The reality is, we feel like we have really resilient systems. It's an almost miraculous infrastructure that supports the global economy. But then one little thing like this right at the choke point, and that's all it took, was a small group of rebels shooting.

Well, they do have some pretty impressive missiles and drones and things, but it doesn't take a huge, well-funded war to disrupt this. And, yes, we have been through a lot in the supply chain industry. It's one of those like, oh, here we go again-type moments.

John Yang:

What is the potential impact on the global economy?

Ryan Petersen:

I think the thing to watch here is that, for the last six, 12 months, you have really been in a deflationary environment, meaning prices have been coming down from the peaks that we saw during pandemic and all the supply chain shortages that were happening.

People have assumed that inflation was on the way out, that we beat it. And ocean freight is — if you listen to retailer earnings calls, they have often been saying, hey, the ocean freight's cheap. There's excess capacity. We expect it to be cheap. It won't be the impact that we had on our profits. We're going to be able to keep prices low to consumers.

All of a sudden, we have to completely rethink that and say, we have already seen in January — the prices for ocean freight for this coming month, for January, have already started to come on. It looks like Asia-to-Europe trade lanes are up about 3X versus just a couple of months ago.

John Yang:

So this is already — the impact is already being felt? It's not — I mean, this has not — only been going on for a few weeks now.

Any sense of how long it is before it really bites, before it really becomes a big problem?

Ryan Petersen:

Well, I think it's just sort of wait and see what happens. It's not easy to see how the U.S. Navy instantly solves this problem.

It's a — Saudi was in an active war with Yemen for it seems like a better part of a decade and wasn't able to stop this. It is an extension of the Israeli conflict in Gaza, as explicitly stated by the Houthi rebels. And, really, it's almost a government in Yemen. It is explicitly stated as connected to that.

So it's not easy to see that there's this simple overnight solution. Sending a carrier group there doesn't solve it immediately with force.

John Yang:

You talk about sending a carrier group, but the United States is actually leading a multinational force that's going to patrol the Red Sea, trying to protect merchant ships.

Is that going to give the shipping companies enough confidence to try this route again?

Ryan Petersen:

You know, I think it's very difficult to say.

The decision-making for that — from the shipping companies is first and foremost going to be about crew member safety. I mean, it is dangerous. And if there was a group firing missiles that my office building or your office building, I'm sure you would make the same decision is, let's stay far away from there.

There's insurance premium. So when it comes to making a business decision, if — in a war zone, if you sail into a war zone with a ship, your insurance is probably void in most policies, or it's a very expensive premium.

And, frankly, this is not an easy solution, whether it's U.S. Navy or a large-scale coalition. Saudi Arabia has been at war. There's a cease-fire, but they had almost a decade of war with Yemen and weren't able to stop it. Yemen — the Houthis have explicitly said this is tied to the conflict in Gaza between Israel and the Palestinians.

And so it's not that there's an easy overnight solution. And even if there was, it's un — doesn't seem like it's just through force and from the carrier groups. So not easy to see how this resolves very quickly. But at the same time, the Suez Canal is incredibly valuable for the world economy. So it's also hard to imagine that the world coming together wouldn't take enough action to fix it.

John Yang:

Ryan Petersen, CEO and founder of Flexport, thanks very much.

Ryan Petersen:

My pleasure.