The Iran-backed Houthis have been assaulting shipping in the Red Sea since October, driving up global shipping costs and creating ripple-down effects on U.S. markets and consumers. Yet, with the recent IRGC seizure of the Portugal-flagged MSC Aries in the Strait of Hormuz, the Red Sea may not be the only waterway impacted by Iran and its proxies.
The economic impacts of the Red Sea and other disruptions so far are largely imperceptible, but they will compound over time. Shipping companies will be the first to feel these effects, followed by manufacturers, retailers, and finally, the consumer.
The Red Sea is one of the most important arteries in the global shipping system, with one-third of all container traffic flowing through it. In addition, 12 percent of seaborne oil and 8 percent of liquified natural gas (LNG) travel through the Suez Canal. But after four months of attacks, half of the global shipping fleet that regularly transits the Red Sea is rerouting around the Cape of Good Hope. Added fuel costs, long delays, and rising insurance premiums are driving costs on shipping companies to the tune of billions of dollars.
“The Red Sea is one of the main arteries of the global economy, and it is clogged right now,” said the CEO of A.P. Moller-Maersk, the world’s biggest shipping company. “At this time when inflation is a big issue, its putting inflammatory pressure on our costs, on our customers, and ultimately on consumers in Europe and the United States.”
Shipping rates reached their peak in February to 190 percent over pre-crisis norms, higher than they were at their peak during the COVID-19 pandemic in 2021. Although these rates have come down, they are still 100 percent over pre-crisis norms. These increased costs are filtered down and absorbed differently across the global supply chain.
U.S. producers and retailers are not generally dependent on Red Sea shipping routes. However, their European and Asian partners cannot say the same. Nearly 25 percent of European imports and 10 percent of European exports from the Middle East and Asia transit the Red Sea.
The United States, meanwhile, is gifted with Atlantic and Pacific ports, which minimize reliance on the Red Sea route. U.S. producers and retailers can also reroute shipments between its coasts, using cross-country highway and rail systems to rapidly move cargo from the West Coast to the Gulf Coast and East Coast.
That said, the full impact of the Houthi’s assault on shipping will still hit American consumers. One reason is that increased shipping costs disproportionally burden sectors with narrow profit margins, such as clothing, chemicals, and even shipping companies themselves.
Major retailers such as H&M, Target, and Walmart are feeling the effects of Red Sea disruptions. Target, for example, sources garments, plastic, toys, and bath products from suppliers in India and Pakistan, which are shipped via the Red Sea. Most retailers have taken steps to limit these disruptions by ordering their products ahead or shifting production closer to consumers.
Producers and retailers that are constrained by thin profit margins and cannot ship products earlier than usual have limited options to adjust to increased shipping costs and supply chain disruptions. They must pass on the added cost to the consumer, contributing to pre-existing inflationary pressures. Clothing retailer Levi Strauss, for example, had a 4.04 percent profit margin in 2023, while shipping company A.P. Moller-Maersk recorded a ten-year average profit margin of .74 percent. By comparison, S&P 500 companies had an average 11.6 percent profit margin.
Shipping remains flexible, but prolonged disruptions in the Red Sea will necessitate long-term adjustments, new investments in new ports, and orders for more ships. Should shippers have to make longer transits avoiding the Red Sea, they will need more ships to sustain and grow trade by volume. Shipping companies before the Houthi assault were already ordering vessels that will begin arriving in their fleets now through 2026. It is, however, unclear if these investments will mitigate further disruptions or prove unnecessary in an impending global economic slowdown.
In addition to this problem, there is the possibility of reduced or severed Panama Canal transits. Already, a draught has forced the Panama Canal authorities to effectively cut traffic by 36 percent, compounding pressures on existing shipping routes. Although the canal is expected to ease traffic restrictions due to an improvement in water levels, transit operations are still at a reduced capacity.
Significantly, these pressures accelerate nascent efforts to harden and diversify U.S. production and supply chains. This became imperative when COVID-19 exposed an overreliance on China and dangerous supply chain brittleness for U.S. industries. In response, many U.S. industries and Congress are now exploring opportunities to onshore and near-source essential goods made overseas—events in the Red Sea add to the pressure to do so.
The European Union, too, is implementing similar measures to “de-risk” its supply chains. These actions can help mitigate future disruptions like the current attacks in the Red Sea while underscoring the importance of the bloc’s access to reliable shipping on which American trade relies.
At the moment, global shipping companies are having to make long-term investment decisions. Central to this effort is the purchase of additional ships to better position themselves for increased trade volume and potential maritime disruptions in the future. Given the current environment, added shipping capacity is likely a wise investment.
A return to secure and uncontested global shipping any time soon, therefore, appears slim after months of U.S. and U.K. airstrikes. President Biden has even admitted that the strikes are not working. Worse, shooting down cheap Houthi drones with million-dollar missiles has cost the U.S. military $1 billion, putting the U.S. on the wrong side of the cost ledger.
The Red Sea serves as a critical thoroughfare for energy and consumer goods. With no apparent end in sight, U.S. consumers and taxpayers will feel the effects. To mitigate existing and future challenges in the global supply chain, Congress should convene industry leaders, military, and diplomats together to inform legislation that protects U.S. interests in the Red Sea and beyond.
Brent D. Sadler is a senior research fellow in naval warfare and advanced technologies at The Heritage Foundation. Follow him on X: @brentdsadler.
Nicole Robinson is a Senior Research Associate at Heritage’s Center for National Security.
Shutterstock.com.
