Crisis in the Red Sea: Impact on Global Trade and India's Exports

In the aftermath of Houthi rebel attacks in the Red Sea and Suez Canal since November 2023, global trade faces significant disruptions. Originating as an offshoot of the Israel-Hamas conflict, the Houthi assaults on merchant shipping have prompted retaliatory measures and heightened tensions between major powers. 

As a dangerous off-shoot of the ongoing Israel-Hamas war, the Houthis, a rebel group representing the Shia Zaidis of Northern Yemen, have launched over 20 missile and drone attacks on merchant shipping with links to Israel and the US, in the Red Sea and Suez Canal. 

They have also hijacked an Israeli linked cargo ship, the Galaxy Leader, and taken its crew hostage. These attacks, they claim, are being done to express solidarity with the Palestinian people — to protest the killing, destruction and siege in Gaza.

In retaliation, on 12th and 13^th January 2024, the US and UK militaries launched a number of aerial attacks at selected Houthi targets, including weapon factories, missile launch sites and radar sites.

As a counter-retaliatory measure, the Houthis launched an anti-ship missile against a US Navy cruiser on 14th January and another missile against a US owned ship, the Gibraltar Eagle, the next day, further escalating tensions in the Red Sea and forcing merchant shipping to increasingly avoid this route.   

Impact on Global Trade: Shipping & Oil Strain 

Typically, 30 percent of global container traffic and more than 1 million barrels of crude oil per day move through the Red Sea, which has the Suez Canal at its northern end and the Bab-al-Mandeb Strait at its southern end, leading into the Gulf of Aden. In fact, it is assessed that about 40 percent of Asia-Europe trade passes through this route.

The Houthi attacks have resulted in container ships and fuel tankers belonging to a number of prominent merchant shipping and oil companies, including Maersk and British Petroleum, avoiding the Red Sea, and instead, taking a much longer route to Europe, around Africa and the Cape of Good Hope, resulting in adverse effects on trade, in terms of added costs and fuel as well as delays in shipments.

Reportedly, the cost of shipping a 40 foot container from China to Northern Europe has gone up from $ 1500 to $ 4000 because of these attacks whereas time taken has gone up by one to two weeks.

Further, global reinsurers have begun inserting cancellation provisions into policies to protect against a full-scale Middle East conflict, a move that threatens to further drive-up costs and risks for businesses operating in the region. Cost of crude oil has also gone up,  there is also a resultant decline in world trade, though marginal as of now, and inflationary pressures are increasing.

Red Sea Dependency & Disruptions in India’s Exports

Valued at about $14 billion,  80% of India’s export cargo to Europe are shipped through the Red Sea. Thus,  India’s exports have been impacted adversely by the Houthi attacks on Red Sea shipping, in terms of rising costs for exporters. 95% of ships have re-routed around the Cape of Good Hope and insurance costs have increased substantially.

In some cases, ships heading for Indian ports have been specifically targeted, eg., a projectile was launched on 23^rd December 2023 at a merchant ship, MV Chem Pluto, docking at Mangalore Port.

On the same day, another vessel, the MV Sai Baba reported a drone attack in the Red Sea. Reportedly, the cost of Indian exports have doubled. The cost of shipping a 24 feet container from India to Europe has already gone up from $600 to $1500.

As shipping costs increase, profit margins have literally been wiped out. Further, major shipping lines have temporarily halted their operations. Thus, the Indian Foreign Minister visited Iran on the weekend and raised the Red Sea security concerns with the Iranian authorities, but a resolution of the problem does not appear immediately in sight.

Diversifying India-Europe Trade Routes 

Possibly, the answer may lie in activating alternate secure trade routes over land and sea which enable Indian cargo to bypass conflict areas as well as the trade routes which are more prone to disruption.

One such trade route which has been announced recently, in September 2023, by seven countries and the European Union (US, EU, France, Italy, Germany, India, Saudi Arabia and UAE), and MOU signed on the margins of the G-20 summit meeting in New Delhi, is  the India Middle-East Europe Corridor  (IMEC).

This latest in a series of initiatives by the United States, which is proposed to be funded by it, is aimed at integrating partners in the Middle East and South Asia into a common geo-economic architecture, while providing an alternative to the Belt and Road Initiative led by China.

Two corridors, consisting of rail, ship to rail and road transport networks, are proposed to be established: the East Corridor connecting the Arabian Gulf to India and the North Corridor connecting Europe to the Gulf. The IMEC Corridor will also include an electricity cable, a hydrogen pipeline and a high speed data cable.

This is the first in the three-part series on The Houthi Attacks in the Red Sea by Lt Gen Philip Campose