International Relation

Red Sea attacks, Panama Canal drought: How trouble at two shipping choke points could impact global trade

05 Jan 2024 4 mins Download PDF

Background: The Red Sea attacks have been carried out by Yemen-based Houthi rebels, who have been in a civil war with the Yemeni government for about a decade. They say the attacks are to protest Israel’s military offensive in Gaza.

Shipping via the Panama Canal has dropped by over 50% due to drought conditions at the 51-mile stretch. Due to the shortage of water, ships moving from Asia to the US are being forced to use the Suez Canal, which takes six more days compared to the Panama Canal. Moreover, Panama is facing its driest rainy season in decades, raising fears of prolonged canal bottlenecks.

Recent Attacks and Tensions:

Drone attack on Chemical tanker MV Chem Pluto near Gujarat raises concerns for Indian oil importers and exporters.
Red Sea attacks by Yemen-based Houthi rebels, protesting Israel’s actions, impact global trade routes.
Choke points Suez Canal and Panama Canal pose threats to over one-third of global trade.

Global Trade Concerns:

Maritime transport disruption worries the world economy as over 80% of global goods trade relies on sea routes.
Blockages in busy shipping routes force longer alternate routes, increasing freight rates.

Impact on India:

Red Sea route disruption may raise Indian agricultural product prices by 10-20%, affecting exporters.
Trade routes via Cape of Good Hope due to Red Sea issues coincide with higher interest rates in the West, raising demand concerns.

Panama Canal Challenges:

Shipping via Panama Canal drops over 50% due to drought conditions, leading to longer routes through the Suez Canal.
Dry rainy season raises fears of prolonged canal bottlenecks, impacting LNG vessels with costly auctions for expedited transit.

Oil Flows to India:

Global shipping majors like Maersk avoid Red Sea transit, leading to over 50% decline in global oil and petroleum flows.
Indian imports unaffected; Russian oil passes through, perceived as Iran’s ally despite Red Sea disruptions.

Impact on Freight Rates:

Red Sea attacks prompt global shipping firms to impose war risk surcharges, potentially causing a 25-30% surge in freight rates.
EU slowdown affects India's labor-intensive sectors, impacting textiles, gems, and jewelry exports.

Solutions:

A. Immediate Measures:

Red Sea:

International Maritime Security Coalition: Strengthen the existing US-led coalition to deter Houthi attacks and ensure safe passage of vessels.
Diplomatic efforts: Engage with Yemeni stakeholders and regional powers to de-escalate the conflict and find a peaceful resolution.
Alternative Routes: Explore and incentivize the use of safer ports and alternative routes outside the Bab-el-Mandeb for non-essential cargo.

Panama Canal:

Water conservation measures: Implement stricter water management practices within the canal and surrounding areas to optimize water usage.
Infrastructure development: Consider expanding existing or building new canal segments to reduce reliance on drought-prone Gatun Lake.
Diversification of shipping routes: Promote investment in alternative routes like transcontinental land corridors and Arctic shipping lanes to diversify dependence.

B. Long-Term Strategies:

Investment in port infrastructure: Upgrade port facilities across the globe to improve efficiency and accommodate larger vessels.

Technological advancements: Promote adoption of autonomous shipping technologies and fuel-efficient vessel designs to reduce reliance on traditional infrastructure.

Global trade diversification: Encourage trade agreements and partnerships among diverse regions to reduce dependence on specific choke points.

Strengthening multilateral cooperation: Foster international collaboration to ensure the security and stability of key maritime trade routes.

Conclusion:

The challenges at the Red Sea and Panama Canal necessitate swift and decisive action. A multi-faceted approach focusing on immediate solutions, long-term infrastructure development, technological innovation, and international cooperation is critical to mitigate the risks of these disruptions and build a more resilient global trade system.

Red sea:

The Red Sea is a seawater inlet of the Indian Ocean, lying between Africa and Asia.
Its connection to the ocean is in the south, through the Bab el Mandeb strait and the Gulf of Aden. To its north lie the Sinai Peninsula, the Gulf of Aqaba, and the Gulf of Suez (leading to the Suez Canal).
The sea separates the coasts of Egypt, Sudan, and Eritrea to the west from those of Saudi Arabia and Yemen to the east.
The Red Sea is one of the saltiest bodies of water in the world, owing to high evaporation and low precipitation; no significant rivers or streams drain into the sea.

Suez canal:

The Suez Canal is an artificial sea-level waterway running north to south across the Isthmus of Suez in Egypt, to connect the Mediterranean Sea and the Red Sea.
The canal separates the African continent from Asia.
It provides the shortest maritime route between Europe and the lands lying around the Indian and western Pacific oceans.
It is one of the world’s most heavily used shipping lanes, carrying over 12% of world trade by volume.

Panama canal

It is a constructed waterway that connects the Atlantic and Pacific oceans across the Isthmus of Panama.
It is one of the two most strategic artificial waterways in the world, the other being the Suez Canal.
It is approximately 80 kilometers long.
The canal was built by the United States between 1904 and 1914, and it was officially opened on August 15, 1914.
It is owned and administered by the Republic of Panama since the oversight of the Canal was transferred from the United States to Panama in 1999.
The Panama Canal consists of a series of locks that raise and lower the water level to facilitate the passage of ships through the continental divide.