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![handle is hein.crs/govepbk0001 and id is 1 raw text is: Congressional Research Service
informing the legislitive debate since 1914
May 8, 2024
Red Sea Shipping Disruptions: Estimating Economic Effects
Attacks by the Yemen-based Ansar Allah (Houthi)
movement in the Red Sea and Gulf of Aden since
November 2023 have disrupted a critical maritime passage
for global supply chains, creating bottlenecks at the Suez
Canal and Bab al-Mandab Strait-one of the world's most
significant trade chokepoints-and forcing vessels into
longer and more costly journeys around Africa. These
shipping disruptions compound ongoing challenges to the
global economy created or exacerbated by the COVID-19
pandemic, Russia's war against Ukraine, conflict and
tension in the Middle East, and a drought that has
substantially scaled back shipping through the Panama
Canal, another key artery of global trade flows. Members of
Congress may have an interest in monitoring the situation
to help inform potential U.S. economic policy responses.
The Suez Canal-which connects the Red Sea with the
Mediterranean Sea and links Europe, Africa, and Asia-
handled approximately 12% to 15% of global trade volumes
in 2023. This strategic passage is also significant to trade in
specific products; by some estimates, it has handled 25% to
30% of all container shipping, 12% of seaborne oil, 8% of
seaborne liquified natural gas, and 8% of the grain trade in
recent years. The disruptions to the safe use of this
waterway have highlighted the vulnerability of global
supply chains to ocean-based security threats.
Preliminary information suggests that the global economic
effects of the Houthi attacks on ships have been limited thus
far, although they have rippled across various industries and
countries differently, primarily via trade linkages (e.g.,
delays and shortages). Potential remains for greater near-
term risks and challenges to the economies of Europe, the
Middle East, and the Horn of Africa. As two analysts from
the St. Louis Fed noted in February 2024, [w]hile
geopolitical conflict often takes place in relatively narrow
geographic areas, the global nature of the market for
international shipping services could act as a channel
through which local shocks are amplified and transmitted to
the rest of the global economy.
The attacks have increased shipping costs and affected
humanitarian flows of food, fuel, and medicine into in these
regions. If prolonged, disruptions to Red Sea shipping could
contribute to global inflationary pressures and exert a drag
on the global economy. Ultimately, the overall impact of
the crisis will depend on its duration and the extent to
which its fallout is contained, and on the responses of all
stakeholders, including governments, shipping companies,
and international organizations.
Chaenges of Economic Forecasting
Projections of the economic impact are based on limited
data that includes a mix of statistical indicators from
government agencies, business and consumer surveys,
financial market variables, and real-time ship and port
tracking databases. They are also based on specific
assumptions and simplifications-which may not capture
the complexity and dynamics of the situation. Forecasts are
also subject to considerable uncertainty that can affect their
accuracy and reliability, including about what actions the
Houthis might take and what the shipping industry and
other countries might do to protect ships in the Red Sea.
Figure I. The Red Sea and Middle East Region
Source: Congressional Research Service (CRS).
Measuring the effects of an evolving crisis and isolating
them from those of the other unfolding regional and global
developments, however, is a challenging task. For example,
customs records, from which official trade statistics are
derived, may be affected by shipping disruptions. Issues
such as these could complicate efforts to timely and
accurately assess the trade and economic effects of the
disruptions (e.g., imports/tariff revenue recorded in April
that would have been recorded in February had it not been
for the rerouting of ships).
Estmatng the mpact
The economic backdrop to the current disruptions is
different than the situation three years ago when, in the
midst of the pandemic, a container ship became grounded in
the Suez Canal (see text box). In 2021, there was a surge in
global demand for physical goods that resulted, in part,
from economic stimulus programs and a sharp shift in
spending from services to consumer durables, while
pandemic-induced constraints on production and
transportation continued to restrict supplies.
Some analysts assess that if the current situation does not
escalate into a wider conflict, near term effects of the
shipping disruptions may be limited to a marginal, overall
reduction in global economic growth and a minor uptick in
global inflation. Disruptions, in their view, have been](ViewImageLocal?handle=hein.crs/govepbk0001&div=1&collection=&method=preview&ext=.png&size=3)