Report to Congress on Economic Effects of Red Sea Disruptions

May 9, 2024 8:10 AM

The following is the May 8, 2024, Congressional Research Service In Focus report, Red Sea Shipping Disruptions: Estimating Economic Effects.

From the report

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.

Challenges 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.

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).

Download the document here.

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