In a global economy, prices of goods are directly affected by the price of oceangoing shipping. If shipping is safe and cheap, then the prices of goods will also be cheaper than they would be if shipping was dangerous and expensive.
For a long time now, shipping has been relatively safe by historical standards. The U.S. Navy has ruled the waves for decades and has kept the sea lanes free and clear.
Recent activity in the Red Sea threatens to disrupt that status quo.
After taking a hit from a missile to one of its container ships this week, Maersk has decided to avoid the Red Sea and the Suez Canal altogether and go the longer way around the Cape of Good Hope. A few other shipping companies have followed suit.
How long will the Red Sea be too dangerous for commercial traffic? How high will the prices of goods rise? How long will they stay high before coming back down? Those are good questions, and I don't have any answers. But here are a few things to consider:
1.) Egypt collects fees for use of the Suez Canal. Decreased traffic means a decrease in foreign currency revenue. I doubt the Egyptians will be very happy about this, and I'm sure they're currently trying to decide how to deal with the Houthis in a way that will restore Canal traffic to its usual level. They might resort to military action, but I think a diplomatic solution is far more likely. They may have already made their decision; who knows.
2.) The Chinese have a significant interest in the Canal. About 60% of their exports to Europe pass through it. Until their Belt & Road Initiative is up and running to a degree sufficient enough to allow them to bypass the Red Sea without suffering any inconvenience, they need the Canal. Like the Egyptians, the Chinese might pursue either a diplomatic or a military solution, but I think they're more likely than the Egyptians to pursue a military one. They have the muscle, and due to their status as the world's factory, they would almost certainly have the world's support if they went in and flattened the Houthis. Also, some Chinese companies own stakes in some Egyptian ports, so there's some added impetus for action. On the other side of the argument, the Chinese have a long history of making threats but not following through, so the prudent presumption is that they'll back down from conflict as usual.
3.) After decades of off-shoring its manufacturing base, the U.S. is now dependent on China for manufactured goods. This dependency was predicated on the assumption that the sea lanes would remain free and clear. An increase in piracy and privateering changes that equation. I doubt anything short of the political dissolution of the U.S. will be enough to repatriate the manufacturing, but I can't rule it out. A quick-and-dirty solution to the Red Sea crisis would be to issue Letters of Marque and Reprisal and let bounty hunters take out the Houthis. That would be a radical step, and so unlikely that I'm embarrassed to even bring it up, but I think it might be the most politically palatable across the board. Official action by the Navy and/or Marines is possible, too, but doubtful due to the military's current state of decline and a general demoralization and enervation among the citizenry. We simply don't have the guts and vitality that Americans had in the days of President Jefferson and Stephen Decatur.
4.) European nations need Chinese goods, but they don't have the military muscle to solve this problem, so they must go begging and horse trading. Perhaps the EU will make offers to Turkey or Iran in exchange for their assistance. I can easily see Erdogan seizing this opportunity to secure boons for his country in exchange for taking action against the Houthis. He has so far played East and West against each other quite expertly during the Ukraine conflict, so he's definitely clever enough.
So those are my thoughts at the moment. The biggest loser here is Europe. They're the ones most directly affected by the disruption in Red Sea traffic. China doesn't need the Canal to ship stuff to the Americas or Australia, so supplies to those continents should be uninterrupted.
Europe is already facing a cold, dark, expensive winter, and this Red Sea stuff is just piling on. Add in the various nations' preexisting domestic issues and conflicts between natives and foreigners, and the whole place seems ready to boil over. Might we see a for-real revolution or shooting war in Western Europe? I wouldn't put money on it, but I also won't rule it out.
2024 threatens to be exciting. Prepare accordingly.
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