Red Sea Attacks Risk Embroiling Global Trade, Geopolitics

Military confrontations in the Red Sea threaten to escalate regional geopolitical tension and global growth prospects.

* This special report is co-authored by Dimitri Zabelin and Alexander Brotman, a geopolitical risk and intelligence analyst based in Washington DC, and a frequent contributor to several geopolitics publications.

Geopolitical turmoil in the Red Sea is hurting international trade with financial and economic ripple effects. The World Container Index, which is assessed by Drewry, reports actual spot container freight rates for major East West trade routes.

All indices are reported in USD per Forty Foot Container. Between November 30 2023 and Jan 11 2024, the price went from $1,381 to $3,073, a 122.52% increase. But, perspective is important. On September 30th, 2021, the rate was $10,377.

The Houthis, an Iran-backed rebel group that controls large swathes of Yemen, have in recent months demonstrated to the world the geopolitical importance of the Red Sea. 40% of Asia – Europe trade passes through the Red Sea and the critical chokepoint of the Bab al-Mandab Strait leading to the Gulf of Aden.

The US recently designated the group as “global terrorists” , with the new legal identification requiring US financial institutions to freeze Houthi funds. The move came in response to their increased attacks on commercial ships in the region.

Since Houthi attacks increased by over 500% between November and December of last year, shipping firms have all diverted their vessels, traveling around the Cape of Good Hope which adds ten days to the journey.

These shifts have also caused Elon Musk’s Tesla plant in Germany to be unable to secure necessary parts, and the volume of containers transiting the Red Sea is currently 70% below the usual volume.

In addition, oil, diesel fuel, palm oil, and grains are being put in jeopardy and forcing countries to re-route their products. According to a report by Reuters, “Rerouting a ship around Africa adds roughly 10 days and $1 million in fuel costs for each one-way voyage between Asia and Europe”.

The macroeconomic effects could result in an uptick in inflation when central banks - particularly in the US - have finally stopped hiking rates and are looking to pivot. This also comes during a time of precarious growth prospects.

The World Bank recently published its Global Economic Prospects report, forecasting that:

“We will see the weakest global growth performance of any half-decade since the 1990s, with people in one out of every four developing economies poorer than they were before the pandemic. Global growth is expected to slow for a third year in a row—to 2.4 percent—before ticking up to 2.7 percent in 2025. Those rates, however, would still be far below the 3.1 percent average of the 2010”.

Throughout history, access to the sea and other critical waterways has been crucial for the development of both state and non-state actors. The Houthis have recognized that their greatest leverage as a by-product of the Israel-Hamas war is to threaten maritime trade and the supposed security that comes with transiting international waterways.

In response, the US and the UK have now launched airstrikes targeting Houthi infrastructure in Yemen. A cycle of tit-for-tat strikes looms unless Washington can establish escalation dominance. In the classic dilemma of asymmetric war, the Houthis win simply by not losing and continuing to threaten US interests and hegemony in the Middle East.

The Red Sea is just one theatre of the increasing multipolar competition, with Iran and its proxies, as well as China, threatening the US-led security order supported by the Gulf states.

While Houthi attacks presently dominate the headlines, there are other conflict risks along the Red Sea. Ethiopia recently struck a deal with the autonomous region of Somaliland to gain access to the Red Sea, much to the ire of Somalia which has threatened a military response.

A future Ethiopian port in Somaliland would also sit close to Djibouti, another state that highlights the Red Sea’s geostrategic importance. Djibouti hosts China’s first overseas military base, in addition to thousands of troops from the US, UK, and other NATO member states.

Like the South China Sea, the Red Sea is where the future of naval power and alliances in service of contrasting perceptions of the international order will be tested. China and the US both have an interest in ensuring the Red Sea remains open to navigation, and the Houthis have even hinted that Chinese and Russian vessels are safe from attack.

However, the desire to gain leverage from a crisis can be a powerful tool in geopolitics. In a signal to the Houthis, Iranian foreign minister Hossein Amirabdollahian told attendees at the World Economic Forum that “all the fronts will remain active” until Israel ceases its operations in Gaza.

Given 2024 is an election year in the US, UK, and many other countries, the security of the Red Sea may be a gamble worth taking for the Houthis and Iran to test long-standing power dynamics in the Middle East.