Why Egypt Has the Most to Lose From Houthi Strikes on Merchant Ships

Courtesy of Foreign Policy, a look at why Egypt has the most to lose from Houthi strikes on merchant ships:

Approximately 30 percent of global shipping-container traffic goes through the Red Sea—the body of water that is now the site of the United States’ latest military intervention, Operation Prosperity Guardian. The Biden administration is leading a coalition of countries against Yemen’s Houthi militia, which has been attacking ships passing through the Red Sea. Geopolitically, the operation represents spillover from the ongoing war in the Gaza Strip. Economically, it’s meant to restore the shipping lanes that global trade relies on.

What’s been the economic fallout from the Houthi attacks on container ships? Why aren’t Europe and China more involved in the military operation against the Houthis? And how are other regional countries affected?

Those are a few of the questions that came up in my recent conversation with FP economics columnist Adam Tooze on the podcast we co-host, Ones and Tooze. What follows is an excerpt, edited for length and clarity. For the full conversation, look for Ones and Tooze wherever you get your podcasts. 

Cameron Abadi: What sorts of goods are transported through the Red Sea in the first place? Are these primarily manufactured goods from Asia that are heading to Europe, to the Mediterranean Sea? Or oil from the Middle East?

Adam Tooze: Yeah, the crucial thing is that they pass through this passage en route to the Suez Canal. That’s where we’re headed. So you go past the Red Sea straits, and then you go up the channel and up to the Suez Canal and then you go into the Mediterranean. The Suez Canal gives us a very good idea of how much traffic we’re talking about here, and it’s in the order of 50 to 60 vessels a day, so more than 20,000 a year. So, if you allow like 12 hours of daylight, that’s like one every 20 minutes. One very, very big ship every 20 minutes.

So this is a major artery of global commerce and trade. Some 120 million-plus tons of goods are transported through this channel each month. These are largely manufactured goods. That’s where I think it really matters most. That’s the kind of stuff which maybe is more time-limited—it needs to arrive just in time, and it’s often part of complex supply chains. Quite a lot of the inputs and outputs of the ramified system that makes motor vehicles are on this route.

Stuff like oil is important, but it’s more fungible, and there’s oil tankers tootling around all over the world, and you can move them in one direction rather than the other.

But I think the more sensitive, point-to-point kind of transportation is what really matters, and that’s manufactured goods. And it’s above all the trade Asia, in other words, China and Europe that’s at stake here. And it’s a very big flow for both sides, for both the Europeans and the Chinese.

CA: So, given that Chinese and European interests then are most directly involved here, why aren’t they—the Chinese and Europeans—more involved in the policing action against these disruptions posed by the Houthis?

AT: I mean, it’s certainly true, speaking from an U.S. vantage point, that both the Chinese and the Europeans are puny by comparison with the United States in terms of their ability to deploy naval forces to the region. A trade powerhouse like Germany can, if it’s feeling ambitious, send a frigate. The French have a more stable platform for military operations. The Chinese also have a long-term deployment, broadly speaking, in the region.

But I think the most important answer to your question is that this isn’t a policing action, from their point of view. This is politics. I mean, the Houthis are shooting at these ships for political reasons. This is not to be confused with Somali pirates, who no doubt, had their own political reasons.

But I think it’s fair to say the Somali pirates were—that’s a kind of survival economy that’s going on there, around the Horn of Africa. Whereas the Houthis are a full-on political movement who are engaged in a deliberate effort to sabotage world trade so as to assist the Palestinians in their struggle against Israel’s onslaught on Gaza, or to at least focus the world’s attention on its ramifications.

And as soon as you code it as policing, you’re basically falling in with the pro-Israeli position on this, which is that they’re a menace to global society, they’re outlaws and so on and so forth. Whereas both the Europeans and the Chinese see through the politics of this situation, at least to the point where they realize they can’t take that position. And so the Chinese vessels in the region have actually apparently taken to broadcasting as loudly as they possibly can to anyone that will listen, “This is a Chinese ship, fully Chinese crewed. Don’t shoot at us. We are not your enemies.” Notionally, the Houthis are trying to target Israel-connected ships in the region. That’s the famous hijacking that they did, or whatever we’re going to call it, like hostage-taking they did when they flew in the helicopter and filmed the whole thing.

And the Europeans are very divided. And the French, notably, who have probably the most military capacity and have been underpinning Europe’s anti-pirate activity in the region, are very wary of allowing themselves to be suborned in a set of operations that ultimately amounts to an extension of the political conflict from the East Mediterranean and the Gaza Strip to a much, much wider region. And even if they chose to act, they would have precious little material with which to do it.

But I think fundamentally, the real issue here is politics and the construction, how you understand what this problem is. And if you understand it as the regrettable extension of the Israel-Hamas conflict to the global seaways, then lining up on one side, as the British, for instance, have done in joining the Americans in their strikes on the Houthis, is a political choice that you’re making. And from the position of many of the Europeans, notably the most capable, and certainly from China’s point of view, that just doesn’t make any sense.

CA: What exactly is the economic chain reaction, then, that follows from these kinds of attacks? Are insurance companies charging more to cover container ships in the Red Sea? Are ships now taking more circuitous routes instead of going through the Red Sea? Do ships themselves invest more in private security?

AT: Yeah. What happens is that insurance companies will obviously have worries about, you know, their ships being in this kind of neighborhood. They deploy them to other parts of the world. There are two different types of problems here. When you were dealing with Somali pirates, it made sense to have armed guards to barricade the ships, have powerful water hoses to drive the pirates off. There was, if you like, a private sector solution to what was basically a form of high seas crime.

If you’re dealing with the Houthis, who are part of a military operation on the scale of a Hezbollah or a Hamas or even something far more substantial than that—they actually have bits of their own air force and a very substantial rocket artillery at this point—the message from the industry is, don’t even attempt to mount a private resistance. This is a war. This isn’t a case of you trying to ward off an intruder or a break-in or even a kidnapping.

And the risk is that they will simply escalate to levels of violence that you can’t possibly match. And so that’s where I think the limit is. And I think there’s a consensus that the solution is political. Those who are not in the crosshairs of this conflict may still, at reasonable risk, travel through this passage. Those who are at risk would be better advised to simply avoid it.

CA: So then, on a macro level, does this all lead to more general inflation, perhaps in Europe more so than in the United States? Are global energy prices already affected by this kind of conflict?

AT: There is a pressure of that type, and that’s the general story that we’ve been experiencing ever since COVID-19 disrupted global supply chains, right? We’ve become very aware of the way in which the “just in time” global economy depends on a steady flow of ships, and we’ve all come to understand the significance of that. I think one of the reasons why both the Chinese and the Europeans are, so far, not panicking and not allowing themselves to be sucked into this is that, quantitatively speaking, it just doesn’t look like that kind of a problem.

First of all, and quite importantly, global trade routes and shipping and container capacity are not stretched the way they were at the high points of COVID disruption, because we’ve had a year and a half of normalization, the containers are, broadly speaking, where they need to be. And what this is, is a diversion of traffic onto longer routes. Now, de facto, that amounts, for a period of time as you make the adjustment, to a loss of capacity. And then if you just simply have to spend longer at sea, there is an incremental reduction.

But we’re talking about, you know, 10 percent, 15 percent reductions in overall capacity around the world. And given the slack in the container shipping market right now—prices are way, way, way off their peaks—there is no immediate reason for panic on that score.

On the energy side, likewise, I think there’s a kind of overall calm. So, roughly 9.2 million barrels of oil per day go through the Suez Canal at this point. That’s about 9 percent of global demand. If that is held up fractionally and needs to take a longer route, you’re talking about a percentage of a percentage.

So you’re not talking about a huge shock to the global energy system. And the effect on global energy prices has certainly seen them tick up as the Houthi attacks went in and then the Americans escalated, but we’re still at lower levels than we were in the immediate aftermath of the Oct. 7 violence and Hamas’s attack on Israel and the escalation from there. So this is not good news for global energy markets, but it’s not a disaster.

And as we’ve also learned with the inflation story, inflation is a process, and a shock like this is a step change. So a step change like this can exacerbate a process, but if inflation is generally speaking coming down, the effect of this might be to slow the pace at which it comes down.

CA: Beyond the major powers, how are other regional countries affected by this crisis right now? I’m thinking of Egypt, which I imagine must be losing out on money from shipping through the Suez Canal.

AT: Yeah. This is, I think, a really crucial issue, and one of the kind of underrated elements of this story is that we tend to go to the global level when we should probably be thinking regionally. And for Egypt, this is really bad news. Egypt earns between $9 and $10 billion a year in fees from these 50 to 60 major ships transitioning the Suez Canal every single day. And so far this year, traffic is down 30 percent.

That $9 billion to $10 billion is about 10 percent of the Egyptian public budget. And the Egyptian public budget is in terrible shape. They’re staggering from International Monetary Fund program to IMF program. Their currency has depreciated hard. They have a nasty rate of inflation over 30 percent. The government is desperate to distribute subsidies. And so a 30 percent fall in traffic, that’s $3 billion. That’s the kind of money that Egypt’s government is desperately talking to the IMF about.

Egypt is a huge piece of the regional puzzle. It’s generally accepted that it’s too big to fail. It’s 107 million, 108 million, 109 million people and counting. This is where I think the rubber hits the road. This is the real problem. Djibouti, by contrast, has about 1 million people. So it’s a tiny piece. And no doubt they will benefit in Djibouti. You know, notably, for instance, the Chinese have their anti-piracy operation base there. It’s the biggest U.S. base in the region. It’s the only U.S. base on the continent of Africa, with 5,000 American troops stationed there. But Egypt is in real trouble. And this really hurts.

But again, I think we have to be conscious of the politics of emergency here, because if we’re saying that Egypt’s biggest problem right now from this crisis is Houthi aggression against particular merchant vessels, we’re really—the tail is wagging the dog. Egypt’s problem is the crisis in the Gaza Strip, right? It’s just terrible for the Egyptian economy, and it threatens Egypt with the prospect of a huge refugee problem, which is politically toxic from the point of view of the Cairo regime. That’s the real uncertainty.

So it would be nice if the Suez Canal was still functioning normally. But what Egypt really needs is a stabilization of the broader crisis.

This entry was posted on Monday, February 12th, 2024 at 12:54 am and is filed under Egypt.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

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