Red Sea crisis: Domino effect on Bangladesh and global supply chain

The protracted Red Sea crisis may hurt Bangladesh's exports, stoke inflationary pressures, and delay the recovery of the economy. Bangladesh’s apparel sector is highly dependent on the route, as nearly 70 percent of the country's clothes are exported to European countries

Kamal Uddin Mazumder Jan 24, 2024
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Red Sea crisis (Representational Photo)

Shipping is the lifeblood of the global economy. Some 11 billion tons of goods are transported by ship each year. Without shipping, intercontinental trade, the bulk transport of raw materials, and the import and export of affordable food and manufactured goods would simply not be possible. For an economic region such as the European Union, shipping accounts for 80 per cent of total exports and imports by volume and some 50 per cent by value. Waterways have been considered the main mode of trade for hundreds of years, mainly due to the convenience and low cost of transporting goods. But recently, this safe path has become unstable. In addition to man-made problems in the waterways, the climate change crisis has added to this, which has made imports and exports more volatile.

The Israeli-Palestinian conflict in the Middle East has expanded beyond two nations. Yemen's Houthi rebels, expressing solidarity with Palestine, have been targeting Israel-linked ships in the Red Sea in response to the latter's devastating war in the Gaza Strip. The crisis deepened after the intensification of counter-attacks on the rebel groups by the UK and the US. The mounting tension has huge ramifications for countries such as Bangladesh, which uses the route to send products to Europe, accounting for 45 percent of the country's overseas sales in the last financial year.

The Suez Canal, which connects the Red Sea to the Mediterranean, is the shortest route between Europe and Asia. Around 12 per cent of global trade passes through the Suez Canal, representing 30 percent of all global container traffic, especially from South Asia, and more than $1 trillion worth of goods annually. According to the White House, 8 percent of the global grain trade, 12 percent of seaborne-traded oil, and 8 percent of the world’s liquefied natural gas trade pass through the Red Sea.

The shipping lines are now diverting to a much longer route, around Africa's Cape of Good Hope, following attacks last month on commercial vessels on the Red Sea, one of the world's busiest shipping routes. William Bain, trade expert of the British Chamber of Commerce, said: "About 500,000 containers were going through the Suez Canal in November, and that had dropped 60 percent to 200,000 in December." The Shanghai Containerized Freight Index (SCFI) report says that due to the conflict in the Red Sea, each ship has to spend an extra 10 days to reach its destination. By doing this, the cost of 25,000 dollars per 20-foot container has exceeded 3,000 dollars. In this situation, due to an increase in time on the one hand and a cost increase on the other, the price of oil and gas will increase much more than before.

Global freight rates are rising again. Industry analysts warned that the security threat in the Red Sea could see prices double over the next few weeks. Meanwhile, major shipping lines announced plans to impose additional surcharges ranging from $700 to $1,500 per TEU container from January. For example, French company CMA CGM imposed a "Peak Season Surcharge" (PSS) of $500 per TEU from January 1 to all European ports from all Asian ports, including India, Pakistan, Bangladesh, and Sri Lanka. The decision already greatly impacts the cost of shipping goods, and if it becomes an extended crisis, it could spark a hike in the price consumers pay for imported goods, which is expected to fuel subdued inflation again.

Impact on Bangladesh

Due to the security threat in the Red Sea, most of the world's largest shipping companies—namely Maersk, MSC, Hapag-Lloyd, CMA CGM, ZIM, and ONE—are largely or completely rerouting their vessels around Africa's Cape of Good Hope, which eventually led to a rise in operation costs and time extensions since they would have to travel an additional 3,500 Km. Bangladesh will not remain immune from the crisis as a good portion of its around $130 billion trade with other nations goes through the waterway. Roughly 70 percent of Bangladesh's export-laden containers, which are destined for the EU, US East Coast, and Canada, cross the Red Sea. It also uses the route to import particularly essential commodities such as wheat, pulses, and soybeans from Russia, Ukraine, Romania, and the US.

The protracted Red Sea crisis may hurt Bangladesh's exports, stoke inflationary pressures, and delay the recovery of the economy. Bangladesh’s apparel sector is highly dependent on the route, as nearly 70 percent of the country's clothes are exported to European countries. Due to the container shortage and increased lead time, exporters are losing orders across the world. Bangladesh’s apparel sector also might lose export orders and see a rise in production costs as the high container fare and raw materials’ import costs have already gone up. As ships are rerouting and owners are demanding a $10–$12 additional freight rate, Bangladeshi exporters and importers will also have to pay higher freight charges. This may also compound pressure on the foreign exchange reserves of the country, as the increased cost of frights will have to be borne in foreign currencies. Not only that, but it will be tough to get ships if the crisis lingers, affecting the business.

Usually, it takes 30 to 35 days for ships to reach European destinations through the Red Sea from departing transshipment ports in Sri Lanka, Singapore, and Malaysia with Bangladeshi goods. At least 10 more additional days will now be needed. This will raise freight costs, which domestic garment suppliers will ultimately have to bear. Garment exporters will have to choose expensive air shipments if suppliers fail to deliver products within the agreed-upon time. But, in the case of air shipments, the cost will be too high. For instance, it costs less than 30 US cents to move one kg of goods from Chattanooga to European destinations through sea routes, whereas the carrying cost for the same quantity is $3.50 if air freight service is used.

The crisis will not only hit Bangladesh, but Bangladesh's competing countries will also find themselves in a similar situation. However, one positive news is that Bangladesh does not use the Red Sea to import goods. China is the top supplier for Bangladesh, making up 26.1 percent of the country's $68.45 billion imports in 2022–23, central bank data showed. India came in second with a share of 13.9 percent. The next major suppliers are Malaysia, Indonesia, Brazil, Qatar, the United States, Singapore, Japan, Saudi Arabia, the United Arab Emirates, and South Korea. Ahsan H. Mansur, executive director of the Policy Research Institute of Bangladesh, said exports have been affected more than imports due to the Red Sea conflict, as most of the exported goods from Bangladesh are bound for Europe and the US.

In relief, Bangladesh's flag carrier vessels have also remained unaffected until now. The Houthis say they will target ships linked only to Israel, so the risk of vessels carrying the Bangladeshi flag may be low since Bangladesh is a Muslim-majority nation. Moreover, the shipment time for fertilizer and fuel is likely to remain unaffected as Bangladeshi suppliers use different routes. Bangladesh imports fertilizer mainly through the Cape of Good Hope and the Arabian Sea. So, the shipping time is not going to increase in this situation.

However, as the Red Sea, one of the busiest shipping routes to Europe, has become more dangerous due to Houthi attacks and strikes by the US and its allies against them, the world may see another supply chain crisis. Energy supplies could be substantially disrupted, leading to a spike in energy prices. This would have significant spillovers to other commodity prices and heighten geopolitical and economic uncertainty, which in turn could dampen investment and lead to a further weakening of growth.

(The author is a security and strategic affairs analyst based in Dhaka. Views are personal. He can be reached at kamalmazumderju@gmail.com)

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