How global trade can survive Houthi attacks

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Once upon a time, bottlenecks in global trade were limited in number and well known. In 1904, British Royal Navy Admiral Sir John Fisher declared: “Five keys lock the world! Singapore, Cape Town, Alexandria, Gibraltar, and Dover. These five keys belong to England.”

You can see his point, even though it didn't last. In 1956, Britain lost control of the Suez Canal, of which Alexandria had been the main port, marking the end of the British empire.

In today's more flexible trading system, it is surprising that global merchandise trade can find a way around it even if one of its doors is locked. Today, globalization’s real bottlenecks are more diverse in function and location, from the seafloor to orbit, and their resilience is more uncertain.

It has been three months since Houthi militants began bombarding cargo ships in the Red Sea in earnest. It is too early to say that attacks have entered a new normal, but there is certainly no obvious end. However, despite the significant disruption to the shipping industry, it has not been enough to hamper global economic growth or prevent global deflation.

For example, there's a good story that tea, coffee and cocoa are currently having trouble getting into Europe. But this matters more to the producer at the beginning of the journey than the consumer at the end of the journey. Together, these three goods account for a paltry 0.26% of the UK consumer price basket, with annual UK food and drink inflation falling to 7% in January, the lowest level since April 2022.

Freight rates have begun to fall from recent peaks, which were well below the levels reached during the COVID-19 pandemic. Container ships have been rerouted around the Cape of Good Hope, increasing costs and lengthening sailing times but not significantly reducing overall cargo volumes.

Supply chain stress is at historically moderate levels, according to the New York Fed's measure. Trade indicators published by the Kiel Institute think tank showed that freight rates for goods shipped to Europe and volumes arriving at North Sea ports stabilized in February. Nature, or at least the global commodities industry, is recovering.

There is also no sense of a major shift in long-term patterns of trade or production. One of the big stories in globalization right now is China’s competitive advantage in exporting electric cars, the first wave of which is breaking out on the shores of the EU economy. The BYD Explorer 1, a cargo ship carrying the first electric cars from the Chinese manufacturer of the same name, lost 10 days because it had to detour around the Cape of Good Hope, but still arrived safely in Bremerhaven two weeks ago with 5,000 vehicles on board car.

Of course, if this continues, there will be some restructuring of the supply chain. Some production, especially large or low-tech products, may be moved from Asia to Turkey or Central and Eastern Europe to supply the EU market. But many of the fundamental advantages in cost and productivity will persist. Even if the Suez Canal is closed indefinitely, Europe's auto manufacturing industry will see no substantial relief from Chinese competition.

A multinational company's survival depends on its ability to assess risk. In 2021, they conducted a trial run of the Suez Canal when the Ever Give container ship got stuck there for a week. Not surprisingly, the shipping industry and international traders have learned to absorb the shock without noticeable effects on world trade and inflation.

However, while the Houthi attack may be close to being known, there are also many known unknowns—commercial bottlenecks involving technology that would have puzzled Admiral Fisher. Undersea data cables, power interconnectors, gas and electricity pipelines, air transport corridors and hub airports, GPS space satellites: damage to any of these could seriously impede the communications on which globalization depends.

The potential for damage here is unclear. We are in an area of ​​uncertainty rather than risk. Still, some of these systems sustained multiple damage without catastrophic consequences. Undersea cables are often damaged by accident (or, in one case, pulled up by Vietnamese fishermen looking for scrap metal), but data is automatically switched to other cables. GPS has competitors, or at least complements, such as the EU's Galileo. Air cargo has survived pilot and air traffic control strikes and an Icelandic volcanic ash cloud that closed North Atlantic airspace in 2010.

Despite the absence of systemic challenges such as climate change and major global conflicts, the global economy has shown surprising resilience in the face of shocks. If the Houthis hoped to blackmail globalization with a Red Sea attack, they failed. There are few indispensable keys to global trade corridors, and control of the Suez Canal does not appear to be one of them.

alan.beattie@ft.com