Governance

UNCTAD raises alarm over disruptions in shipping routes for global trade

Issues in Suez Canal, Panama Canal and Black Sea pose unprecedented challenges; may increase shipping costs, impact developing nations

By Zumbish
Published: Friday 23 February 2024
Situated between Africa and West Asia, the Red Sea serves as a crucial link connecting the Indian Ocean to the Suez Canal and the Mediterranean Sea. Photo: iStock

United Nations’s trade and development body has raised an alarm over escalating disruptions in shipping routes for global trade in a new report. 

The disruption of Red Sea shipping due to attacks has significantly impeded traffic through the Suez Canal. This, coupled with ongoing geopolitical and climate-related issues, is causing a shift in global trade routes and adversely impacting the global trade landscape, said UN Conference on Trade and Development’s (UNCTAD) report. 

Navigating Troubled Waters. The Impact to Global Trade of Disruption of Shipping Routes in the Red Sea, The Black Sea and the Panama Canal was released February 22, 2024. Accounting for 80 per cent of the worldwide transportation of goods, maritime transport serves as the cornerstone of international trade.

The Red Sea has long been a crucial waterway for international trade. It is wedged between Africa and West Asia and links the Indian Ocean to the Suez Canal and Mediterranean Sea. 

Geopolitical tensions around the world have also escalated as Houthi militants continue to target commercial vessels in the Red Sea, resulting in more than 33 reported attacks since November 19, 2023, international nonprofit World Economic Forum said in a report. 

These attacks have disrupted the Red Sea's maritime trade routes through the Suez Canal, which in turn, has affected the global trade landscape. It has also exacerbated the existing disturbances in the Black Sea caused by the conflict in Ukraine. As a result, there have been changes in the routes for oil and grain trade, disrupting established patterns, UNCTAD said in a statement.

Furthermore, the Panama Canal, a vital passage connecting the Atlantic and Pacific Oceans, faces an independent challenge of decreasing water levels. The decline in canal water levels has sparked apprehensions regarding the enduring resilience of global supply chains, highlighting the vulnerability of the world's trade infrastructure, the report said.

Drop in transits

Transits crossing Suez Canal reduced by 42 per cent against its peak, as per UNCTAD estimates, and weekly container ship transits have dropped by 67 per cent. The reason behind this fall is major players in the shipping industry temporarily suspended Suez transits, it added. Meanwhile, transits crossing Panama Canal dropped by 49 per cent against its peak, as assessed.

The increasing uncertainty and the decision to circumvent the Suez Canal by rerouting around the Cape of Good Hope are imposing both economic and environmental burdens. This also adds extra strain on developing economies, UNCTAD added.

Further, there has been a substantial rise in average container spot freight rates since November 2023, the report found. The last week of December, 2023 registered the highest ever weekly surge showing a growth by 500 to and from the United States. This trend is said to have continued. 

“Average container shipping spot rates from Shanghai more than doubled since early December (+122 per cent), growing more than threefold to Europe (+256 per cent), and even above average (+162 per cent) to the United States West coast, despite not going through Suez,” further stated UNCTAD. 

Vessels are steering clear of the Suez and Panama Canals, opting for alternative routes. This shift results in extended travel distances for cargo, leading to increased trade expenses and higher insurance premiums. Moreover, the need for greater speed to compensate for detours is contributing to a rise in greenhouse gas emissions, the global trade body said.

The report particularly emphasized on the importance of Panama Canal in concern with foreign trade of countries on the west coast of South America. “About 22 per cent of the entire Chilean and Peruvian foreign trade volumes are dependent on the canal. Ecuador is most dependent on it with 26 per cent per of its foreign trade volumes passing through the canal,” it said.

Many East African countries’ foreign trade is highly dependent on the Suez Canal, the report said. “Approximately 31 per cent of foreign trade by volume for East Africa’s Djibouti is channeled through the Suez Canal. For the East African countries of Kenya and Tanzania, the share is 15 per cent and 10 per cent respectively. Among all these countries, Sudan’s foreign trade mostly depends on Suez, as 34 per cent of its trade volume passes through it,” it highlighted.

Underscoring the potential far-reaching economic implications of prolonged disruptions in container shipping, UNCTAD warned that global supply chains could be threatened and potentially delay deliveries, which may translate into higher costs and inflation, it said. It also raised alarms about the full impact of higher freight rates to be experienced by consumers within a year’s time.

Moreover, it signalled a hike in energy prices with gas transits being discontinued. It emphasised that this has particularly impacted energy supplies and prices in Europe.

“The crisis could also potentially impact global food prices, with longer distances and higher freight rates potentially cascading into increased costs. Disruptions in grain shipments from Europe, Russia, and Ukraine pose risks to global food security, affecting consumers and lowering prices paid to producers,” UNCTAD said.

For over ten years, the shipping industry adopted decreased speeds to reduce fuel costs and address greenhouse gas emissions, it said. However, it pointed out that disruptions in key trade routes like the Red Sea and Suez Canal, along with factors affecting the Panama Canal and Black Sea, trigger surge in vessel speeds to maintain schedules, leading to higher fuel consumption and greenhouse gas emissions.

It, meanwhile, also underlined the vulnerability of developing countries to these disruptions.

The urgent need for swift adaptations from the shipping industry and robust international cooperation to manage the rapid reshaping of global trade, was also underlined by UNCTAD. The current challenges underscore the exposure of global trade to geopolitical tensions and climate-related challenges, demanding collective efforts for sustainable solutions especially in support of countries more vulnerable to these shocks, it added.

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