Global Trade in Turmoil as Red Sea Conflict Reshapes Shipping and Supply Chains

The Red Sea crisis has severely disrupted global trade, increasing shipping costs, rerouting maritime traffic, and causing environmental and digital disruptions. While a ceasefire offers hope for recovery, uncertainties remain over long-term stability and economic impacts.

The Red Sea has become a major global flashpoint, with severe disruptions to maritime trade, economic stability, and environmental security. A detailed report by the World Bank’s MENA FCV Economic Series, supported by data from the International Monetary Fund (IMF), the United Nations Office on Drugs and Crime (UNODC), and the Financial Times, highlights the crisis’s far-reaching consequences. Since the outbreak of conflict in October 2023, Houthi forces have launched over 200 attacks on commercial vessels, resulting in 12 fatalities and a drastic drop in shipping traffic. The Suez Canal and Bab el-Mandeb Strait, which previously carried 30% of global container trade, have seen vessel activity fall by 75%, forcing ships to take the costly detour around Africa’s Cape of Good Hope. This shift has increased transit times, disrupted supply chains, and triggered a surge in global shipping costs.

Winners and Losers in Global Trade

The crisis has redrawn the global trade map, creating winners and losers among ports and economies. The Strait of Hormuz, the world’s most critical oil passageway, has recorded a 15% decline in maritime traffic, with alternative land routes becoming more prominent. Western Mediterranean ports such as Barcelona, Valencia, Algeciras, and Tanger Med have benefited from rerouted Asia-Europe trade, increasing transshipment volumes. Conversely, Eastern Mediterranean hubs like Piraeus and Port Said have suffered, as fewer ships now pass through the Suez Canal.

South Asian ports, including Colombo, have capitalized on the crisis, capturing cargo from disrupted Red Sea trade routes. However, not all regions have adjusted successfully. Jordan, Oman, and Qatar have seen trade plummet, with Jordan’s shipping exports down 38% and imports falling 50%. The Egyptian economy has been particularly hard-hit, suffering a $7 billion loss in Suez Canal revenues equivalent to nearly 5% of its GDP. In response, Gulf nations have developed alternative trade solutions, including a land corridor linking Persian Gulf ports to Haifa, aiming to bypass conflict-affected maritime zones.

Soaring Freight Costs and Inflation Concerns

The crisis has drastically increased freight costs, pushing global shipping expenses to unprecedented levels. The Drewry World Container Index shows that shipping prices remain 141% higher than pre-crisis levels, while freight rates on key Red Sea routes have soared by 230%. The Freightos Baltic Index reveals that shipping from China to the Mediterranean has seen some of the largest price spikes.

Despite this surge in costs, inflation has remained relatively stable. Analysts attribute this to weak global demand, stable commodity prices, and businesses maintaining larger inventories. Unlike previous crises such as the COVID-19 pandemic, this disruption has not yet caused runaway consumer price increases. Experts note that long-term shipping contracts have shielded many companies from sudden price hikes, and energy markets have remained unaffected so far. However, if the crisis drags on, higher transport costs could eventually translate into higher consumer prices worldwide.

Environmental Disaster and Digital Disruptions

Beyond economic concerns, the crisis has unleashed a severe environmental catastrophe. Attacks on oil tankers and cargo vessels have caused widespread oil spills, contaminating fragile marine habitats and coral reefs in the Red Sea. Satellite data indicates that the number of oil slicks in the region has increased by 113.8%, covering an area more than 10 times the size of Bahrain.

Fishing, a vital industry for coastal communities, has suffered immensely. The Yemeni government estimates that up to 500,000 coastal residents who rely on fishing have been affected. Meanwhile, Saudi Arabia’s desalination plants, which supply drinking water to millions, face contamination risks from the growing pollution.

In addition to environmental damage, the crisis has disrupted global internet infrastructure. In February 2024, the British cargo ship Rubymar was struck near the Bab el-Mandeb Strait, dragging its anchor across the seafloor and severing four major undersea data cables. These cables are crucial for telecommunications between Asia, Europe, and the Middle East, and their damage forced the rerouting of 25% of global internet traffic, disrupting financial markets, cloud services, and international business operations.

Hope for Resolution and Future Uncertainty

Recent diplomatic developments offer a glimmer of hope for resolving the crisis. A ceasefire between Israel and Hamas took effect on January 19, 2025, leading the Houthis to announce that they will limit their attacks to Israel-linked vessels. If the crisis is resolved by May 2025, analysts predict shipping trade in the Red Sea region will grow by 6%, with European Union trade increasing by 5%. If a peace settlement is reached sooner, by February 2025, these economic benefits could be even greater, with Red Sea shipping exports surging by 17.4% and European trade expanding by 10.2%.

However, doubts remain over the long-term stability of Red Sea shipping. The Houthis have profited significantly from maritime disruptions, charging shipowners for safe passage. Some experts, including analysts from The Economist, warn that the group could continue using trade disruptions as a financial and political weapon. The risk of further conflict-driven disruptions remains high, and maritime security will continue to be a pressing global concern.

The Red Sea crisis has exposed deep vulnerabilities in global trade, reshaping traditional shipping routes and forcing businesses to rethink logistics strategies. While some ports and industries have adapted, others face prolonged economic distress. The environmental impact ranging from oil spills to disrupted fishing industries may take years to recover from. The digital fallout from undersea cable damage also underscores the growing interconnection between physical conflict and digital infrastructure security.

As the world watches closely, the coming months will determine whether the crisis subsides or escalates further. With global trade, regional economies, and environmental stability at stake, the resolution of the Red Sea crisis is not just a regional concern but a global imperative.