In today's rapidly evolving global landscape, business leaders are facing a paradigm shift that puts pressure on international trade. Many CEOs came of age during an era of globalization when the principles of free markets and international trade were taken for granted as net benefits. However, the ground has shifted beneath our feet. The key issues currently confronting businesses — supply chain disruptions, evolving trade policies, and geo-political tensions — are often examined individually. 

The Middle East has become a focal point of heightened tensions, notably driven by the activities of the Houthi rebels, Hezbollah, and threats of the Iraqi Resistance Movement. This article seeks to delve into the dynamics of international trade, spotlighting how geopolitical unpredictability and regional tensions, particularly in the Red Sea area, are exerting a profound impact on global commerce and supply chains. As we accept this new reality, business leaders should view their decision-making processes through the lens of the circumstances of global conflict.

This article was written by Mourad Seghir ([email protected]) & Iman Zalinyan ([email protected]),  consultants with RSM Netherlands Business Consulting with a focus on International Trade & Strategy.

The Red Sea Situation

The Suez Canal, a vital artery for global trade, facilitates the transit of approximately 12% of the world's trade as it connects the Red Sea to Egypt, offering the shortest route between Asia and Europe. Above all, the Suez Canal is the most important channel for oil shipments being imported from the Persian Gulf towards Europe and North America. However, the proximity of Israel to Egypt, coupled with the ongoing conflict in the region, has angered Houthi militants backed by Iran, to target ships heading towards Israel or having alleged ties with Israel. Their stated objective is to continue these attacks until Israel agrees to a ceasefire. 

Regardless of the protection from helicopters, provided by the US Navy warships to attack against the Houthi’s, the Danish ships owned by Maersk were requested to pause all cargo movement until further notice. As a result, Maersk, alongside three other world’s biggest shipping operators – being CMA CGM, Hapag-Lloyd and MSC – paused operations running through the Red Sea-Suez Canal and rerouted altogether. China's largest shipping firm – Cosco - holding almost 11% of the global trade market, also suspended its shipping to Israel via the Suez Canal route, following the lead of the Orient Overseas Container Line (OOCL), a part of Cosco's shipping group, which ceased operations through the Suez Canal without accepting any Israel cargo. The reasoning behind Cosco's decision remains undisclosed. 

The Houthi attacks on cargo vessels triggered a spike in ocean freight rates, resulting in carriers diverting over $200 billion in trade, according to the Dutch Bank ING. With the primary route shifting to the Cape of Good Hope, the added distance of approximately 6000 nautical kilometers extended journeys between Asia and Europe by 10 days, incurring an additional $1 million in fuel costs for each round trip. This escalation in oil prices and war insurance premiums poses a significant risk of supply chain disruptions due to congestion and equipment shortages.

The Business Impact and Geopolitical Dynamics 

The implications of these disruptions are profound. Ocean freight rates have become a pressing concern for supply chains. The International Monetary Fund (IMF) estimated that these concerns added approximately 1% to global inflation. Rhys Davies, a former government trade adviser, noted that while tensions in the Red Sea have affected freight costs, their impact on inflation is expected to 2 be limited. The disruption is considered time-constrained, and its effect on inflation should remain minimal as long as the conflict resolves. 

Forecasts anticipate a 1.8% reduction in global inflation compared to 2023 unless further escalations of geopolitical conflicts occur. Notably, sustained disruptions to shipping, particularly involving Iran or the closure of the Strait of Hormuz which is a key route for shipping oil and gas, could significantly inflate global inflation rates. In a potential escalation, the Iraqi Resistance Forces recently launched a cruise missile near Israel's vital Haifa port, which was not intercepted. The looming question is whether Hezbollah and its allies might also consider closing the Mediterranean Sea route to Israel, which could result in a total economic blockade.

Forward thinking

In the wake of Houthi-related disruptions to international trade in the Red Sea area, businesses must adopt a multifaceted strategic approach. Scenario planning becomes paramount as it allows companies to anticipate various outcomes of geopolitical conflicts, ensuring they are prepared for any escalation. 

Supply chain agility is critical, enabling swift responses to sudden changes in the geopolitical landscape or regulatory environment. Inventory optimization is another key consideration, balancing lean inventory practices with maintaining adequate safety stock levels, particularly for critical goods. 

Robust risk management and contingency planning are essential for establishing rapid response protocols and monitor cost dynamics for effective pricing strategies. These recommendations are imperative for businesses navigating the complex and uncertain trade environment shaped by geopolitical related disruptions:

The strategic recommendations offered in the article are highly relevant to businesses grappling with the disruptions caused by Houthi-related incidents in the Red Sea area. These recommendations enable companies to proactively manage risks, maintain the resilience of their supply chains, and ensure business continuity in an environment marked by geopolitical uncertainties and trade disruptions. 

RSM is here to guide you through these turbulent times. Our strategic recommendations are specifically designed to address the complexities and uncertainties brought about by geopolitical disruptions in the supply chain. By partnering with us, you empower your business to proactively mitigate risks, fortify your supply chains, and ensure seamless business operations, even in the face of geopolitical uncertainties and trade disruptions. Embrace change with confidence and let us help you chart a course towards sustained success in today's dynamic international trade landscape.