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February 26, 2024

Maritime Chokepoints: The Achilles Heel of Global Trade 

Maritime Chokepoints: Threats to Global Trade Security

Global maritime trade is in choppy waters. Prominent sea routes across the world are under pressure due to rising geo-political tensions and climate change. Reports indicate that up to half of the world’s sea trade is at risk of interruption across four critical maritime chokepoints. 

What are Maritime Chokepoints? 

Maritime chokepoints are strategic, narrow passages that connect two larger areas and serve as critical waterways facilitating international trade. These locations are typically straits or canals where high volumes of traffic converge, creating vulnerabilities due to structural risks, geopolitical tensions, and piracy. 

Location: The Suez Canal and Bab El-Mandeb Strait 

The Suez Canal, a linchpin in global maritime trade, typically facilitates the passage of 12% of global maritime commerce. However, the onset of attacks on ships in the Red Sea in late 2023 has precipitated a significant rerouting of approximately 470 container vessels, with alternative routes via Cape of Good Hope extending transit times by 9 to 17 days. 

Map Via Cogh Animation Services

Impact on Global Trade 

Drewry revealed that shipping rates from Shanghai to Rotterdam had escalated by 158 percent compared to the previous year. Similarly, significant increases were observed on other major routes: Shanghai to Genoa rates rose by 97 percent, Shanghai to Los Angeles by 133 percent, and Shanghai to New York by 101 percent over the same period. 

The Suez Canal crisis has significantly impacted various sectors, with automotive companies like Tesla and Volvo experiencing production and delivery delays. Adidas and DHL, face heightened challenges in managing supply chains due to increased shipping times and costs. Levi Strauss & Co is navigating through the disruptions with adjustments in shipping routes to mitigate delays. 

Expert Quote: “Unfortunately, we don’t see any change in the Red Sea happening anytime soon,” Charles van der Steene, regional president for Maersk North America, told CNBC. “We’re advising them the longer transit routes could last through Q2 and potentially Q3. Customers will need to make sure they have the longer overall transit time built into their supply chain.” 

UNCTAD

Location: The Panama Canal 

The Panama Canal, facing its own set of challenges, has seen a reduction in daily transits due to alarmingly low water levels attributed to the El Niño phenomenon and possibly exacerbated by climate change. Drought-induced restrictions, due to low rainfall at Gatún Lake that supplies the canal, cut capacity by 15 million tons in 2023. Before water issues, up to 38 ships navigated the canal daily; recent restrictions will likely reduce this to under 30. 

This strategic conduit, which accounts for 5% of total global container trade, has been forced to reduce its operational capacity, further complicating the global shipping matrix and prompting shippers to seek alternative routes and modes of transport. 

Impact on Global Trade 

A McKinsey report highlights the repercussions of the most severe drought in decades on the Panama Canal, suggesting a potential shift in maritime trade routes. Due to restricted canal transit slots, an estimated 4,000 fewer crossings might occur annually. Specifically, around 2,000 transits, mainly by dry-bulk carriers and roll-on/roll-off ships, could reroute around the Cape of Good Hope.  

This adjustment is anticipated to elevate the total ocean transport costs for trade via the Panama Canal by approximately 5 percent, or an annual $1.1 billion. Moreover, these alternative routes could prolong travel times by about 20 percent, adding an average of four days to journeys that previously averaged 22.6 days through the canal. This strategic shift underscores the broader implications of climate and environmental factors on global logistics and trade efficiency. 

Expert Quote: “Due to problems at the Red Sea, many people forced to take alternative routes have tried to resort to Panama, but it has not been possible. If rainfall does not begin in May, we would evaluate again whether to cut transit by one or two vessels per day, or to reduce maximum vessel draft to 43 feet.” the Deputy Administrator for the Panama Canal Authority, Ilya Espino, told Reuters. 

IMF Portwatch, Politico, BCG analysis
Image Source: IMF Portwatch, Politico, BCG analysis 
 

Location: The Strait of Hormuz 

The Strait of Hormuz stands as the world’s most critical oil transit chokepoint, with 20%–30% of the global oil trade passing through it. The potential for escalated conflict in the Middle East poses a significant threat to the free passage of vessels, with implications that could ripple through the global economy, reminiscent of historical closures that led to substantial hikes in crude oil prices and global economic downturns. 

Impact on Global Trade 

Annually, 80 million metric tons, or 20% of the world’s LNG supply, navigates through the Strait of Hormuz, underscoring its critical role in global energy markets. Disruptions here can sharply escalate global oil and gas prices, affecting economies worldwide. Historical closures in 1973 and 1979 saw oil prices surge by approximately 300%, significantly impacting global economic growth. 

Although the global economy now has a more diversified energy portfolio and is less reliant on Middle Eastern oil, the strategic importance of the Strait of Hormuz remains paramount. JPMorgan Chase has warned that a blockade could drastically inflate oil prices, with wide-reaching effects across energy markets and the global economy, highlighting the need for strategic oversight and planning to safeguard against potential disruptions. 

Expert Quote: “In a ‘large disruption’ scenario — comparable to the Arab oil embargo in 1973 — the global oil supply would shrink by 6 million to 8 million barrels per day,” the World Bank said. “That would drive prices up by 56% to 75% initially — to between $140 and $157 a barrel.”  

(Note the above quote is from October 2023) 

Location: The Straits of Malacca and Taiwan 

The Strait of Malacca, a vital artery for 30% of global trade, and the Strait of Taiwan, through which 40% of the world’s container fleet passes, are both grappling with geopolitical tensions. The Straits are not only critical for East Asia’s connectivity with the Middle East and Europe but also for China’s energy security, with 80% of its energy imports transiting through the Strait of Malacca. Its narrowest width at 2.7 kilometers makes it a focal point for concerns over piracy, theft, and blockades, emphasizing its strategic importance. 

Impact on Global Trade 

Disruptions here could severely impact various sectors, including the automotive industry, where China’s role in the supply chain, especially for electric vehicles, is crucial; the electronics sector, reliant on components and manufacturing in East Asia; and the retail and fashion industries, which depend on timely deliveries for seasonal releases.  

Global interconnectedness means that disruptions could lead to fluctuations in global oil prices, affecting economies worldwide. The pharmaceutical industry, which sources many active ingredients from Asia, and the food industry, reliant on specialty items from the region, could face significant challenges, underscoring the broad and profound impact of this maritime chokepoint on global trade and economies. 

Expert Quote: The Malacca Strait’s crucial maritime role is emphasized by its traffic, threefold that of the Panama and Suez canals. The U.S. Energy Information Administration (EIA) states that blocking it would mean “nearly half of the world’s shipping fleet would be required to reroute around the Indonesian archipelago.” Choosing the Lombok Strait as an alternative would increase travel by 4,600 kilometres and 170 hours, hiking costs by 20%. The EIA warns that such a detour would “tie up global shipping capacity, add to shipping costs, and potentially affect energy prices,” impacting global maritime logistics significantly. 

In Conclusion 

The Suez Canal, Panama Canal, Strait of Hormuz, and the Straits of Malacca and Taiwan are pivotal points upon which the stability and efficiency of global trade hinge. Faced with geopolitical tensions, piracy, climate-induced challenges, and the ever-present threat of blockades, these chokepoints underscore the vulnerability of global supply chains to disruption. As the world grapples with these challenges, the importance of safeguarding these maritime lifelines becomes paramount, necessitating international cooperation, strategic foresight, and resilience planning to ensure that the arteries of global trade remain open, secure, and efficient. 

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