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Red Sea crisis poses threat to Bangladesh's exports

Rayhan Ahmed Tapader

Rayhan Ahmed Tapader

Sat, 27 Jan 24

The global daily transportation of crude oil faces a significant disruption through the Red Sea due to ongoing conflicts. International market analysts view this as a substantial setback in the global supply chain of crude oil, with shipping vessels coming to a halt, particularly along the connection route of the Arabian Sea, Red Sea, and the Suez Canal. Unfortunately, this route is currently under threat due to ongoing attacks by Houthi rebels originating from Yemen. As a result, major shipping companies worldwide are diverting their routes through alternative paths across the Atlantic Ocean and around the Cape of Good Hope in Africa. This takes two weeks longer to ship goods from Asia to Europe and the East Coast of the United States. So the shipping companies have announced to charge the extra cost for this from the customers. The impact of additional duty imposed by shipping companies is also affecting Bangladesh because most of the export products from Bangladesh are transported through this route. However, one-tenth of the imported goods are brought using this route.

According to Export Promotion Bureau (EPB) data, 63 percent of exports from Bangladesh are destined for Europe and the United States. And according to Bangladesh Bank data, eight percent of Bangladesh's imported goods come from Europe and the United States. According to that, in the Red Sea crisis, the country will have to pay an additional fee in the import-export goods transportation of about four thousand billion US dollars. All the world's leading shipping companies have business in Bangladesh.

According to shipping information service provider Alphaliner-Narer, the world's top five shipping companies are MSC (Mediterranean Shipping Company), Maersk, CMA-CGM, COSCO, and Hapag-Lloyd. These five companies transport approximately half of Bangladesh's imported and exported goods in containers. In economic zones comparable to the European Union, shipping constitutes 80 percent of both imports and exports, with around 50 percent based on value. Primarily due to the convenience of transportation and cost-effectiveness, maritime routes have been considered a primary medium of commerce for centuries. However, recently, this secure pathway has become precarious. Alongside the human challenges in maritime transportation, environmental issues have compounded, contributing to climate change, further destabilizing the reliability of import-export activities.

The Israeli-Palestinian conflict in the Middle East has extended beyond the two countries. Yemen's Houthi rebels, in solidarity with Palestine, have been targeting Israeli-aligned ships in the Red Sea in response to the latter's devastating war in the Gaza Strip. The crisis deepened as counter-attacks against rebel groups in the UK and US intensified. The growing tensions have huge implications for countries like Bangladesh, which use the route to ship goods to Europe, accounting for 45 percent of the country's foreign sales last fiscal year. The Suez Canal, which connects the Red Sea to the Mediterranean, is the shortest route between Europe and Asia. About 12 percent of global trade passes through the Suez Canal, representing 30 percent of all global container traffic, particularly from South Asia, and over a trillion worth of goods annually. According to Washington, 8 percent of global grain trade, 12 percent of oil traded at sea, and 8 percent of world liquefied natural gas trade pass through the Red Sea. After last month's attacks on commercial ships in the Red Sea, shipping lines are now taking longer routes around Africa's Cape of Good Hope, one of the world's busiest shipping routes.

Trade experts are stating that in November, nearly 500,000 containers were traversing the Suez Canal, and in December, this number has decreased by 60% to 200,000 containers. According to the Shanghai Containerized Freight Index report, due to the conflict in the Red Sea, each vessel now requires an additional ten days to reach its destination. This has resulted in an increase in costs, with every twenty-foot container facing an additional expense of $25,000 to $30,000. In this situation, as time increases on one side, expenses rise on the other, causing a ripple effect on the prices of oil and gas, which are expected to surpass previous levels. The global trade imbalance is once again on the rise.

Industry analysts have warned that due to security threats in the Red Sea, the prices could potentially double in the coming days. Major shipping lines have already announced plans to impose additional surcharges on each TEU container, ranging from seven to ten dollars, starting from January. This decision has already significantly impacted transportation costs, and if it evolves into an extended crisis, it could become a cause for price escalation for imported goods, potentially exacerbating inflation. However, Bangladesh may not escape this crisis as it heavily relies on waterways for nearly one-third of its approximately $130 billion worth of trade with other countries.

Approximately seventy percent of Bangladesh's exports are carried by containers, which traverse the Red Sea, destined for the EU, US East Coast, and Canada. This route is also utilized for importing essential goods such as wheat, lentils, and soybeans from Russia, Ukraine, Romania, and the United States. The prolonged crisis in the Red Sea can potentially harm Bangladesh's exports, increase the pressure on the exchange rate, and delay economic recovery. The textile sector in Bangladesh heavily relies on this route, as nearly seventy percent of the country's apparel exports reach European countries. Due to container congestion and increased sea transit time, exporters worldwide are losing orders.

Bangladesh's apparel sector may also lose export orders and increase production costs as higher container fares and raw material import costs have already increased. As ships are re-routing and owners are demanding additional freight rates of $10 to $12, Bangladeshi exporters and importers will have to pay higher freight charges in addition. It can also put a compounding pressure on the country's foreign exchange reserves, as the increased cost of the scare will have to be borne in foreign currency. Not only that, if the crisis is prolonged it will be difficult to get ships, affecting business. Generally, ships with Bangladeshi products take thirty to thirty-five days to reach European destinations from transshipment ports in Sri Lanka, Singapore and Malaysia via the Red Sea. At least 10 additional days will now be required. This will increase the freight cost, which will ultimately be borne by the garment suppliers.

If suppliers fail to deliver goods within the specified timeframe, garment exporters will have to resort to more expensive air shipments. However, air shipment comes with significantly higher costs. This crisis will not only impact Bangladesh but also affect other competing countries in a similar situation. However, it's noteworthy that Bangladesh does not primarily use the Red Sea for importing goods. China, the top supplier for Bangladesh, generated approximately $68.45 billion in imports for the country from 2022 to 2023, constituting 26.1% of the total, according to information from the Central Bank.

India holds the second position with a 13.9% share of Bangladesh's imports. The top suppliers include Malaysia, Indonesia, Brazil, Qatar, the United States, Singapore, Japan, Saudi Arabia, the United Arab Emirates, and South Korea. Local experts suggest that the conflict in the Red Sea has resulted in more damage to exports than imports because a significant portion of Bangladesh's exports goes to Europe and the United States. Fortunately, Bangladesh's flag-bearing vessels remain unaffected by the turmoil so far.

The Houthis claim that they will only target ships associated with Israel, which might potentially reduce the risk for Bangladeshi flag-bearing vessels as Bangladesh is a predominantly Muslim country. However, due to the use of various routes by Bangladeshi suppliers, the transit time for goods, especially for items like fertilizers and garments, can become less favorable due to the conflict and tensions in the Red Sea. Nevertheless, as the Red Sea serves as one of the busiest shipping routes to Europe, the increased attacks by the Houthis and the response from the United States and its allies have made the situation more challenging.

The world may witness another supply chain crisis, and energy supply could be significantly affected. With energy prices leading the way, this will significantly increase other commodity prices and increase geopolitical and economic uncertainty, which could dampen investment and lead to further weakening of growth. Almost all of Europe's maritime trade with Asia is centered on the Mediterranean. The majority of maritime communication between countries in South, Southeast, and East Asia, including Turkey and Europe, takes place over the Indian Ocean. For this, cargo ships from various countries in South, Southeast, and East Asia enter the Indian Ocean through the Arabian Sea, using the Aden Submarine System to navigate the Bab el Mandeb Strait and enter the Indian Ocean. Therefore, the current situation in the Indian Ocean raises concerns among experts that it could create significant disruptions in global trade, particularly affecting the interconnectedness of the entire Indo-Pacific region and causing a major impact on world commerce.

Author: Researcher and Columnist

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