Is the growing instability in international waters a harbinger of Reverse Globalization?
The recent attacks in the Red Sea region have had a significant impact on global supply chains, primarily affecting maritime trade routes, which are crucial for the transportation of goods worldwide. One of the leading shipping companies in the world, ‘Maersk paused /diverted’ all its vessels bound for the Red Sea or Gulf of Aden, following the incident involving Maersk Hangzhou. While this was the immediate step to protect the goods and people, this cannot be a long term solution.
According to estimates, the Red Sea alone handles about 10- 12% of global trade, and is a critical passageway for international shipping, particularly for the transport of oil and other commodities to Europe and Asia.
Attacks and disruptions in this region can lead to disruptions, causing delays and increasing transportation costs, having a domino effect on the global economy if not addressed immediately. While global powers are coming together to mitigate these challenges. As a freight forwarder, we believe a few possible strategies will come into play in the coming months.
⦁ Increased Insurance Premiums
With the rise in regional instability, insurance premiums for cargo ships passing through the Red Sea are likely to increase. This added cost will eventually be passed on to consumers, affecting global markets.
⦁ Diversification of Supply Chains
To manage these risks, freight forwarders and companies will consider diversifying their supply chains. This could involve identifying alternative routes or modes of transportation to avoid the high-risk areas. Maersk has already diverted their cargo ships via Cape of Good Hope. Businesses might even consider air transport or multimodal transportations as alternatives.
⦁ Investment in Security Measures
Investing in enhanced security measures for vessels passing through high-risk zones can be another strategy. This includes employing private security, implementing advanced tracking systems, and adhering to maritime safety protocols.
⦁ Maritime Task Force
The establishment of a credible maritime task force to secure these trade routes might be necessary. However, this invites additional costs and logistical challenges. The presence of a security force could lead to the militarization of key maritime routes, possibly increasing transit times and costs, akin to a toll gate system.
⦁ Collaboration with International Bodies
Engaging with international organizations such as the International Maritime Organization (IMO) and regional authorities can help in coordinating efforts to ensure safer passage through these waters.
⦁ Leveraging Technology for Real-time Monitoring
The use of advanced technology like AI and IoT for real-time monitoring of supply chain operations can help in anticipating and quickly responding to disruptions caused by such geopolitical events.
⦁ Strategic Stockpiling
Companies and countries might consider strategic stockpiling of essential goods to cushion the impact of any potential supply disruptions. This requires careful planning to balance the costs of storage against the benefits of having a buffer stock.
⦁ Flexible Logistics Planning
Flexibility in logistics planning, including having contingency plans and backup suppliers, can be a key strategy to manage the unpredictability of supply chain disruptions due to such attacks.
⦁ Clear Communication with Stakeholders
: Maintaining transparent and timely communication with all stakeholders, including suppliers, customers, and logistics partners, is vital. Keeping everyone informed about potential delays and plans can help manage expectations and reduce operational friction.
⦁ Analysis of Historical Data
Analysing historical data on how previous disruptions affected the supply chain can provide valuable insights for better planning and risk management.
In summary, the attacks in the Red Sea region pose significant challenges to global supply chains. While the US has taken an initiative to set up the ‘Maritime Task Force’, not all countries are on board. While the political or social obligations of every country might delay the process of this task force from being a reality, it is important for businesses and shipping companies to find real time solutions to tide over these situations.
Going forward that might not be the only challenge that will cause disruptions in the supply chain and hence it is important that businesses plan a robust system to mitigate these challenges. Freight forwarders and businesses need to adopt a multifaceted approach, combining strategic planning, technological innovation, and collaboration to navigate these challenges effectively.