(Bloomberg) --
For two months, Houthi militants have been launching surprise attacks on civilian ships in the Red Sea. Repeated rounds of retaliatory strikes by the US and its allies haven't stopped the assaults. Now, these tensions are threatening not only trade routes, but the broader global supply chain.
The Big Take spoke with Bloomberg News reporters Enda Curran in Washington, DC and Mohammed Hatem, who reports on economics and politics in Yemen, about what brought us to this point and how companies are trying to strengthen their supply chains in the face of uncertainty.
Here is a lightly edited transcript of the conversation:
State Department Press Briefing: Earlier today, the Secretary of State announced the designation of the Houthis as a specially designated global terrorist, effective February 16th, for threatening the security of the United States.
These attacks against international shipping have endangered mariners and disrupted the free flow of commerce and freedom of navigation. For the past several weeks, the United States, with allies and partners around the world, has made clear that there must be consequences for those attacks. And today's designation follows on our military action last week to hold the Houthis accountable for their actions.
Sarah Holder: As the fighting between Israel and Hamas rages on, the effects of the conflict are starting to spill over into the rest of the region. In response to the ongoing war, The Houthis, a Yemeni militant group, began firing rockets and conducting drone strikes against Israel on October 19th. Soon after, they employed an additional tactic: attacking commercial shipping vessels in the Red Sea on the way to and from the Suez Canal, a crucial artery for global trade that connects Asia with Europe. Israeli allies, including the US and UK, have since responded with airstrikes of their own, to try and deter these attacks. But freight companies are already wary — they've largely redirected their ships to take alternate routes that are significantly longer.
Today on the show, what these disruptions mean for the global economy — now and in the long-run — and what companies are doing to secure their supply chain. From Bloomberg News, this is the Big Take, I'm Sarah Holder.
Sarah Holder: International shipping has faced some complications in recent years, none more damaging than the COVID pandemic.
Enda Curran: Supply chains were squeezed during the pandemic to extraordinary levels. But in 2023, costs of shipping came down dramatically and goods flowed smoothly around the world. And broadly speaking, supply lines were functioning.
Sarah Holder: Enda Curran writes about the global economy for Bloomberg News.
Enda Curran: Well, if you thought all the problems were ironed out, what's happening to Red Sea is a very blunt reminder that those problems haven't gone away at all.
Sarah Holder: Enda spoke with our producer Alex Sugiura about the ongoing situation in the Red Sea.
Alex Sugiura: Can you take us through what this disruption actually looks like? For instance, where do these ships go instead of through the Red Sea?
Enda Curran: So the practicalities of this is that these ships get loaded up with, say, merchandise goods right around East Asia, and they sail through the Red Sea on the way to the Suez Canal, primarily for the European market, but not only for the European market; it also serves America from that side of the world, But what's happening now, of course, is due to the conflict in the Red Sea, that's more or less cutting off the Suez Canal for a lot of international shippers, and instead they're going right around the bottom of the south of Africa around the Cape of Good Hope and heading up the long way.
Sarah Holder: And the numbers are pretty staggering.
Enda Curran: The International Monetary Fund has run some numbers and they estimate that transit volume through the Suez Canal is down by around 37% up to about mid-January, compared with a year earlier. And then the correlation of that is that volumes going around the Cape of Good Hope have surged by around 54%.
Alex Sugiura: What are analysts telling you about the long-term or even medium-term impacts of these attacks?
Enda Curran: So there's a kind of a benign take on all of this. The benign take is: Look, this conflict will de-escalate; it's happened before, and ultimately security will be restored, and these ships can return to the Red Sea and the Suez Canal, and even if it's not, for the moment, there are alternatives around the South of Africa, and of course, there's plenty of freight options out there. That's the kind of hopeful take. But those same people will also say to you, the longer this drags on, the more worrying it will become.
Sarah Holder: Those concerns are centered on rising costs for manufacturers, freight and consumers.
Enda Curran: There's a dual impact on the world economy here. On the one hand, you have the extra shipping costs and the extra freight costs associated with this conflict in the Red Sea, is sparking worries that ultimately this might mean higher prices for consumers, which, of course, means faster inflation at a time when the world is hoping inflation is slowing down.
Sarah Holder: It isn't just the price of consumer goods that will rise from these disruptions. The Suez Canal is also how Europe gets its oil.
Enda Curran: There's also, though, the impact on energy costs because if this conflict continues, if it deepens, if it broadens out in the rest of the region, the concern there, of course, is two things: A, energy won't be able to be shipped through that part of the world, and again it's a crucial artery for energy; and B, the cost of oil could go higher.
Sarah Holder: In his reporting, Enda spoke not just with analysts and economists, but also with business owners who are already scrambling to solve these supply chain issues.
Enda Curran: One of those I spoke to was Hans VanDanElzen. He runs an Arizona-based company called YoYo Factory. They make their yoyos in Shenzhen and they make it for markets that include the U. S. Canada, Mexico, across Europe and Japan. So he's on both sides of this. He's getting his goods across the Pacific to America. But he also has to get his goods from Shenzhen to Europe.
And that's where he's getting a little bit worried about how this conflict does play out. You know, if it's near term, we'll say de-escalation, then he's not too concerned about the overall hit to his business, the overall hit to his costs. He'll get his yoyos to Europe in time. But the longer this drags on, the more worried he's getting.
And that's why he's talking about, you know, the time for him to build up his inventory of stocks and make sure he doesn't run low. He's keeping an eye on the costs of all of this and how much of it he can pass on to his customers. And of course, he's looking for alternatives. One possible idea he spoke about was he could ship his produce from Shenzhen over to the US and from the US across to Europe.
Sarah Holder: Analysts, business owners and even governments are trying to adapt in real time. But it's hard to anticipate how the conflict will unfold. After the break: what are the prospects for de-escalation in the Red Sea? And what companies can do to make their supply chains safer against shocks.
Sarah Holder: We're back. Earlier, our colleague Enda was describing the hope that these Red Sea attacks could cease sooner rather than later. But I wanted to talk with Bloomberg's Mohammed Hatem, who reports on economics and politics in Yemen, for some background on the Houthis, what's happening on the ground in the country, and the chances in the short term for de-escalation. We spoke earlier via Zoom.
Sarah Holder: Have you spoken with any Houthi representatives who've shared more about their strategy?
Mohammed Hatem: I talked to one of their leaders, Mohammed al-Bukhaiti, and he was telling me that they will not stop this kind of attacks until the end of the offensive in Gaza. And he said this is a good opportunity for them to show also their might and strength region-wise and maybe across the globe.
Sarah Holder: That global influence is underscored by the amount of international trade being disrupted by their attacks on vessels in the Red Sea. According to Flexport, a digital logistics platform, over 500 container ships have already been rerouted away from the Suez Canal, which is about a quarter of the world's shipping capacity.
Sarah Holder: What are you hearing from people on the ground in Yemen?
Mohammed Hatem: Yemen has been under a sort of brutal conflict that has been dragging for years. It has created massive suffering. It has created a very dire humanitarian situation and the UN described it as the world's worst humanitarian crisis. Now they are put into another conflict and we don't know how long it's going to take and how it will turn — so this is, there is a sort of uncertainty, a sort of concern, a sort of worry about the situation.
Sarah Holder: US and UK airstrikes have targeted Houthi weapons caches in the hopes of sending a message that these attacks will have serious consequences, but the Houthis have kept attacking anyway. I asked Mohammed when all this fighting could end.
Sarah Holder: What are the prospects for de-escalation in the Red Sea?
Mohammed Hatem: The Houthis on their side they are not deterred by any attacks, by strikes, by the warning, by the UN Security Council resolution. And they are determined to continue these attacks on the ships. They said, these ships are bound to Israel and we will try to stop them. But the Americans and the international community consider what the Houthis are doing is not an attack on the Israeli ships, but attack on the international trade, because they have touched the nerves of the economy, of the international community, and I think the international committee has responded to this, and the response has been also gradually, you know, it's not — but with this determination of the Houthis to continue, and they're firing attacks and now they are attacking, we will see more and more escalation. And I think maybe the Americans, they will escalate along with their allies, further in the future. And then maybe it will develop into a sort of killing maybe Houthi leaders, massive operations or massive strikes. And I think we are likely to see a long-term conflict that will not, that is not going to end soon.
Sarah Holder: Companies caught in the crossfire are pondering ways to harden their manufacturing infrastructure. Here's Enda again:
Enda Curran: Industry executives say this just puts another focus on the whole story of nearshoring, friendshoring, relocating, diversifying your industrial manufacturing base, making sure you're not vulnerable to some of these supply choke points around the world; be it war, be it disease, be it climate.
Sarah Holder: At the core of these strategies is a focus on how to streamline production and avoid middlemen. Brandon Daniels, CEO of logistics firm Exiger, recently spoke on Bloomberg TV about this.
Brandon Daniels: And then that means investing in innovative ways, to diversify your supply chains across maybe different materials, or different suppliers, so that you have control over those supply and shipping lines.
Sarah Holder: Houthi attacks on commercial vessels in the Red Sea are rearranging the ways the world can continue to effectively do commerce. And with the conflict showing no signs of stopping soon, companies are thinking critically about how to insulate their supply chain from the dangers of today's international waters.
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