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Red Sea shipping attacks have economic implications for the entire world

LEILA FADEL, HOST:

Overnight in Yemen, the U.S and U.K. carried out airstrikes on over a dozen targets in Houthi-controlled areas. The Iranian-backed military group had been using drones and missiles to strike military and commercial ships in the Red Sea, even holding one ship hostage in what they said was an effort to blockade Israel for its war in Gaza. The attacks put the most direct route between Europe and Asia, the Suez Canal, off limits for many ships, and that has economic implications for virtually the entire world. Marco Forgione is director general of the Institute of Export and International Trade, and he's here to talk about those economic implications from London. Good morning.

MARCO FORGIONE: Good morning, Leila.

FADEL: So, Marco, how have these Houthi attacks on commercial ships in the Red Sea affected global trade?

FORGIONE: They've been hugely disruptive. About 10% of global trade transits through Suez, 12% of global oil, about 8% of LPG gas, but 30% of container shipping goes through Suez. So this has been hugely disruptive to global trade and supply lines. And an analysis that was released yesterday of the impact of the disruption on the global economy showed that it had had a 1.3% impact already. And that's before last night's attacks.

FADEL: So, OK, the military strikes now we've seen as a response from the U.S. and U.K., in your view, is that the right response to deal with this impact?

FORGIONE: It was bound to happen. From the moment Operation Prosperity Guardian was announced, the reality was it was going to have to require military intervention. The Houthis are well-armed, they are using irregular warfare tactics, and the threats and the launches of the attacks have caused tremendous disruption to global shipping. And the only way now is to try and reduce their capacity, the Houthis' capacity, to launch the attacks and try and create space then for the negotiation of a political settlement. But the Houthis are well-armed and well-backed by Iran. They've been using drones, ballistic missiles, cruise missiles, as you said, piracy as well. This is going to be a long and complex issue to resolve.

FADEL: Now, the Houthis have vowed to respond. In the meantime, that means this continues the disruption, right? I mean, what happens economically now?

FORGIONE: It continues the disruption, the concern. It increases significantly the costs of shipping, the insurance. The diversion around the Cape of Good Hope at the bottom of Africa adds about 3,500 nautical miles, over $1 million in additional cost and delay of up to two weeks. This is hugely disruptive. It is inflationary, increases costs and also increases the possibility of there being scarcity of goods and products. And a lot of what goes through Suez actually are imports, so it's things like oil, iron ore, gas, which feed industry.

And, you know, that in itself will cause problems for months to come as manufacturers find it difficult to either source their components or, indeed, have to pay increased costs for their fuel. And oil last night spiked 2% overnight. And there are threats that that will increase, particularly because Iran, who back the Houthi rebels, have said that these attacks will not go unchallenged. And yesterday morning, the Iranian authorities boarded a oil tanker on the other side of the Arabian Gulf in the Strait of Hormuz, where 30% of global energy flows through. So this risk of escalation has a considerable threat to the global economy.

FADEL: So if you could, just break it down for a regular American pocketbook here. How does this, what feels so far away, affect somebody who's at the grocery store trying to pick something up or at the gas station, in the few seconds we have left?

FORGIONE: It's going to see a significant increase, because what's happening here, we're estimating before what happened yesterday between 5 to 10%. But for the U.S. particularly, there is an additional problem, which is that the Panama Canal is also constrained because of environmental issues. So there's a reduction of trade flows through the Panama and through Suez. And you're talking about the potential pressure being very significant for fresh product, for produce and for energy.

FADEL: Marco Forgione leads the Institute of Export and International Trade. Thank you for your time. Transcript provided by NPR, Copyright NPR.

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