The world’s maritime supply chain has taken a beating because of the actions of Iran-backed Houthi rebels in the Red Sea and the reduced capacity of the Panama Canal. However, there is an even larger supply chain crisis looming just over the horizon: the closure of the Strait of Taiwan by the Chinese People’s Liberation Army Navy.
The growing supply chain tensions began in October 2023, when Iranian-backed Houthi rebels increased attacks on commercial shipping in the Red Sea, causing shipping companies to reroute their ships around Africa’s Cape of Good Hope. This rerouting has added an additional two weeks to the supply chain and is now contributing to a shortage of available shipping containers. As of Jan. 24, approximately 562 vessels, accounting for more than 7.5 million TEUs of capacity, or nearly 25% of global capacity, have diverted or will divert away from the Suez Canal.
Twelve percent of the world’s trade passes through the Red Sea either by entering or exiting the Suez Canal, and the attacks are starting to affect European manufacturers. In fact, Tesla has announced that it will close its factory outside of Berlin from Jan. 29 through Feb. 11 due to Houthi-driven delays in the supply chain.
Predictably, shipping rates have increased significantly. Routes from Shanghai to the United Kingdom have increased from approximately $2,000 per 40-foot container to more than $10,000. Freight costs between Asia and Northern Europe are up 173%, Asia-Mediterranean prices have doubled, and carriers are adding surcharges ranging from $500 to $2,700 per container.
Compounding the problem, the Panama Canal is operating at reduced capacity, with the number of ships allowed to pass reduced from 38 to 24, due to drought-driven low water levels.
In addition, the Panama Canal Authority has reduced the draft levels, or, how low a vessel can sit in the water from 50 feet to 44 feet, meaning that ships must carry less cargo on every transit. For a container vessel, every foot of draft represents about 300-350 containers. All of this means we have fewer ships traversing the canal daily, each carrying 1,800–2,100 fewer containers. Some carriers are rerouting to avoid the canal and instead taking a route around the southern tip of South America, adding one to two weeks to their voyage.
Things are so bad in the canal zone that shipping giant Maersk has decided that its ships with freight going to or from Australia and New Zealand will no longer use the canal. Instead, containers will be offloaded and shipped across Panama via rail and then reloaded onto waiting ships on either side of the country.
Shipowners are charging an average of $600 more per container to ship via the canal. And through November 2023, shipping companies paid a total of $235 million to “cut the line” if another ship canceled its transit reservation, buying priority passage through the canal and paying up to $4 million per trip.
These challenges to the maritime supply chain are significant. However, those challenges are dwarfed by the impact of a potential closure of the Strait of Taiwan by China because of a kinetic war between China and Taiwan, or simply a blockade of Taiwan by China.
The Taiwan Strait is the primary shipping route between China and Japan, the world’s second- and third-biggest economies, respectively, and Europe. The Taiwan Strait handles more than 80% of the largest ships by tonnage and more than 40% of the world’s container fleet travels via the strait.
A blockade of Taiwan — or worse, a war between China and Taiwan — would do more than affect the global supply chain. It would destroy the world’s economy.
More than 60% of the world’s semiconductors are manufactured in Taiwan. These chips are needed for everything from mobile phones to pick-up trucks and from washing machines to televisions.
A disruption of chips shipping from Taiwan would make the shortages seen during the COVID pandemic seem like “the good ole days.”
It is also possible that if China acts in one form or another against Taiwan, Iran will become emboldened and will close the Strait of Hormuz. This would devastate the global oil trade because approximately 20% of the world’s total oil consumption passes through the strait each day. An average of 20.5 million barrels per day of crude oil, condensate, and oil products passed through Hormuz in the first nine months of 2023.
Imagine what would happen to the price of oil if both the Red Sea and the Strait of Hormuz were effectively closed to the transport of oil. Oil would top $200 per barrel or more. Gas stations would run out of gas, and the rationing we saw in the early 1970s would return.
The world would see unprecedented inflation, a global recession, empty store shelves, and civil unrest if these global supply chain shocks occur.
The Biden administration must take action to demonstrate that the United States will not tolerate the disruption of maritime trade. The administration must take more aggressive action against both the Houthis and Iran. Perhaps President Joe Biden could take a page from Ronald Reagan’s book and sink half of the Iranian naval fleet, as he did during Operation Praying Mantis. Iran must be sent a strong message.
In addition, the United States must maintain a strong naval presence in the South China Sea and the Strait of Taiwan, showing that we are committed to freedom of the seas and the right to global navigation.
The world is at a tipping point. Will the Biden administration show the leadership the world needs to prevent this worst-case scenario?
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Jim Nelles is a supply chain consultant based in Chicago. He has served as a chief procurement officer, chief supply chain officer, and chief operations officer for multiple companies.
