Shipping Choke Points Raise Business Costs Even After The Iran War

International Shipping Choke Points

In past eras, the fixed artillery that controlled a passageway could be defeated only by direct attack from ships, aircraft or ground forces. Today, though, weapons can be hidden in caves, concealed in innocent-looking structures such as barns, or even submerged. Defeating the threat is very difficult, as evidenced by Houthi success in impeding shipping in the Red Sea.

Some recognized choke points seem very unlikely to be limited by rogue nations or dissident groups. The English Channel and the Oresund (the passage through Denmark connecting the North Sea to the Baltic) are bordered by stable, democratic countries that have good relationships with their neighbors. But that is not the case everywhere.

The Houthi attacks on shipping in the Red Sea well illustrate the threat. Beginning in 2023 and continuing through this year, with two limited cease-fires, the attacks led to drastic reductions of shipping on that route. Liquified natural gas carriers stopped traveling the Red Sea entirely, as did most oil tankers. Shipments between China and Europe were almost all routed around the Cape of Good Hope, adding ten days of transit—and associated costs.

The “tanker war,” a part of the 1980s Iran-Iraq war, consisted of aircraft and missile attacks on ships, and not just tankers. Small crewed boats with rocket launchers and heavy machine guns were also used. Gradually, drones and guided missiles became cheaper and more capable and more easily concealed. The development of inexpensive and less visible attack equipment has been a huge change in risk.

The greatest risk to shipping aside from the Strait of Hormuz is the Malacca Strait, between Malaysia and Indonesia and next to Singapore. Annual transits exceed 100,000 ships. Piracy is already a problem. Rebel groups on the coast could disrupt this critical trade route.

Also in the western Pacific region, the Taiwan Strait could be the center of a war or confrontation between the People’s Republic of China and Taiwan. The United States might get involved. One possibility is that the U.S. would stop Chinese ships from using the Malacca Strait, which is China’s main path for oil imports.

Business Adjustments To Shipping Risk

Business adjustments to the risk of disruption increase costs. A company typically wants the lowest all-in price for a given quality product. But companies must consider reliability of supply. Purchasing managers tell new employees stories of a buyer who saved a few cents on every on-off switch, only to end up with many thousand-dollar machines that could not be shipped for lack of a reliable switch. In some cases, businesses will buy from higher-cost suppliers. In other situations, they will carry a larger inventory. In some circumstances a product will be re-designed to avoid needing a hard-to-source component. All alternatives raise costs.

Memories are often short. Companies that let mitigation lapse don’t eliminate the underlying risk — they just shift the time in which the cost shows up. Instead of mitigation spending now, they get disruption losses later. Either way, higher risk translates into higher costs.

The changing technology of attacking shipping has raised the risk to shipping. That higher cost—whether for mitigation efforts or for periodic supply disruptions—will continue for quite some time. New technology may, sometime in the future, help defense. The history of war shows back-and-forth advances between offensive technology and defensive technology. Someday in the future, international shipping will become safer, and therefore cheaper. In the meantime, global product costs are higher because of the higher level of risk to international shipping.