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Are Houthi attacks doing that much damage to the world economy?

Are Houthi attacks doing that much damage to the world economy?

The true impact of the Red Sea crisis is far less clear than many claim

Reporting | Middle East

In the past two weeks, the U.S. has carried out at least 10 rounds of airstrikes against Yemen’s Houthis, who have responded with more attacks on Red Sea ships. The Biden administration argues that a “sustained campaign” of strikes is now necessary to protect the continued flow of global trade.

“These assaults, notably the unprecedented use of anti-ship ballistic missiles, have significantly disrupted the free flow of commerce and navigational rights in one of the globe's most critical waterways,” a senior Pentagon official said Monday.

There is some data to support this argument. So far, the Houthis have hijacked one ship and launched at least 34 attacks, none of which have led to casualties or major damage to the vessels. Fully 90% of container ships that would usually travel through the Suez Canal are now going around Africa, according to some analysts.

The disruption also led to a 1.3% drop in global trade in December of last year, and uncertainty about Red Sea shipping has made it all the more difficult to get international aid into Sudan. Even China — not exactly a U.S. ally — has called for de-escalation in the Red Sea to get shipping back on track.

But do the Houthi attacks really pose a major threat to world trade, as the Biden administration claims? If so, is that a good enough reason to risk further escalation by bombing the Houthis when less risky options are still available?

RS put these questions to Eugene Gholz, a political science professor at Notre Dame University and an expert on the relationship between economic policy and national security. The following conversation has been edited for length and clarity.

RS: You wrote in a recent article for the Cato Institute that “the cost of diverting shipping away from the Red Sea is not very significant in the grand scheme of the global economy.” Can you tell me more about this argument?

Gholz: It's easy to talk about huge increases in fuel and personnel costs in percentage terms. They could go up by 100%, which makes it seem like a dramatic increase in shipping costs. But those costs are actually quite small compared to the cost of the cargo on an average cargo ship. A full load of fuel for a medium-sized container ship costs a couple of million dollars. Having to say, sail around Africa instead of going through the Red Sea, even if it doubled the fuel cost, that would only add a couple of million dollars. Amortized across a billion dollars of value of cargo on an average container ship, it's a very marginal change in the cost to consumers of getting their product delivered.

If you had two shipping lines, one of which bore twice as high a fuel cost as the other, that would have a significant competitive effect in the shipping liner industry, not in the industry of the cargo that's being carried. If everyone's fuel cost goes up in the shipping industry because they're all sailing around Africa, or if everyone's shipping cost goes up because they're paying slightly higher insurance premiums for going through the Red Sea, that doesn't have a competitive effect in the shipping industry. And it doesn't cause a big effect in consumer markets, because the cost of the consumer products is very, very marginally affected.

RS: Do we have any data yet on how this is affecting the global economy as a whole? Or of increases in prices for regular people?

Gholz: You would need very fine-grained data to try to find any effect. You see articles that say consumer prices have gone up in the last couple months. The Red Sea issue has been happening, but that's hardly the only thing that's been happening in the global economy, right? Disentangling the effects of the cost of sailing through the Red Sea or avoiding the Red Sea from all the other effects in the global economy is not plausible. What you have to do is think about directly measuring the marginal increase in costs due to the alleged disruption or adaptation for the Red Sea, rather than looking for the very blunt outcome measure of average global prices.

RS: Do you have a sense of how expensive this operation is for the Pentagon and how it's affecting our stockpiles?

Gholz: The military operation is kind of expensive. It's much more expensive than the cost of riding out shippers' adaptation to the Houthis' disruption. And it's much more expensive than what the Houthis are spending to try to create whatever disruption they can, which is very minimal.

The Pentagon has released numbers into the current U.S. budget debate. They say that since October, they've spent $1.6 billion on this mission. That's a funny number. It includes a pretty substantial operations and maintenance cost, like the fuel for the ships and the aircraft that are operating in the Red Sea. They are using more food and fuel and maintenance.

But the main cost is the weapons that they're expending, which are not part of the $1.6 billion that is in the current budget debate in Washington. We might fire multiple missiles to try to intercept one incoming Houthi missile, or we might fire multiple missiles or drop multiple bombs to try to hit one Houthi target to reduce their capability to launch missiles. Each of those missiles that we fire, let's say they cost a million dollars or more. That adds up.

Let's say we attack a Houthi radar. Well, the Houthi radars are cheap. Some of their radars seem to be modified private commercial radars, things you could pick up at Bass Pro Shop for going out boating. They cost a few thousand dollars apiece, and we're hitting them with million dollar missiles. This is a bad cost trade-off.

There's also risk. If this gets some Americans killed, if the Houthis got a lucky shot and they actually hurt someone, that's a huge cost. If the United States gets drawn further into the maelstrom of Yemeni politics, or if the American hawks satisfy their wildest dream and leverage this into getting the United States to attack Iran, that's an incredibly costly thing.

RS: What would the economic impacts be if this spread to the Persian Gulf beyond the Red Sea?

Gholz: Again, the cost of our likely response is much higher than the cost of the economic disruption. I've done a bunch of work about the real limits on Iranian military capability to disrupt shipping in the Persian Gulf. If it's just the Iranians taking potshots at oil tankers or container ships in the Persian Gulf, it's not a huge threat to the global economy, or it doesn't need to be unless we panic and overreact. But the cost of a war with Iran is potentially enormous.

There are a whole lot of potential stages between full-blown regime change war and doing nothing, which is probably the economically effective response. There are some that are relatively low-cost responses, which are also probably not the likely U.S. responses, even if they would be more effective on a cost basis.

RS: How do you respond to those who argue that the U.S. does have an essential responsibility to safeguard the flow of global commerce?

Gholz: Well, we don't have a responsibility. We choose to claim that mission for ourselves, even though there isn’t a lot of threat to global commerce. And we don't really protect global commerce. It's not like we run a convoy system for delivering commercial cargo all around the world and protecting them with American frigates. This is not the British-Spanish competition over the Treasure Fleet that led to the Spanish Armada.

Shippers make routine decisions all the time about what routes to take, which risks to accept, which cargo to carry or not carry. They don't think about the role of the U.S. military in those things. The U.S. Navy is a big military, but it's not everything, everywhere, all at once. Shippers are just on their own.

If you're deciding about a particular threat to commerce that you think is something that you could use gunboat diplomacy to respond to, the question you have to ask is, does it cost enough to global commerce to make it worth it for the United States to try to respond?

There is an argument that, when the U.S. is making that decision, it should only think about the cost of the disruptions to the U.S. and the costs the U.S. would have to pay to stop them. There's also an altruistic view that says we should think about the cost to the global economy because we are the world's dominant power. If it doesn't cost us too much, we should gracefully and benevolently provide the service to the world of protecting the world's commerce. But even if you think the United States should be providing this global public good, that doesn't make every possible action effective and wise.

RS: What would a better approach look like?

Gholz: A better approach from the beginning would have been to let shippers make reasoned decisions about whether to transit the Red Sea or go around Africa. We should basically just leave the Houthis alone. If they take a few ineffective potshots that don't really hurt anybody, it's not worth it to respond.

Yes, I would rather the Houthis weren't doing this. If we ignore it, maybe it'll go away; maybe it won't. But it doesn't cost that much to just leave it alone. The right response is to let people whose job it is to make decisions about ship routing, about insurance rates and evaluating risks, about time to market for different products, let these people do their job. This is their day-to-day, normal business. Many of them are good at it.

A Houthi fighter stands on the Galaxy Leader cargo ship in the Red Sea in this photo released November 20, 2023. Houthi Military Media/Handout via REUTERS

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