(Jan 22): The Red Sea accounts for 12% of world maritime trade and 20% of the world's transportation of cargo, including oil and gas.

When the Red Sea is no longer stable, even if the Suez Canal in Egypt is safe, many shipping companies will prefer not to risk using the Suez Canal to get through the Red Sea.

Prior to Oct 7, 2023, the insurance premium for ships using that route was between 0.05% and 0.07%. After the continued bombardment of Gaza over three months, with all but one week of truce between Nov 24 and 30, 2023, the insurance premiums for traversing ships and vessels have jumped by 10 times.

An insurance policy that was once US$100,000 (RM472,650) for a cargo ship has jumped to US$1 million. This has compelled at least five of the world's leading shipping companies, especially Maersk from Denmark, to circumnavigate the African continent through the Cape of Good Hope. The maritime route will always be 30% more expensive than a land route. Thus the lack of maritime routes, especially one as critical as the Red Sea, can affect world trade and economic recovery.

Using the Cape of Good Hope route to reach the Indian Ocean, and then the Straits of Malacca to reach the South China Sea and the East China Sea, that hosts up to 80% of maritime world trade, would add two weeks to the whole journey.

Meanwhile, the Houthis do not mind being attacked. They know the US, UK and the coalition of 10 navies have to use expensive missiles, worth at least US$1 million each, to destroy the cheap drones/missiles of Houthis, priced at US$10,000. The maths of defence and offence does not compute. But there is more to this conflict.

Although President Joe Biden had given the order to bomb Yemen for the fifth time on Jan 18, 2024, the same US president confirmed on Jan 19, 2024 that the barrage of missiles has not proven to be successful.

By admitting that neither the US nor UK have had any success, Biden has therefore incentivised the Houthis to wait it out even as missiles have been raining down on Yemen.

So far, only China and Russia have understood the need to avoid costly naval military exchanges. To further divide China and Russia from the US and the UK, if not the rest of the coalition of 10 navies, the Houthis have given a guarantee that any ships bearing Chinese and Russian flags will be spared.

However, unless Chinese and Russian vessels give the Houthis advance information of their navigation routes, how would the Houthis know their whereabouts?

As things stand, the insurance premium on ships going through the Red Sea has shot up, as has the cost of transportation.

Insurance industry sources confirmed on Jan 20, 2024, that war risk premiums had risen to around 1% of the value of a ship, from around 0.7% last week, with various discounts applied by underwriters. They added that rates were expected to move higher.

Be that as it may, the US and the UK governments have opted to take a belligerent stance against the Houthis. In turn, the latter had declared that they are "proud to be targeted by them". This has produced a narrative that portrays the Houthis as people who dare to stand up against the imperialist powers. In the long run, fighting against the Houthis is not a sustainable strategy as they have had more than 20 years of experience in dodging the wrath of the greater powers. They have even gone to the extent of dominating 80% of Yemen by 2015.

The increased premium on shipping translates into hundreds of thousands of dollars of additional costs for a seven-day voyage. These figures will increase to millions when the journey is twice as long. All these costs will be passed on to consumers, thus increasing the rate of inflation all over again.

Meanwhile, the terms being offered for war risk quotes are now significantly shorter, “with 24 hours being the norm”, to quote Munro Anderson, head of operations at marine war risk and insurance specialist Vessel Protect, a unit of Pen Underwriting.

Furthermore, the rates are increasing as a reflection of the significant and opaque risk exposure within the Red Sea. Hence, with tensions rising in the Red Sea, “the cost of transporting goods globally will increase and inevitably trickle down to the end consumer”, supply chain platform e2open director Nicole Hudson is quoted as saying.

This adverse turn of events is most unfortunate. The American economy has just begun to turn around. This has happened while keeping the threshold of inflation to little more than 2% as of November 2023; although 2% is a magic figure preferred by Federal Reserve Chairman Jerome Powell.

While a ceiling of 2% can keep the Federal Reserves from raising interest rates, a war that adds more risk in the Red Sea cannot. If the rates were to trend northward, the rest of the world's central banks would have to follow suit, thus imposing a greater burden on the consumers who have taken out mortgages.

As events unfold, the naval coalition's attacks on the Houthis have made a stronger global recovery all but impossible — as the Houthis have not been hit in any serious and significant manner yet.

Thus, a combination of higher insurance rates and rising fees for using the Suez Canal has meant that it is becoming cheaper to take the longer route of the Cape of Good Hope at the tip of South Africa. This would also mean less certainty over delivery times.

In turn, if the US-led coalition continues to fail to thwart further attacks, then it implies a failure to protect the freedom of navigation in the region and potentially elsewhere too, such as the South China Sea.

Either way, one can anticipate that the war insurance coverage will become unavailable. Forcing most of the traffic to use the much longer route around the Cape of Good Hope will then be a permanent option — unless the Houthis are overcome.

“Shipowners and charterers may find that rerouting around Africa is more cost-effective than incurring the combined costs of Suez Canal transit fees and insurance premiums,” broker Clarksons Securities said in a note in the week of Jan 13, 2024. But it also means global trade will rest on the backbone of a weaker recovery.

The truth is the Houthis have struggled badly to pay the salaries of their public servants. The fiscal situation in Yemen has long been acute.

If madness is doing the same thing over and over again, only to expect a different result, the US and the UK’s naval policies are a serious mistake.

Dr Phar Kim Beng is the senior adviser to the Bluebridge Education Group at the University of Cambridge, England, and the CEO of the Strategic Pan Indo Pacific Arena, Malaysia and London. He is a former director of the Political and Security Community at the Asean Secretariat.