Ships today handle more than 80% of global goods. And the modern economy rests on the rule that ships of any nation may sail the high seas. “Suddenly, that pillar of the international order shows signs of buckling,” writes The Wall Street Journal (Feb 1, 2024).
In the Red Sea, Houthi rebels have stormed onto cargo ships, causing freight rates to quadruple and setting a precedent that American vessels aren’t welcome across one of the world’s most vital transport lanes.
Open oceans allowed a global economy to emerge from the wreckage of two world wars. The freedom for all container ships to safely ferry goods on the high seas helped lift China from poverty, turn the U.S. into a country of middle-class consumers and cement the dollar as the world’s reserve currency. Until the 20th century, trading nations competed in blood for the right to ship merchandise to foreign ports; these days they compete on price and quality.
Only eight decades separate the present from a past when most manufactured goods moved by land and a ship was only as safe as the state protecting it. Less than 500 million tons of dry cargo crossed the seas annually in the 1950s. That world was dotted with small manufacturers serving local buyers. Today, container ships carry 23 times more tonnage, integrating a global economy of mammoth conglomerates targeting whichever customer on earth offers the most profit, soonest. That integration has driven down costs, allowing IKEA to cheaply sell identical sofas in 59 countries and McDonald’s to fry Idaho’s Russet Burbank potatoes around the world.
But it has also made car factories, big-box retailers, fashion houses and electronics dealers significantly more vulnerable to even the smallest snags: Witness the tens of billions of dollars in trade held up when a single cargo ship, the Ever Given, ran aground in the Suez Canal for six days of 2021. Or the supply-chain breakdown that unfolded as the Covid-19 pandemic left container ships log-jammed outside Asian and American ports.
Governments from Europe to Asia that have grown prosperous and accustomed to safe seas want to keep maritime chokepoints open, particularly the Suez Canal, the Taiwan Strait and the Horn of Africa. Worldwide, the average cost of shipping a 40-foot container has jumped 2.7-fold in the past 3 months, to $3,964.
Classroom discussion questions:
- What can operations managers do to address this risk?
- In Supp. 11 of your Heizer/Render/Munson text (see page 477), transportation mode analysis is introduced. How can this model be used to deal with Red Sea disruptions/costs/dangers?