The Ever Given container vessel is finally freed, but there has been extensive discussion of the potential economic costs of disruption to world shipping arising from the closure of the Suez canal. Much attention has been paid to the fact that 12% of total global trade flows through the canal.
By contrast, few observers have remarked on the fact that the canal has been closed for long periods in the past, giving us a fairly good idea of the likely cost of an extensive blockage. As it turns out, this cost is smaller than some coverage would suggest.
Conflicts in the Middle East have twice led to the closure of the Suez canal, in 1956 and again in 1967.
The 1956 closure began with the decision by the Egyptian government to nationalise the Suez canal, previously under British and French ownership. The British and French governments launched a military operation to regain control, which resulted in the sinking of most of the ships in the canal at the time. They eventually withdrew, and the canal was cleared and reopened after four months.
The 1967 crisis, which began with the six-day war, resulted in the closure of the canal for six years. This lengthy period provides useful evidence of the impact of such a closure. I undertook an analysis of the issue a few years ago drawing on work by James Feyrer of Dartmouth College.
Feyrer began by working out the average increase in shipping distances between countries caused by the canal closure. For any given country, these increases can be weighted by trade flows to give an average effect. For a few countries, like India and Pakistan, the trade-weighted increased shipping distance was large (about 30%) and so, it turns out, was the impact on trade and economic activity. Mostly, however, the effect was smaller. For example, the increase for Britain was 3.3% and for France 1.5%.
Feyrer estimates that, in the long run, a given proportional increase in shipping distances – say, 10% – produces a reduction in trade of about half that proportion (in this case 5%). Further, he estimates, a reduction in trade produces a reduction in national income or GDP that is about 25% as large.
Combining these numbers with an estimate of the ratio of trade to GDP, I estimated that the loss to Britain from the closure of the canal while it lasted was around 0.06% of GDP. The corresponding number for France would be about 0.03%.
Fevrer doesn’t give an estimate for Australia, but the distance saved using the Suez canal rather than the longer route around the Cape of Good Hope is not large in proportional terms, so it’s unlikely the effects on our economy would be larger than those estimated for Britain. 0.06% of GDP is around $100m a year, not negligible, but not remotely comparable to the disruption caused by the Covid pandemic.
The temporary closure of the Suez canal casts some light on a much more contentious issue: control of the South China Sea.
Would a crisis in the South China Sea, presumably caused by a Chinese attempt to claim control, have such a huge adverse effect? It is routinely pointed out that the volume of trade passing through the South China Sea ($US3.4tn according to one estimate) is very large, amounting to 20% of world trade.
But the great majority of this trade is going to or from China. As I observed back in 2016, the Chinese government can control this trade in any way it chooses using domestic policies. As it turned out, the Chinese government has exercised this power against Australia in relation to a wide range of exports.
The remaining $1tn or so of trade (about 1.5% of global GDP) might, in the event of a crisis, be forced to take more circuitous routes, as happened when the Suez canal was blocked. Some might even take routes through the Southern Ocean. This would undoubtedly be costly and inconvenient. But using the same method as was applied to Suez, it’s easy to see that the total impact would be modest.
It’s easy to make sea lanes sound more important than they actually are. Most of the time, if one route is closed, another will be found, and trade will go on much as before.
