Why the Suez Canal is vital to global trade

 Right now, the Ever Given—a container ship about 1,300 feet long, which is longer than the Eiffel Tower is tall—is lodged sideways in Egypt’s Suez Canal, where it is blocking all other ships from passing. Efforts are underway to remove it, but they’re moving slowly. It could take days to straighten out the ship, which was blown off its course by strong winds, and more time to repair damage to the canal.

The situation is a giant headache, given that Suez is the node in the global shipping network with the greatest effect on world trade. An estimated $400 million worth of goods flow through the canal each hour.

© Provided by Quartz Ever Given container ship is pictured in Suez Canal

In a study last year, economists examined the importance of various hubs facilitating trade between various destinations. Of them, “Egypt is the most important in terms of being pivotal and being able to affect global welfare when there’s changes to how easy it is to go through this particular node,” says Woan Foong Wong, an assistant professor of economics at University of Oregon and one of the authors of the study.

The reason is Egypt’s location. “It’s a very central hub,” Wong says. The 120-mile canal through the country connects the Indian Ocean and the Mediterranean Sea, making it a vital passage for ships seeking to travel between Asia and Europe without having to circumnavigate Africa in the process.

About 80% of the volume of international trade is transported by sea, according to the United Nations. The “very purpose of the canal is to shorten transportation routes for global supply chains,” says Yemisi Bolumole, an associate professor of supply-chain management at Michigan State University. It allows ships to save thousands of miles in their journeys, making it one of the most trafficked shipping lanes in the world. About 12% of the world’s trade volume makes its way through Suez.

The Suez Canal’s global importance

Countries located near the canal in Asia and Europe are likely to register the greatest impact from the blockage, Wong says. Their study found the negative effects from trade-hub disruptions diminished the further you moved from the hub. The US will probably feel it less, especially as many of the goods it receives from Asia cross the Pacific ocean.

But the blocked traffic at Suez will almost certainly ripple around the globe. The study found that trade works like a hub-and-spoke system, and 80% of trade doesn’t go directly from a point of origin to its destination. Wong says goods “actually are routed via other countries and specifically these entrepots,” or hub ports. “And so the fact that these networks exist is going to mean that disruptions at each one of these nodes, and particularly very important nodes like the Suez, are going to have really big reverberating effects throughout the transport network.”

Costs for companies shipping goods are set to rise too. Bolumole points out that longer shipping routes burn more fuel, raising the question of who covers the extra expenses, the shipper or the shipping line. The already astronomical prices of shipping containers may rise as well.

“The domino effect that’s now in place is that transit time for a large number of container ships will be delayed, forcing container liners to cancel some shipments in order to reposition containers,” says Eytan Buchman, chief marketing officer at Freightos, an online marketplace for freight shipping. “Those cancellations will then make available container space sparser, which means higher rates.”

Global trade was already reeling from the aftershocks of Covid-19. The situation at Suez is more strain on the system.