Recent attacks on ships in the Red Sea have prompted vessels to reroute through the Cape of Good Hope, resulting in significant global shipping disruptions. This analysis explores the repercussions of these events on global trade and introduces a multi-country general equilibrium model to assess their aggregate implications, says an article published on cepr website.
Summary
- Recent attacks on ships in the Red Sea have prompted vessels to reroute through the Cape of Good Hope, resulting in significant global shipping disruptions.
- Rerouting through the Cape of Good Hope has extended voyages by approximately 3,500 nautical miles, leading to increased shipping times and costs. Global exports have declined, with shipping costs doubling over this period.
- A multi-country general equilibrium model is employed to study the impact of reduced shipping capacity on global trade flows and economic activity. The model shows increased shipping costs and the value of shipping firms, leading to overall economic contraction.
- Global shipping dynamics serve as a crucial channel through which local shocks reverberate across the global economy. As geopolitical tensions persist, shipping disruptions may become more frequent, amplifying global economic turbulence.
Impact On Global Shipping
Rerouting through the Cape of Good Hope has extended voyages by approximately 3,500 nautical miles, leading to increased shipping times and costs. Notably, global exports have declined since shipping companies began rerouting their voyages, with shipping costs doubling over this period.
Quantifying The Aggregate Implications
A multi-country general equilibrium model is employed to study the impact of reduced shipping capacity on global trade flows and economic activity. The model closely aligns with empirical shipping dynamics, showing increased shipping costs and the value of shipping firms. Reduced effective shipping capacity leads to a decline in tradable absorption and a partial reallocation of absorption toward nontradable goods, resulting in overall economic contraction.
Concluding Remarks
Global shipping dynamics serve as a crucial channel through which local shocks reverberate across the global economy. As geopolitical tensions persist, shipping disruptions may become more frequent, amplifying global economic turbulence. However, adjustments by shipping companies to mitigate such shocks may offer some resilience to the global economy in the long term.
Implications For The Future
Continued monitoring of shipping dynamics and their broader economic implications is essential, particularly in light of ongoing geopolitical conflicts and potential disruptions to global supply chains. Understanding these dynamics can inform policy responses aimed at enhancing the resilience of global trade and mitigating the adverse effects of shipping disruptions.
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Source: cepr.org
