Updated Jan 12, 2024 - Economy

The economic risks from Red Sea turmoil are rising

Animated illustration of a siren flashing on top of a shipping container.

Illustration: Aïda Amer/Axios

Turmoil in the Red Sea is taking a turn for the worse, and may create new bottlenecks in an already strained global supply chain.

Why it matters: The situation has become another wild card for a world economy increasingly wracked by instability.

Catch up fast: The U.S. and U.K. conducted targeted strikes in Yemen against Iran-supported Houthi rebels on Thursday, in reprisals for their incursions in the Red Sea.

The impact: The tensions have sent oil prices on a tear, and complicated shipping for a number of companies — including Tesla, which suspended production in Germany to grapple with supply chain troubles.

  • It raises concerns about goods shortages that, if sustained, could reignite inflation, and amplify conversations about moving production closer to home (be it the U.S. or Europe).
  • As Axios' Emily Peck reported last week, the disruptions are lighting a fire underneath prices that have only begun normalizing from COVID-era woes.

Zoom out: The "nearshoring"/onshoring conversation has gathered momentum since the Great Supply Chain crisis of 2021-22. COVID-19 and geopolitical tensions converged to create widespread shortages and delays that put upward pressure on already soaring goods inflation.

With nationalism on the rise and the global economy being fractured, Mexico has emerged as a major beneficiary of the U.S. nearshoring conversation. Last year, the country displaced China as the U.S.'s largest trading partner.

  • "Firms are seeking to increase supply chain resilience by shifting production closer to the final consumer and to 'friendly' countries. Mexico's attractiveness is pretty clear: it borders and has a free trade agreement with the US, and also has comparatively low labor costs," Capital Economics wrote in a recent analysis.

What they're saying: "One of the action items companies can take is diversifying their supply chain..[and] the sources of their goods," Alfonso de los Ríos, CEO of Nowports, a digital freight forwarding startup, told Axios in a recent interview.

Yes, but: Since the pandemic, companies have taken pains to make their logistics more resilient to global shocks. And there are limits on how seamlessly one production hub can replace another in a far-flung location.

  • Capital Economics points out that Mexico's nearshoring success is based on being "already established as a key source of imports for the US, such as autos or some electronics."
  • "Even then, we think that there are bigger risks to Mexico's free-trading relationship with the US than seem to be widely assumed and these could ultimately hinder the nearshoring process," they add.

The bottom line: Moving production closer to home to hedge against geopolitical risks, while optimal, is easier said than done. In the meantime, troubles abroad may easily become a near-term inflation and supply-chain risk.

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