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IMEC and Red Sea Crisis

Context:

  • Due to the continuing red sea crisis global supply chains are increasingly grappling with inflated freights, delayed vessel schedules, and product shortages.
  • The crisis in the Red Sea has once again brought to the fore the vulnerabilities of global supply chains, highlighting the need to revisit alternate routes for global trade.

Why is the Red Sea route important?

  • The Red Sea has strategic importnce for global trade due to the presence of Bab el-Mandab Strait which lies between Yemen and Djibouti.
  • It is one of the world’s busiest cargo and oil transit points with almost 12% of international merchandise trade passing through the strait.
  • An immediate and unwanted consequence of the Red Sea conflict has been that major container and oil carriers have been forced to re-route shipments via the Cape of Good Hope.
  • The re-routing has led to rising ocean freight, inflated insurance costs, and also longer voyage times leading to delays and shortage of products.
  • It has also increased transportation costs. The higher shipping costs will be eventually passed onto consumers in the form of increased commodity prices.

How has the crisis affected India?

  • India’s trade with European and North African countries flows almost entirely through the Red Sea route which is almost 24% of its exports and 14% of its imports.
  • In the year 2022-23, India’s bilateral trade with Europe and North Africa stood at around $189 billion and $15 billion respectively.
  • The rising fears among traders have already seen a drop in Indian shipments to these regions.
  • As per the Federation of Indian Export Organisations (FIEO), rising threats have prompted Indian exporters to hold back nearly 25% of their cargo ships transitioning through the Red Sea.
  • As global supply chains are battling delayed shipments and also rising costs, China is actively projecting China-Europe freight trains which are part of the bigger Belt and Road Initiative (BRI), as an alternate route.

What about the IMEC?

  • The India-Middle East-Europe Economic Corridor (IMEC) was announced during the G-20 summit in 2023 and is another alternative which is not receiving much attention.
  • The main problem for the inactivity apart from the MOUs is there have not been any investments or operations regarding the corridor.
  • Also, the Israel-Palestine conflict has put a pause on the normalisation of Arab-Israel relations which is a key element of the multi-nation initiative.
  • Another major issue is the vulnerability of the Strait of Hormuz.
  • The entire trade of the IMEC architecture flows through the Strait of Hormuz and with Iran’s proximity and control over the strait, the risk of disruptions remain very significant.
  • Some experts even argue that the Strait of Hormuz problem can be avoided by including Oman in the IMEC architecture and keeping the supply chain away from Iran’s reach.
  • However, that would mean further delays, as new ports and railway links will have to be developed across Oman which can conect it to Saudi Arabia.

How can the IMEC be made viable?

  • Despite the above challenges, the economic logic of the corridor holds, which should encourage stakeholders to keep working towards it.
  • At the very outset, an empirical study on the economic benefits of the corridor needs to be conducted.
  • The corridor is estimated to cut the journey time from India to Europe by 40% and slash transit costs by nearly 30%.
  • However, there are speculations that multiple handling of cargo and multi-nation transit would increase carriage and also compliance costs.
  • Therefore, it is critical to quantify the economic advantages of the corridor to attract more stakeholders and also to attract investments.
  • Also a robust financial framework needs to be in place.
  • Since there are no binding financial commitments on any of the signatories of the IMEC, investments will have to be attracted from governments, international organisations, and private sector entities.
  • Lastly, a comprehensive multi-nation operational framework is very much needed.
  • As the corridor involves facilitating trade across different legal systems, a multi-national framework is necessary in order to overcome the issues that may arise between the countries.
  • A forum for the corridor also needs to be constituted to undertake the aforementioned activities.

The post IMEC and Red Sea Crisis appeared first on Vajirao IAS.

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