Sea lanes not as important as you thought

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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, John Quiggan writes in the The Guardian.

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%.

The full article can be read here.

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