China's ambitions as a global power are being put to the test as the crisis in the Red Sea escalates. Yemen's Iran-backed Houthi rebels have been launching attacks on commercial shipping in the Red Sea in response to Israel's military campaign in Gaza. These strikes have not only disrupted global supply chains but also pose a significant challenge to China's export-oriented economy.
The attacks by the Houthi militants have effectively diverted one of the world's major trade routes, leading to concerns for China, the largest exporting nation globally. Thus far, China's response has been limited to urging an end to attacks on civilian ships and offering veiled criticism of US-led strikes against the Houthis in Yemen. China has emphasized the importance of respecting the sovereignty of countries along the Red Sea, including Yemen, and expressed its commitment to working with all parties to ease tensions in the region.
China's next moves in this crisis will need to be carefully calculated as it faces a delicate situation. China has been Iran's biggest trading partner for a decade, with approximately 90 percent of Iran's oil exports being purchased by China last year. The United States has called on Beijing to utilize its substantial leverage with Iran to halt the attacks. However, China must navigate its relationship with Iran while also mitigating the potential economic consequences of these attacks.
As a result of the escalating crisis, Chinese shipping giants like Costco and OOCL are rerouting their vessels away from the Red Sea and the Suez Canal. They are joining companies like Maersk in opting to send their ships around the Cape of Good Hope in South Africa instead. While this alternative route significantly increases shipping times by two to four weeks, it also raises costs by approximately $1 million per voyage.
This rerouting of ships has already started to impact global trade. Companies like Tesla, Volvo, and Geely have warned that their products will take longer to reach shelves and showrooms, potentially increasing costs for consumers. The Shanghai Shipping Exchange has reported a surge of over 300% in ocean freight rates from Shanghai to Europe between November and January. This increase in shipping costs is particularly concerning for China, as it could lead to more Western companies shifting production away from China and closer to their home countries.
China's export-heavy economy is already grappling with challenges, including a property crisis, declining population, and sluggish domestic consumer demand. The crisis in the Red Sea further adds to these concerns, and China must navigate its response carefully to protect its economic interests while also playing a responsible role in international affairs. The situation demands a delicate balance between maintaining its relationship with Iran and ensuring the stability of global supply chains.
