Could the Red Sea crisis sink planned tax cuts?

Although the governments of impacted countries, including the UK, USA and China, have condemned the attacks on shipping in the Red Sea and called for an immediate ceasefire, various ocean carriers have decided to avoid the Red Sea route for safety reasons.

Most carriers, including Maersk, Hapag-Lloyd and CMA-CGM, have taken the decision to reroute their journeys via the Cape of Good Hope in Southern Africa, a longer route extending journey times by about 7-10 days in order to avoid the Red Sea. 

This decision, however, comes at an additional cost to businesses, as major carriers have invoked clauses in their shipping agreements to charge additional fees in relation to the Red Sea crisis ranging from $300-$1,575 (approximately £235-£1,245) per 20-foot container from January 2024. These additional fees are not unexpected, as rerouting the journeys around the Cape of Good Hope not only costs the carriers more time, but also impacts crew, maintenance and fuel costs. While many businesses will have no choice but to bear this additional cost burden, they are still very likely to experience disruption to their supply chains.

The threat to the Red Sea is a threat to direct and indirect participants of approximately 12% of global trade. While ocean carriers are the front-line businesses impacted by this crisis, all types of businesses that depend on raw materials, processing materials and/or consumer/finished goods being shipped between America, Europe and Asia are directly impacted by this ongoing crisis.

So how could we be affected? The most obvious impact of this crisis is on businesses and the inevitable delays in the movement and delivery of goods to where they are needed, regardless of the additional cost impacts. This means that even when businesses are happy to pay more to ensure the safety and security of cargo, they still have to manage the potential risks of any resulting inability to meet customers’ demands, staff time management issues and other strains that this might put on them.

Businesses also face a potential customer pricing dilemma as a result of the increased landed cost of goods, which is a consequence of higher transportation costs (additional Red Sea surcharges), higher insurance premiums due to current circumstances, higher customs duties based on the increased cost of goods and other ancillary costs. 

Ultimately, businesses have to decide on whether and when to pass the additional costs they face on to their customers. If and when they do, there is a wider concern for individuals as the global market could face potentially significant inflationary pressures if the crisis continues. With inflation and interest rates still relatively high, the Red Sea attacks could prolong the cost-of-living crisis. They could also jeopardise the chancellor’s plans for tax cuts in the Spring Budget, as putting money into taxpayers’ pockets with tax cuts at the same time as external price pressures risks fuelling the flames of inflation still further.

Although businesses may not be able to curtail the attacks in the Red Sea or avoid the additional cost impacts, there is need for them to take action, where possible, to mitigate and manage the pressure on their international supply chains. The chancellor will certainly be hoping they act, as failure to do so could have a major impact on his political room to manoeuvre on tax measures in an election year and, in turn, on taxpayers’ pockets.