New year, new attacks in the Red Sea

As far as cargo ship disruptions in the Red Sea go, 2024 has picked up where 2023 left off, with increased attacks on carrier vessels in the region in recent weeks by Yemen’s Houthi rebels. As the U.S. Department of Defense has reported, over two dozen ships have been hijacked or attacked with drones, missiles, and speed boats since mid-November, with an notable uptick in recent weeks—all adding up to continued disruptions to global shipping this year.

In addition to the attacks themselves causing financial losses to carriers and cargo interests, the risks in the region have led many steamship lines to change routes or delay transit. These decisions are significant due to the sheer volume of trade flowing through this sea channel, accounting for as much as 20% of all container shipping by volume according to one estimate.

The bottom line for global supply chains? More cargo slowdowns, increased freight rates, and an ever-growing need to diversify suppliers. As we explore in this article, it is important to take legal and regulatory considerations into account when reshuffling supply chains in light of the Red Sea attacks and other notable developments expected this year.

Rising ocean transportation costs and delays

The ongoing attacks in the Red Sea have already led to shipping delays and increased freight costs in the ocean shipping sector. Reroutes around the Cape of Good Hope, the preferred alternative route, reportedly add two weeks or more of travel time and approximately 4,000 nautical miles to a vessel’s voyage. The longer travel means increased wage, insurance, and fuel costs for ocean carriers, which has exacerbated transport costs already on the rise due in part to Russia’s ongoing invasion of Ukraine and resulting sanctions by the United States and allies on Russian oil exports.

Given that ocean shipping is a federally regulated industry, to what extent can ocean carriers pass along these increased costs to their customers, the shipping public, in the form of rate increases and surcharges? In a December 21, 2023 notice to industry, the Federal Maritime Commission (FMC) acknowledged the recent Red Sea-related threats to commercial shipping while simultaneously warning that any rate increases and/or additional surcharges by carriers must meet all applicable requirements under the Shipping Act, as amended, and other U.S. laws.

Then, earlier this month, the FMC issued a second industry advisory expanding on the same points, and announced a hearing about Red Sea-related developments to take place on February 7, 2024. Expect increased FMC monitoring of carrier activities as freight rates and surcharges—as well as the volatility of those rates—continue to rise.

That said, while FMC regulations generally require steamship lines to delay any general rate increases or new surcharges for 30 days (or risk penalties), the Commission is considering special permission requests under the agency’s regulations (46 CFR 520.14) from steamship lines and nonvessel operating common carriers (NVOCCs) seeking to reduce or eliminate this 30-day waiting period “for good cause.” Many carriers have already received approval from the Commission to impose immediate rate increases and surcharges. Beneficial cargo owners (BCOs) are advised to participate in or monitor the FMC’s February 7 hearing to better understand where the Red Sea-related general rate increases and surcharges are headed during the first quarter of 2024 (hint: up).

More (regulatory) stresses on the maritime industry 

The disruptions from the ongoing Red Sea attacks must be viewed in the broader context of greater vulnerabilities in ocean shipping. Natural disasters and environmental issues—such as the ongoing drought in the Panama Canal—will continue to be a factor in 2024. Growing cybersecurity attacks from state and nonstate actors (and disruptions during changeovers from legacy technologies) won’t stop.

On top of these you can include additional legal and regulatory requirements that have recently come on line, such as increasingly rigorous climate regulations in the form of the EU’s Emission Trading System (ETS) regulations that took effect on January 1, 2024 for commercial cargo vessels, setting new requirements for monitoring, reporting, and verification of emissions. As another example, new International Maritime Organization (IMO) Amendments to the Facilitation (FAL) Convention are now in effect, imposing maritime single window (MSW) requirements, related to a unified digital exchange of information for vessel clearance purposes,  for ports around the world (which up to 30% of ports are reportedly unprepared to adopt). At least in the short term, these new regulatory regimes add new burdens on global maritime shipping, potentially leading to higher freight costs, increased scheduling and reliability issues, and more in 2024.

Free trade considerations when diversifying supply chains

Amidst these pressures, it is no surprise to anyone following these issues that U.S. companies are increasingly reconsidering their sourcing strategies, with a focus on flexible, agile, and resilient supply chains. That won’t change in 2024.

From a legal and regulatory angle, what should U.S. companies be considering as they think about reworking their supply chains? For one thing, it is critical to know the free trade agreement (FTA) environment well, as smart supply chains must take FTA rules into account to avoid regulatory pitfalls and benefit from tariff savings. This will be a critical part of making supply chains stronger and more “resilient” this year.

Take the U.S.–Mexico–Canada Agreement (USMCA), for example. A joint review of the agreement is scheduled for 2026, which could, as specified in Article 34.7 of the agreement, extend the deal for a further 16 years. The United States and its North American trading partners are already gearing up for the upcoming review, which will merit the close attention of U.S. companies.

Elsewhere in the Western Hemisphere, Colombia’s new president, Gustavo Petro, has stated that he will seek to renegotiate the agreement signed with the United in 2012, which will impact trade and import of some agricultural products. Savvy U.S. companies are increasingly taking advantage of the Dominican Republic–Central America–United States Free Trade Agreement (CAFTA–DR), with qualifying U.S. imports increasing 19.4% in 2022 and exports increasing 24.3%. For most companies, it pays to know the FTA landscape.

Conclusion

The Red Sea attacks and other challenges to the ocean shipping sector this year will require U.S. companies to “scale up” their attention to the new threats and volatility in the global shipping environment. At the same time, those U.S. companies that are seeking to diversify and regionalize their supply chains will need to “drill down” and develop a nuanced understanding of trade agreement rules and other legal and regulatory considerations for their supply chains. The most successful companies will be able to pull off both simultaneously.