Vietnamese Exporters Navigating Impact of Red Sea Tensions

9:12:03 AM | 3/7/2024

The escalating tensions in the Red Sea region have far-reaching consequences for global trade and supply chains. As Vietnam’s importers and exporters grapple with these challenges, it becomes important to adopt flexible approaches to mitigate the disruptions caused by these incidents.

In addition to diversifying transportation methods, exporters should diversify suppliers of inputs and accessories, aiming to mitigate the risk of production interruptions and ensure adherence to delivery schedules

Impact of Red Sea tensions

The ramifications of the Red Sea tensions have become a source of concern for Vietnamese traders since late 2023. Specifically, the Red Sea and the Suez Canal serve as a key route for ships traveling between European ports, the East Coast of America, southern Asian ports, eastern African ports and Oceania. This maritime route constitutes approximately 12% of global maritime traffic, underscoring its pivotal role in international trade.

However, conflicts in the Red Sea since late 2023 have compelled numerous shipping lines to alter their routes, bypassing the Suez Canal and opting for a lengthier journey around the Cape of Good Hope. This deviation extends shipping times by 10 to 15 days, resulting in considerable cost escalations. Major shipping firms like Yang Ming Line, One, Evergreen Line, HMM and Maersk have imposed surcharges due to itinerary changes on Asia-Europe routes, steering clear of the Suez Canal and the Red Sea.

A representative from the Vietnam Maritime Administration highlighted a substantial surge in freight rates during the first two months of 2024 on routes from Vietnam to Europe, with an approximate increase of 120%. Similarly, routes to the Americas have experienced a surge of 30-40%. Notably, freight rates to Europe witnessed a dramatic escalation from December 2023, with rates to Hamburg skyrocketing from US$1,200-1,300 in December 2023 to US$4,350-4,450 in January 2024. European businesses are particularly affected, given their heavy reliance on Red Sea routes for supply chains.

Beyond the heightened freight rates, the scarcity of empty containers has significantly impeded the fulfillment of import and export orders. The delay of shipments by 1-2 weeks upon arrival at ports has disrupted manufacturers' raw material supply chains, leading to production delays and compromising the quality of numerous exported agricultural products.

Economic experts emphasized that the escalating freight rates and oil prices are poised to trigger a "domino effect" on other commodity prices, exacerbating economic and geopolitical instability. This, in turn, poses a substantial impediment to global economic recovery. In light of export activities experiencing a nearly year-long deceleration, with signs of recovery emerging only in the second half of the previous year and early this year, it becomes imperative to devise effective solutions to alleviate challenges for importers and exporters.

Proposing solutions to minimize risks

In response to the challenges, the Ministry of Industry and Trade has proactively presented a set of solutions to mitigate the impacts of the Red Sea tensions, disseminating this information to business associations, logistics service firms, and the import-export community.

The representative from the Agency of Foreign Trade (AFT) under the Ministry of Industry and Trade said that this is a challenge beyond the capacity of any single nation to resolve, acknowledging Vietnam's unavoidable susceptibility to its effects. Tran Thanh Hai, Deputy Director of AFT, called upon shipping lines to uphold existing routes, expedite the return of empty containers, and strictly adhere to regulations concerning freight rates and surcharges. Simultaneously, he advocated for thorough research into and consideration of multimodal transport methods, integrating rail, sea and air freight.

Furthermore, Hai urged the Vietnam Logistics Business Association (VLA), shipowners, and cargo owners to maintain vigilant oversight of the situation. He encouraged them to collaborate closely with businesses, shipping lines and Vietnamese authorities, fostering the most favorable conditions to ensure the smooth flow of import, export and international trade. Industry associations were advised to counsel their members to closely monitor developments and actively formulate scenarios and response plans.

AFT and pertinent bodies are poised to receive and meticulously analyze information and suggestions from various units. They will maintain a vigilant and proactive stance, closely monitoring the situation. Their aim is to provide informed counsel to leaders of relevant ministries and agencies, while also promptly reporting to higher authorities to garner necessary support solutions for businesses facing the challenges posed by the Red Sea tensions.

The Vietnam Logistics Business Association (VLA) advocated for exporters to diversify shipping methods in the short term. The association is committed to supporting businesses by facilitating the dissemination of updated information and fostering seamless coordination within supply, import and export chains. VLA underscored the importance of prudence in negotiating and signing commercial contracts and transportation agreements, recommending the inclusion of compensation provisions for emergency situations and the procurement of comprehensive insurance coverage.

Furthermore, VLA recommended that, in addition to diversifying transportation methods, exporters should diversify suppliers of inputs and accessories, aiming to mitigate the risk of production interruptions and ensure adherence to delivery schedules.

By Huong Ly, Vietnam Business Forum