By Amitendu Palit
India and the United Arab Emirates (UAE) formalised a bilateral inter-governmental agreement for implementing the India-Middle East -Europe (IMEC) economic corridor during the Indian Prime Minister’s recent visit to the UAE. The IMEC is a crucial alternative to continental transit through the Suez Canal. Fast progress on the IMEC means good news for global trade and augurs well for Indian traders too.
Global trade prospects are critically dependent on uninterrupted flow of traffic through some major shipping routes. These include the Malacca Strait, Strait of Hormuz, Panama Canal, and the Suez Canal. Of these major shipping routes, the last two—Panama Canal and the Suez Canal—have been witnessing disruptions leading to serious concerns over costs of shipping and smooth functioning of global energy, food, and industrial product supply chains.
The Panama Canal has been affected by drought in surrounding areas that have reduced the flow of water to it. This has led to several containers that require a strong depth of water to navigate to steer clear of the Canal. As a result, cargo moving from one coast of the US to the other is forced into a much longer transit. Containers plying through the Suez Canal are also facing a similar plight.
For the last few years, the Suez Canal has been facing persistent disruptions leading to piling up of shipping traffic, delays in shipments and rise in freight costs. The first such instance that led to build up of unmanageable congestion was in early 2021. ‘Ever Given’—a Taiwan-based 400-meter-long container—got stuck in the Canal sideways. The width of the Suez Canal is a little more than 200 m. The diagonal misalignment of a long container like the Ever Given left no room for vessels to move on either side. Ships were forced to queue up in both directions and were stuck. Several containers had to reverse and take a much longer route—via the Cape of Good Hope in South Africa—to reach their respective destinations in either Asia or Europe. The entire episode cost the global shipping industry more than $50 billion.
Since the Ever Given incident, the urgency of locating an alternative route for North-South trade, which includes transportation of cargo from India to Europe and vice-versa, has become imperative. As the shortest route for moving goods between India and Europe, the route has been immensely popular. But the Ever Given incident exposed the Canal’s structural frailties. It also highlighted the possibility of similar traffic chokes arising from greater accumulation of traffic in the Canal. Such a possibility, for example, can arise from lesser ships using the Panama Canal, and some of the ships looking to use the Suez.
Diverted traffic-driven congestion apart, the Suez Canal has been experiencing political problems. Since December 2023, there has been persistent attacks on ships by Yemen-based Houthi militants, arguably backed by Iran, and resorting to aggression in the Red Sea for demonstrating their support for Palestine in the current strife in Gaza. There have been multiple impacts of the attacks. Several carriers have diverted to the longer Cape of Good Hope route leading to longer shipping times and transit costs. For ships continuing to use the Suez Canal, insurance premiums have gone up. Higher freight rates and safety concerns have led to a shortage of containers leading to an overall decline in transportation capacity. Though for Indian exporters the shortage has not yet resulted in complications, prolongation of the problem might certainly do so. As it is, the Suez Canal authorities have been raising freight rates regularly leading to sustained increase in shipping costs. The political complications are further augmenting expenses.
It is not just India and Europe that need to identify an alternative to the Suez Canal. The imperative is as much for several other countries in Asia and Europe that are part of the crucial North-South trade traffic that runs through the Suez. It is here that the IMEC offers an interesting alternative.
By offering a multi-modal connectivity option for moving goods from India to Europe – partly by sea from India to the Gulf and then again from Israel to Greece and Italy – facilitated by an intermediate passage by rail through the Middle East – the IMEC is expected to significantly reduce the number of days for moving goods from India to Europe. Lesser number of days also imply lower transport costs. However, actual cost efficiency achieved by this alternative route vis-à-vis transit by the Suez Canal will depend upon the ease with which cargo can switch from sea to rail modes, and vice-versa. Some factors are critical in this regard. These include the swiftness with which loading and unloading functions can be handled at designated sea and land points of the IMEC. The functional efficiencies will depend on the trade facilitation mechanisms in place at the transit points and the availability of trained staff.
The IMEC’s eventual acceptability will depend upon the abilities of its members to assure its users about safe passage. The Houthi threats underline the critical importance of this assurance. Unless movers feel secure, the take-up of the IMEC will not be substantial. In this regard, it is good to note that India and the UAE have moved ahead on implementing the Corridor without waiting for abatement of tensions in Gaza. This sends a strong signal that notwithstanding the periodic flare-ups in tensions around its geography, the IMEC stakeholders are determined to see it through.
The author is Amitendu Palit, Senior research fellow and research lead (trade and economics), Institute of South Asian Studies, NUS. Views are personal.