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Impact Of Somali Piracy On International Trade Economics Essay

Abstract: Piracy, armed robbery and hijacking of ships globally has a devastating impact on human life, safety of navigation, environment & global economy. It is estimated that 90% of the world trade is dependent on International shipping. Gulf of Aden & east Somali coast is a major shipping route if something concrete is not done soon to stop threat of Somali pirates, shipping will get only slower and more expensive as insurance rates already have gone up and more ships opting to take slower route around south Africa instead of through Suez canal.

INTRODUCTION: Act of piracy has been there since ages but in recent years the problem of piracy incidents has increased and is coupled with hijacking of merchant ships on a regular basis particularly in Gulf of Aden and in east coast of Somalia waters. These piracy attacks threaten lives of seafarers and security of world trade. These pirates are heavily armed who are terrorising high seas, although some steps have been taken to curb piracy attacks but they are not significant at all, pirates are still attacking ships on daily basis. In present day scenario situation has become so serious that most of the shipping companies & charterers of the vessel are avoiding the Gulf of Aden & rerouting ships via Cape of Good hope, South Africa. This is leading to severe economic consequences by adding additional weeks to the duration of many ships voyages and has devastating impact on international trade, in terms of maintenance of inventories, the price of fuel and raw materials. This is not only a limited to economic loss but also endangering lives of Seafarers who are civilians and are entitled to protection as they go about their lawful profession. The present situation is a grave danger & threatening the lawful rights of seafarers.

The Pirates in Somalia are those people who are taking these desperate measures in order to survive impoverished conditions of poverty, famine, inflation, lawlessness. The financial impact due to act of piracy is and will continue to worsen in the near future if no concrete steps are taken very soon.

IMPACT OF MARITIME PIRACY AND HIJACKING IN GULF OF ADEN AND EAST COAST OF SOMALIA:

Any act of piracy, armed robbery and Hijacking has serious impact on human life, the safety of navigation and the environment. It is a criminal act which not only affects victims but also has severe financial losses to world’s economy.

Nearly 80 percent of the vessels passing through the gulf of Aden are trading in Europe. Those economies are directly affected by the piracy incidents and additionally its affecting maritime industry also. Governments and maritime industry has taken positive steps to protect themselves from being attacked although these steps are not very significant and effective but still put lot of economic burdens in terms of larger military presence in high risk areas, rerouting ships to bypass Gulf of Aden and Suez Canal, paying higher insurance premiums subsequently the all tax payers and consumers have to bear the extra costs.

The carrier is limited to two actions only against piracy in the Gulf of Aden , Avoiding the area by taking Cape of good hope, South Africa route or accept the risk of operating ships through the area with enhanced security measures. Although delays due to rerouting does not affect cargoes of lower values much but for high value cargoes where goods are required for just in time manufacturing or at regular frequency it has great negative impact. We can take an example to illustrate this problem, if a Tanker has to proceed on a voyage from Saudi Arabia to the United States via Cape of Good Hope this adds approximately 2700 nautical miles to the voyage. This additional distance each voyage increases the overall annual operating cost of the vessel significantly also vessel will do less no of voyages during the year from about six round trip voyages to five voyages; as a result productivity drops by about 26 percent. Losses are not only limited to this there is lot of additional fuel costs also incurred for rounding off Cape of Good Hope. Total annual losses for just one ship of this type are estimated to be about $3.5 million.

In liner trade the cost of avoiding risk becomes more critical in meeting the demands of liner trade there is need for an additional vessel in order to maintain schedule service and capacity of the liner operation. In a Europe and Far East trade if vessel is avoiding Suez Canal & rounding off via Cape of Good Hope this increases the expenses about $89 million annually, mainly the fuel cost of about $74.4 million and charter expense of $14.6 million, additionally it also increases voyage duration by about 5.7 days per ship which results in the need of additional vessel to maintain the service frequency although due to economic crisis as there are lot of ships laid up and available for trade this cost may be insignificant. There is also a cost of war risk zones for ships transiting the Gulf of Aden in terms of additional premiums and payments. The amount of insurance premium has also gone up to $20000 per ship each voyage, excluding injury, liability and ransom coverage which earlier just about a year ago was only $500 (Lloyd’s list, November 26, 2008). This additional cost of insurance covers adds up to $ 400 million (Lloyd’s list, November 21, 2008).

The following table summarizes the major cost differences between Cape of Good Hope route and via Suez.

Table 1.1

Additional Cost Estimates Summary

Category

Via Suez

Via Cape of Good Hope

War Risk Insurance

$20,000

N.A.

Suez Canal Tax

$200,000

N.A.

Crew cost ( While in Maritime security patrol area)

2 Times basic wages

N.A.

5,000 TEU Containership charter hire / day

0

$40,000

5,000 TEU Containership Fuel / day

0

$125,000

300,000 DWT VLCC Charter hire / day

0

$48,000

300,000 DWT VLCC Fuel / day

0

$47,500

Licensed security Guard for voyages through Gulf of Aden

$60,000

Sonic deterrent equipment and operators / trip

$20,000 to $30,000

In the high risk area of Gulf of Aden and Somalia coast there are Naval vessels from 16 countries patrolling the area in order to deter piracy attacks and hijacking incidents. The price tag with this act of providing some sort of security is taxing global economy with globally economy already in crisis this is another burden which does not only end in keeping vessels in region but once and if pirates are apprehended, the price tag goes up with regard to money spent to keep them in custody and try them in courts of law, although some steps have been taken to reduce these costs by regional agreements but still costs are quite high.

Specialised Maritime organization, The International Maritime Organisation , The International Maritime Bureau, United Kingdom Maritime Trade Organization, European Union Naval Force, Combined Maritime Forces all these organisations, governments are taking lot of efforts but still there is need for more stricter actions and United Nations laws and additional funds to help eradicate this problem. There is need for the hard line approach as in case of dealing with terrorists and Funds can be utilized for this cause in a global effort to eradicate piracy which will help global economy in long way.

According to “International Maritime Bureau” which is leading recording body & first point of contact for piracy, the estimated costs of piracy are around $13 and $15 billion every year in losses between the pacific and Indian Ocean alone(Ryan 2006). Earlier economic estimates had placed the annual global figure at approximately $16 billion (Burnett, 2002; 2000). These costs not only include thefts on ships and stolen cargoes but also vessel subjected to delays in port when attack is reported and investigated and increased insurance rates as well.

Up till now we are only talking about monetary losses but a significant loss of human life is also there from maritime piracy, Just in last year itself there were nearly 40 highjackings in the Gulf of Aden & with 133 kidnapped seafarers held as hostage and there have been incidents of piracy attack happening not weekly or daily but sometimes up to three times within hours, As per International maritime bureau findings in Somali piracy attacks there are 6 groups involved with about 1200 people. At the end of last year there were 10 ships being held with danger to lives of seafarers on board. In 2006 15 sailors were killed in pirate attacks, 188 were taken hostage and 77 were kidnapped and held for ransom. Since 1995 over 350 sailors are reported to have lost their lives in pirate attack worldwide (IMO); which means on average 30 sailors every year this number sometimes increases and reduces.

A significant percentage of overall piracy attacks include attacks on energy vessels (Oil Tankers, Gas Tankers & Bulk carriers with coal cargoes), ranging from 12% of total attacks which took place in 2006 & it became double to 24% in 2007. Most Pirate attack earlier included those on energy vessels are cases of simple robbery at sea with pirates boarding and robbing the ships in port or with small speedboats when vessel is underway but now increasingly we see disturbing trend of hijacking and kidnappings for ransom particularly in Somalia and Gulf of Aden until recently there were few case and now tankers have been targeted & hijacked and crew is held for ransom.

FIGURE 1.2

World’s maritime security of energy trade was shaken up by hijacking of Sirius Star a VLCC by Somali Pirates on Nov 15, 2008. Vessel was enroute from Saudi Arabia to the United States when it was attacked some 450 nautical miles south east of Kenyan coast, The vessel carried two million barrels of oil worth approximately $100million, the ship itself was worth an additional $150 million. Pirates held 25 crew hostage and pirates demanded $25 million ransom. Ultimately ransom was paid and vessel and crew was released. This particular attack on a large tanker vessel was a matter of grave concern. It was not only the largest energy vessel ever high jacked but the largest vessel of any type ever taken hostage. Additionally it was very far from shore than normally Somali pirates operate and there are no Navy patrols also in that area. If such a vessel is intentionally run aground, sunk or set on fire by pirates it would cause devastating economic impact due to environmental damage.

These piracy incidents and hijackings are linked to terrorism also and ultimately causing increase in trade costs, lost earnings in turn lost revenues to the governments and affecting supply chain sustainability. In addition there are implicit costs also with regard to countermeasures taken to safeguard which can be direct costs or indirect costs for implementing and complying with new regulation e.g. International ship and port facility Security code (IMO-ISPS code). According to an estimate Direct costs on ship operators for security purpose is approximately $1279 million / Initial cost and then $730 million / year and similarly for port facilities average cost is in terms of 4.87 billion, As per International maritime bureau piracy costs shipping from US $1 billion to US $16 billion, all these sum up to a big revenue lost for world economy.

Estimated costs to deploy a frigate for a month is about $ 1.3 million and approximately $200-350 million is required to sustain naval vessels in the Gulf of Aden annually. Somalia’s neighbouring countries are also impacted by the costs of piracy. Increased insurance premiums and diverted trade affects economic growth and continued maritime insecurity discourages Investments and tourism. Egypt has been affected by reduced traffic primarily caused by piracy. Revenue from Suez canal is reduced by 30 percent from $ 5.1 billion to $3.6 billion. Suez Canal receipts are Egypt’s third highest foreign currency earner after tourism and remittances.

COMBATING PIRACY:

To combat Somali piracy steps are being taken globally, The safe navigational corridors have been established through Gulf of Aden in cooperation with United Kingdom Maritime Trade Operations(UKMTO),European Union Naval Force(EUNAVFOR), Combined Maritime Forces(CMF), Indian Navy ,Forces from NATO ,China, Malaysia and Russia. This transit corridor is intended to reduce the risk of collision between vessels providing a measure of traffic separation and allowing maritime forces to conduct deterrent operations against Somali pirates with greater degree of flexibility. To navigate in these corridors a group transit programme is followed at pre designated entry times for vessels to enter in groups. Vessels are also advised to take passive defence measures such has high speeds, evasive manoeuvres, specialist security teams employed on board etc and there are reporting requirements in high risk areas.

But still there is lot to be done as Piracy attacks are still taking place, the main hindrances are national laws and United Nations Security Council’s resolutions which come in the way and most important are Governments response which is very indifferent and lack of funds to eradicate piracy completely.

Now question arises that with the presence of the world’s leading nations with their naval forces at their disposal, why we are unable to maintain the security of one of the world’s most strategically important seaways, linking Europe to Asia via Suez Canal/Red sea/ Gulf of Aden. There are definitely some reforms are required in terms of governments to empower their navies and to ensure they have the freedom to engage forcefully against any act of piracy in the Gulf of Aden and East of Somalia. It will be onetime expenses in the Global economy but will restore the long lost International trade and impact on Global economy in future. This will also restore the global supply chain and supply of consumer goods, the majority of which are carried from Asia to Europe via this vital route.

Post 9/11 shipping companies their crews and ports had to comply with the IMO International ship and port facility security code , Requirements to code with regard to cost of compliance amounts to Billions of dollars similarly Governments need to generate funds for piracy also and with a political will enforce their Navies to act force fully against pirates. Although UN Security Council on 02nd June 2009 has permitted states co-operating with Somalia’s transitional federal government, and enter the country’s territorial waters and use all necessary means to repress acts of piracy, armed robbery and hijacking but still situation has not improved much hence still a lot needs to be done.

CONCLUSION:

The effect of piracy on Global economy is visible in at least two ways. First, piracy disrupts the International trade from Asia to Europe and US through Middle East and in turn raises the overall price of all international commerce, consumer products and commodities etc. Secondly it affects the trade of oil being transported from Middle East to western states.

Gulf of Aden is a very vital route for approximately 20000 vessels per annum which contains about 7 percent worlds oil and 11 percent of worlds petroleum Oil is major source of each country’s economy and power as main source of energy, similarly coal and all other commodities also have their affect on economy. Constant supply of this resource is very important for especially big consumer’s countries like US and Europe if natural supply of these resources is disrupted or delayed which definitely slows down economy. According to US Bureau of economic analysis “the availability of Oil, natural gas and coal is what made the US rise to a global super power”

The US alone consumes some 25 percent of Global oil production. Now these act of piracy lead to increasing prices everywhere. This has also raised insurance premiums consequently there is increase in the single transit value through Gulf of Aden which is enormous amount of money. The increase in transit costs ultimately affects the whole international trade & trading costs by rising prices for both final consumers and shipping. Especially in such an economic turmoil and financial crisis, this has caused resources to become more expensive, and is really a matter which requires immediate attention.

It is not just question of Loss of International trade and high trading costs but the Human costs are of even greater value. Piracy has resulted in loss of life, trauma inflicted on hostages and their families. It is always a threat to Human security in the Horn of Africa and disrupts much needed relief assistances in famine struck Somalia where one third of population rely on food aid and humanitarian supplies.

Only now due to intensified and diversified impact on international trade & supplies it has triggered an international coordinated response but still a forceful and concrete solution to the piracy is required at the earliest.

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