Egypt is in turmoil. After Tunisia, now Egypt is rocked by a popular uprising, and the outcome of the so far peaceful protests is still uncertain. With the country more less not running at all for seven days straight, they are now starting to run out of...everything. The repercussions could be even worse than what we have seen so far, and there is even a chance, albeit unlikely, that the Suez Canal may close. That would be a serious blow to global supply chains.
Such political risks are not often debated in the supply chain management literature, but every firm with a supply chain that sources globally or operates internationally is exposed to Political Risk, a book by Robert McKellar that deals exclusively with political risk and how businesses can prepare for and manage political risk.that may be very different from what they are used to domestically, where political risks often limit themselves to de-regulations and re-regulations of business sectors, tax cuts or tax hikes or sudden environmental measures or security enforcements following major events or changes in government. On the international scene such and perhaps even worse changes can come abruptly and without warning, not because they cannot be foreseen, but because the firm usually lacks the tools and the knowledge it needs to anticipate and react coherently to political risks. Recently I reviewed
Closing the Suez Canal is such a political risk, but it is not unprecedented, and closing the Suez Canal is nothing new. In fact, the Suez Canal was closed during 1967 - 1975, following the Six day War:
On 5 June 1967, at the beginning of the Six Day War, Egypt closed the Suez Canal. The closure was sudden and unexpected – fifteen cargo ships known as "The Yellow Fleet"' were trapped inside during the closure. At the end of the war, the Egyptian and Israeli armies were stationed on either side of the canal and the prospects for reopening were very uncertain. The canal remained closed until the end of a second conflict – the Yom Kippur War – and subsequent peace negotiations, eight years later.
This lead to a considerable drop in trade between countries that now faced a near doubling of the distance between them, as described by James Feyrer, Professor of Economics at Dartmouth College writes in his essay on Lessons for trade and the trade-income link:
For these countries, the closure caused an average fall in trade of over 20% with a three to four year adjustment period. Trade between these pairs recovered completely after the canal reopened eight years later with a similar adjustment period. A 10% decrease in ocean distance results in a 5% increase in trade.
Two years ago, when attacks by pirates had became more than a few incidents in the Gulf of Aden, the BBC ran a short story on the impact on European supply chains if shipping companies should decide to take the longer route around Africa to avoid pirate attacks and what that would mean to the average consumer. A sudden closing of the Suez Canal now would perhaps have a similar effect. North Sea Oil has already risen to $100/barrel in fear of such a closure, the BBC reports. And the Egypt unrest is already threatening Egypts status as rising outsourcing star, according to cio.com.
If there is a major supply chain disruption in the near future, Egypt will be part of it, for sure. Reuters is already reporting that cargo disruptions are choking Egyptian ports. What's next?