How Houthi attacks are impacting international trade deals

The Red Sea serves as a crucial maritime artery, connecting the Mediterranean Sea to the Indian Ocean, making it a vital route for international trade. The Houthi threat in this region poses significant risks to international commercial agreements, potentially disrupting the flow of goods and creating a ripple effect across the global economy.

The Houthi movement, based in Yemen, has been a source of regional instability, frequently engaging in acts of aggression, including targeting commercial vessels in the Red Sea. Such actions not only jeopardize the safety of shipping routes but also cast a shadow over the reliability of international commercial agreements.

Efrat Shuster.

The Houthi’s attacking and illegally seizing vessels in the Red Sea, a vital trade route for countries around the world, cause disruptions in the transportation of goods, putting all those on the vessels in risk for their lives and safety, as well as causing delays in transport, and inevitable financial losses for businesses involved in international trade.

Such heightened security risks in the Red Sea will lead to increased insurance costs for vessels passing through the region. Insurers are likely to adjust premiums to account for the additional threat posed by the Houthi movement, impacting the overall cost of conducting international trade.

In the realm of international commerce, the use of Incoterms (International Commercial Terms) plays a pivotal role in defining the responsibilities and obligations of buyers and sellers in the movement of goods. The Houthi movement's potential attacks on vessels in the Red Sea introduce a layer of complexity to the interpretation and application of Incoterms in contractual agreements. For Example, Incoterms such as FOB (Free On Board) and CIF (Cost, Insurance, and Freight) specify the point at which the risk and responsibility transfer from the seller to the buyer. Given the heightened security risks, businesses may find it necessary to revisit and potentially renegotiate their Incoterms to account for the increased threat in the Red Sea region.

This could lead to a reassessment of cost-sharing arrangements, insurance coverage, and the determination of the point at which risk is transferred, adding an additional dimension of uncertainty to international commercial agreements. Clarity in contractual terms becomes paramount, and parties involved must carefully consider and address the potential impact of security concerns on the practical implementation of Incoterms in the face of evolving geopolitical risks.

Not just international trade businesses will be adversely affected, disruptions in the Red Sea could have a cascading effect on various industries. Businesses may face challenges in maintaining efficient supply chains, leading to potential shortages and increased costs. Companies may become hesitant to enter into long-term contracts or investments, fearing the unpredictability caused by ongoing security concerns.

The Houthi threat to vessels in the Red Sea poses a substantial risk to international commercial agreements and the global economy at large. The international community must work together to find diplomatic solutions to address the underlying issues, enhance maritime security, and ensure the continued smooth flow of goods through this critical waterway. Failure to do so could have far-reaching consequences, affecting businesses, economies, and the livelihoods of people around the world.

Efrat Shuster is the Founding Partner of Shuster Law Firm, she is an expert in international commercial transactions.