Distributive policy

The impact of maritime piracy on trade and transport

Maritime piracy has long haunted both global shipping and people living near coasts (e.g. Accetture et al. 2020). However, in times of pandemic-induced port closures, the blocking of the Suez Canal by the Ever Given, and conflicts between rival governments in the Strait of Hormuz and Southeast Asia (Cosar and Thomas 2021) , it does not come to mind as the number one threat to global transportation networks. Nevertheless, modern piracy remains a common threat to international merchant shipping (Figure 1). As a result of the 229 incidents in 2020, more than a hundred people were held hostage, several of whom were injured (IMO 2021).

Figure 1 Hacking incidents worldwide per year

Source: Sandkamp et al. (2021). Data from the International Maritime Organization.

Apart from the danger to the crew, piracy attacks also lead to ship delays, as well as damage to the ship and the cargo. Shipping companies are adapting by rerouting their ships on costly detours (Bendall 2010) or investing in armed guards, electric fences, barbed wire, water cannons and other weapons. Senders also bear the implicit costs of piracy such as higher wage premiums and insurance payments. All of these costs have an economic dimension and make it more expensive to transport goods, which ultimately affects the welfare of trading countries.

Pirate attacks are not evenly distributed across the world’s oceans and strike the coastal areas of developing countries more frequently than those of developed countries. Figure 2 shows the distribution of pirate attacks between 2015 and 2020. Most attacks took place in West Africa with a total of 385, followed by the South China Sea with 344 and the Strait of Malacca with 283 attacks. Piracy has become a particularly rapid problem in the Arabian Sea and along the Indian coasts over the past decade.

Figure 2 Distribution of piracy attacks from 2015 to 2020

To note: The map shows the total number of hacking incidents from 2015 to 2020 by region. South America is subdivided into three regions.
Source: Sandkamp et al. (2021). Data from the International Maritime Organization

The frequently affected Strait of Malacca and the South China Sea form segments of the key maritime trade route between Asia and Europe. Therefore, piracy is not only a threat to the lives of crews at sea, but also to global trade. In our recent empirical analysis (Sandkamp et al. 2021), we investigate how piracy affects exporting firms’ mode choice, ship routing decisions, and overall exports.

The impact of piracy on exports and the choice of mode of transport

In the first part of our analysis, we use China Customs data, which provides information on monthly export transactions at the company-product-destination-country level for the period 2000 to 2006. Basically, the data also shows the mode of transport for transactions. This allows us to match bilateral trade flows with the number of pirate attacks (extracted from the International Maritime Organization) on all trade routes from China to the destination country and analyze the effect by mode transport.

At the eight-digit product level, we show that piracy reduces Chinese exports to countries that are supplied through the affected routes. Figure 3 illustrates the results using 95% confidence intervals. The effects on the quantity exported are indicated in blue. The results indicate that an additional piracy incident along a set of routes linking China to a particular destination continent reduces exports to all counties on that continent by 0.1%. Given an average of 26 incidents per month along the routes to Europe, this implies that exports are 2.3% lower than in a world without piracy. As shown in Figure 3, this overall effect is solely due to seaborne trade adjustments, with the estimated coefficients for air trade not significantly different from zero.

picture 3 Point estimates and 95% confidence intervals of the effect of piracy on the quantity of Chinese exports and the size of shipments (in %)

To note: On average, 26 incidents of piracy take place per month on all routes between China and Europe.
Source: Sandkamp et al. (2021).

At the company transaction level, piracy reduces the number of transactions made per vessel, while the average size of shipments increases (Figure 3). These two results are consistent with the theoretical considerations of Kropf and Sauré (2014). The authors model that an increase in fixed costs per shipment – ​​such as investments in protection against hacking – reduces the frequency of shipments while increasing the size of the average shipment. Consistent with their theoretical framework, the size of Chinese companies’ shipments increases with the number of hacker attacks. We find that one additional piracy incident increases ocean shipping size by 0.13%. For shipments to Europe, this represents an increase of 3.4%. Additionally, an additional attack reduces the likelihood of a company shipping a product by sea along affected routes by 0.02%. Piracy thus encourages companies to switch from maritime transport to air transport.

The impact of hacker attacks on export behavior is proving long-lasting, especially for smaller businesses that could be hit harder by higher insurance costs. In addition, goods with a low unit value are on average more strongly affected than those with a high unit value.

The impact on ship behavior

In additional analysis, we compare high-frequency position data of large container ships (e.g. Heiland et al. 2020) with geocoded pirate attacks over the period 2015 to 2020. The use of geographic position and the cruising speed of ships allows us to better understand the mechanisms behind the reductions in trade at sea.

The estimated coefficients of the regression of the number of ship positions in a given region on the number of piracy incidents indicate that container ships avoid regions recently subject to pirate attacks. Given an estimated coefficient of -0.005 in the most rigorous fixed effects estimate, our results imply that 26 pirate attacks lead to a reduction in the number of ship positions by 12%. This supports the hypothesis that ships are making detours following an increase in pirate activity. It is also possible that the total number of ships leaving ports to go to a specific destination will decrease. Additionally, there is tentative evidence that ships passing through the affected regions are increasing their cruising speed. By increasing travel time and fuel consumption, both adjustment mechanisms increase transport costs and partly explain the overall decline in trade volumes.

Conclusion

Overall, the empirical analysis reveals that piracy negatively affects trade in several ways. Exporting companies are reducing the frequency of ship shipments and switching modes of transport from ship to plane, although the average size of the remaining shipments is increasing. Container ships avoid regions prone to pirate attacks by rerouting and also increase cruising speed, which increases shipping costs. Overall, piracy reduces Chinese exports along the relevant sea routes (2.3% for exports to Europe).

Coupled with the dangers that piracy poses to the crews of targeted vessels, the negative effects of piracy on trade imply the need for governments to tackle the problem. An increased naval presence would be an obvious short-term solution. In the long run, improving living conditions in the countries from which the pirates operate could help by eliminating the need for individuals to turn to criminal activity to feed themselves and their families.

Although maritime piracy continues to decline, the results presented in this column may also be relevant to more recent threats facing shipping. In particular, terrorist attacks along the Suez Canal or military assaults by rival governments in the Strait of Hormuz (Cosar and Thomas 2021) can affect shipping costs and uncertainty similarly to piracy. Knowing the potential distortions these conflicts can generate can help policy makers minimize their impact on the global transportation network.

The references

Accetturo, A, M Cascarano and G de Blasio (2020), “Long-term consequences of pirate attacks on Italian shores”, VoxEU.org, 15 April.

Cosar, K and B Thomas (2021), “Disruption of seaborne trade in South East Asia: A quantitative analysis”, VoxEU.org, 4 January.

Bendall, HB (2010), “Cost of piracy: a comparative approach to voyage”, Maritime Economics and Logistics, 12(2): 178–195.

Heiland, I, A Moxnes, KH Ulltveit-Moe and Y Zi (2020), “Trade from space: Shipping networks and the global implications of local shocks”, VoxEU.org, 07 January.

IMO (2021), “Reporting acts of piracy and armed robbery against ships”, MSC.4 265.

Kropf, A and P Sauré (2014), “Fixed costs per shipment”, Journal of International Economics 92(1): 166–184.

Sandkamp, ​​A, V Stamer and S Yang (2021). “Where did the rum go? The impact of maritime piracy on trade and transport”, Journal of world economy, future.