Where has the rum gone? The impact of maritime piracy on trade and transport

Alexander Sandkamp,Vincent Stamer,Shuyao Yang

doi:10.1007/s10290-021-00442-1

Alexander Sandkamp, Vincent Stamer + Show 1 more

Open Access

https://doi.org/10.1007/s10290-021-00442-1

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Abstract

Despite a general agreement that piracy poses a significant threat to maritime shipping, empirical evidence regarding its economic consequences remains scarce. This paper combines firm-level Chinese customs data and ship position data with information on pirate attacks to investigate how exporting firms and cargo ships respond to maritime piracy. It finds that overall exports along affected shipping routes fall following an increase in pirate activity. In addition, piracy induces firms to switch from ocean to air shipping, while remaining ocean shipments become larger. At the ship-level, the paper provides evidence for re-routing, as container ships avoid regions prone to pirate attacks.

Highlights

With around 200 incidents in 2017 which lead to 166 crew members being taken hostage or kidnapped and three killed, maritime piracy remains a real threat to international merchant shipping (ICC IMB 2018).1 Beyond the risk faced by the crew, piracy increases the cost carried by shipping companies, including higher wage premia, a rise in insurance payments due to a lower expected value of a shipment, ransom payments, as well as the actual cost of protecting the ship through military escorts, armed guards, electric fencing, razor wire, water cannons, non-lethal laser or acoustic devices (Towergate Insurance 2018; Gilpin 2009).Increased fuel and time cost of altering routes can be substantial
At the product-level, the significantly negative coefficient of − 0.0009 reported in Column (1) implies that one additional case of piracy along a set of routes linking China to a particular destination continent is associated with a 0.1% fall in exports to all countries on that particular continent
Even though piracy has disappeared from the news, it is still a frequent phenomenon and the costs associated with it remain as relevant as ever

Summary

Introduction

With around 200 incidents in 2017 which lead to 166 crew members being taken hostage or kidnapped and three killed, maritime piracy remains a real threat to international merchant shipping (ICC IMB 2018). Beyond the risk faced by the crew, piracy increases the cost carried by shipping companies, including higher wage premia, a rise in insurance payments due to a lower expected value of a shipment (since it may be damaged or sunk with a higher probability), ransom payments, as well as the actual cost of protecting the ship through military escorts, armed guards, electric fencing, razor wire, water cannons, non-lethal laser or acoustic devices (Towergate Insurance 2018; Gilpin 2009). This paper investigates the effect of piracy on trade and transport at the product-, firm- and ship-level. Pirate activity on a set of trade routes reduces the frequency of shipments by vessel and induces exporters to switch transportation mode from ocean to air, while remaining average shipments per firm become larger. This paper extends the scope by considering the universe of Chinese exports to all destination countries to empirically investigate the effects of piracy on ocean and air trade. It uses comprehensive data on global container ship positions to investigate how piracy in a given region affects the number of ships in that area.

Theoretical framework

Estimation strategy

Trade effects and the choice of transport mode

Effects on ship behaviour

Extensions and robustness

Conclusion