Geopolitical Risks and Shipping Costs

Abstract

Understanding the reasons affecting shipping costs is important for policymakers to have a stable economy as well as a stable shipping industry. Accordingly, this paper investigates the effects of geopolitical risks on the global shipping costs measured by the Baltic Dry Index (BDI) and the Harper Petersen Charter Rates Index (HARPEX), where the former can be used to measure the shipping costs for essential commodities, whereas the latter can be used to measure the shipping costs related to container ships. The investigation covering the monthly period of 2001m1-2023m12 is based on a structural vector autoregression model, where the value of the U.S. dollar and global oil prices are controlled for. The empirical results based on cumulative impulse responses show that shocks to geopolitical risks increase shipping costs measured by both BDI and HARPEX, where these positive effects are statistically significant for BDI in the long run and for HARPEX in the short run. For robustness, alternative measures of geopolitical risks, namely geopolitical threats and geopolitical acts, are also used. The corresponding results show that shocks to geopolitical threats increase both BDI and HARPEX, whereas shocks to geopolitical acts reduce both BDI and HARPEX. It is implied that understanding the reasons behind geopolitical events is essential to identify their effects on shipping costs. Further results show that the volatility of both BDI and HARPEX are driven the most by the value of the U.S. dollar, followed by oil prices, and geopolitical risks. Important policy implications follow for policymakers and shipping companies.

Keywords: Geopolitical Risks, Shipping Costs, Oil Prices, US Dollar

JEL Classification: L91, R41