Trade Relies on Freedom of Navigation by Cargo Ships that Drive the World’s Economies​

By John D. McCown

In 2025, some 40,000 commercial cargo ships, each more than a football field long, moved $16.5 trillion in goods across the seas.  That represented 60.6% of the $26.3 trillion in the total 2025 global merchandise exports reported by UNCTAD.  Compared to world GDP of $117.2 trillion disclosed by the IMF, those goods shipped on vessels equaled 14.1% of the world’s economy.  When the 67% of global GDP represented by services is excluded, those goods moving across the water equal 42.8% of that most tangible part of the economies of the world.  Personalizing the impact, on a per capita basis the goods moved by sea equate to an average of $1,996 for everyone on the planet based on current population.  Almost two thirds of that value of waterborne trade, or $10.5 trillion, moved on the efficient container ships that are the backbone of world trade.

As the facts above underscore, commercial shipping is not just important to the economies of the world, it is absolutely essential.  Without it, economic activity would be decimated.  The numbers above relate to the direct impact, and it even goes beyond that as many of the goods moved by vessel are inputs into other products.  All of the benefits commercial ships deliver depend on free and safe passage across the seas and oceans of the world.

Recent events have thrown into question centuries old principles related to freedom of navigation that underpin trade and that have also been codified into international law.  Somali pirates attacking and seeking to capture and hold cargo ships for ransom brought back illegality that most thought was long gone.  The Houthis began firing drones at commercial vessels in the Red Sea two years ago, effectively shutting down the Suez Canal as an option for most.  For container ships in Asia to Europe services, a major lane representing 25% of worldwide container miles, going around Africa added one-third to voyage distances and had the effect of reducing global capacity 8%.  While not as economically disruptive as the 1956 Suez Crisis, the added cost across all shipping sectors that is borne by consumers is significant.  But these events pale in comparison to what would be the most brazen assault ever on the principle of freedom of navigation in the form of the current situation related to the Strait of Hormuz.

Freedom of navigation as a legal concept dates back to the Roman Empire which recognized the commonality of the seas.  However, the Romans were also possessive and referred to the Mediterranean Sea as Mare Nostrum, Latin for their “inner sea.”  Given that Rome controlled the entire Mediterranean coast at the time, that semantic hubris is understandable.  But others were allowed to move cargo across those waters in what was an extensive maritime trading network.  The first more formal codification of freedom of navigation came in 1609 when the Dutch, the dominant trade carrier at the time, championed an approach known as Mare Liberum, Latin for “freedom of the seas.”  Bilateral treaties would be entered into by European countries enshrining that principle in what marked the beginning of international law.  The modern understanding of freedom of navigation was embodied in the United Nations Convention on the Law of the Sea (UNCLOS) established in 1982.  Article 87 of UNCLOS explicitly codifies this concept, saying “The high seas are open to all States, whether coastal or land-locked” and lists “freedom of navigation” as the first of several rights for all states on the seas and oceans of the world.

The Strait of Hormuz was closed by Iran at the beginning of the war with the U.S.  While ceasefire negotiations are proceeding, Iran is demanding the ability to implement some type of “toll” regime for cargo ships to pass through the Strait.  Both the closure of the Strait of Hormuz or The economic consequences to the world would be significant and such an illegal act, if let to stand, could inspire similar actions elsewhere.

First, let’s disabuse any notion that Iran’s plan would have anything to do with the term toll as it is typically used in maritime commerce.  A toll is a fee paid to make use of a canal resulting in shorter voyage differences that follows from changing the geography of the land in the host country.  That fee compensates the country for building and maintaining the canal and the surplus is a return on the land used to build the canal.  The Panama and Suez canals follow that basic model, with a fee structure based on size and type that is applied equitably to all ships.

What Iran is seeking is not a toll but actually a tribute, harkening back to the Barbary Wars more than two centuries ago.  There is no canal infrastructure in Hormuz or the Persian Gulf that was built or which need maintenance; this is merely a punitive levy. After the American Revolution when American merchant vessels were known to no longer come under the protection of the British Royal Navy, Barbary pirates from North Africa attacked and captured ships that were held for ransom.  In 1786, the U.S. began paying tribute to stop these attacks.  Threats to American freedom of navigation, both Barbary pirate seizures and French attacks on merchant ships, were catalysts triggering the rebuilding of the U.S. Navy.  With the demands for more and more money, growing to be one-fifth of the federal government budget, President Washington acted in 1794.  He urged and Congress passed authorization to construct six heavy frigates along with the establishment of the U.S. Navy.  Not willing to meet the latest Barbary pirate demands for more tribute, in 1801 President Jefferson dispatched new naval forces to the Mediterranean and that ended the pirate attacks on U.S. merchant ships.  In the first major projection overseas of American power, the U.S. demonstrated its ability to defend its interests internationally and emerged as an active maritime player on the global stage.

Navies of the world, especially the U.S. Navy, have consistently embraced freedom of navigation.  A key element of U.S. Navy deployments is to engage in FONOPS, or Freedom Of Navigation Operations.  Those operations are conducted to challenge unlawful maritime claims and to defend navigational freedoms and rights of passage in disputed areas.  As I write this, a news report just came out saying the two U.S. Navy guided missile destroyers were transiting the Strait of Hormuz in what must primarily be a FONOPS to underscore that exact point.

There is a significant difference in risk to a U.S. Navy warship passing the Strait compared to an unarmed cargo vessel doing the same thing.  Civilian crews on merchant marine vessels should never be asked to transit through an area with possible mines and where forces have threatened to fire upon them.  Even if they wanted to do it, vessel owners would not allow that to happen because insurance companies have withdrawn coverage due to the hostilities.

The direct economic costs from a continued shutdown would be staggering.  As has been widely reported, some 20% of petroleum as well as 20% of LNG sail outbound in over 50 large vessels each day through the Strait.  We have yet to see the full brunt of the energy supply issues that will become more apparent the longer a shutdown persists.  A resolution that results in a fee for safe passage, with news reports pointing to $2 million per ship, would not be as harmful but would still come with a significant economic cost to consumers.  At 50 outbound ships per day, that fee would total $36.5 billion in tribute payments that would be passed on to consumers worldwide.  It likely would not impact transits because the cargo value of the ships, $200 million for a VLCC carrying 2 million barrels at current prices and multiples of that for a large container ship based on average value per load, can absorb such fees.  Another aspect of the planned fee are reports that it would be paid in cryptocurrency, making it untraceable and something that would be another chip in the role of the dollar as the reserve currency of the world.

The larger economic risk to any Strait of Hormuz fee is that it could inspire similar action elsewhere, either at known maritime chokepoints or even in land close to busy sea lanes.  Beyond the Strait of Hormuz and the canals referenced earlier, other key maritime chokepoints include the Strait of Malacca, Strait of Gibraltar, Bab-el Mandeb Strait, Taiwan Strait, Turkish Straits, English Chanel, Danish Strait and Luzon Strait.  Once the Pandora’s Box is opened calling into question the centuries old principle of freedom of navigation that has also been codified into what is one of the most important international laws, as it certainly would be with any permanent fees to pass the Strait of Hormuz, there is no telling what havoc will unfold.  Whether by terrorists or political leaders looking for revenue, the effect on the world economy from these illegal actions will be the same.  Such actions cannot be allowed.

If there was ever a situation calling for action by the United Nations, any plan to impose fees related to the Strait of Hormuz is it.  The reminder that any such plan would be a direct violation of Article 87 of UNCLOS should be immediately expressed in formal U.N. resolutions.  The U.S. is not party to UNCLOS because as a treaty it required a two-thirds vote in the Senate and sovereignty concerns related to deep seabed mining regulations but embraces freedom of navigation.  While Iran formally signed the treaty in 1982, it never ratified UNCLOS and therefore is not legally bound by its provisions.  However, the lack of either the U.S. or Iran being a party to UNCLOS should not preclude the U.N. from addressing this blatantly illegal situation. If Iran were to still move ahead with this action, consideration needs to be given to a U.N. organized naval force.  In 2006, a maritime task force developed under U.N. auspices had 15 countries participating.  Even through this would require a larger naval force, freedom of navigation is such a core responsibility of the navies of the world that the U.N. could be successful in forming a coalition of navies to ensure a bedrock principle and international law are maintained.  Perhaps the U.N. could do today what the U.S. Navy did more than two centuries ago to maintain freedom of navigation and stop illegal demands for tribute.

I’ll readily admit a bias related to one particular Sunday morning news show that I always try to watch.  While I do not always completely agree with Fareed Zakaria, I always find his analysis insightful.  His April 12 show certainly did not disappoint and anyone interested in knowing more about the Iran situation should watch a replay or listen to the podcast linked in this sentence.  In particular, his take at the end of the show this week is an eloquent commentary referring to the importance of freedom of navigation and weaving open seas and open trade and markets along with the long-term benefits to the U.S. from the rules-based system it sits atop.

Less trade means smaller economies across countries and larger conflicts among countries.  My recent article published by the Center for Maritime Strategy goes into what I think are the manifold benefits of trade.  History has proven time and again that what has flowed from David Ricardo and his Theory of Comparative Advantage has been good for the world and has been very good for the U.S.

Whatever the outcome of the current situation related to the Strait of Hormuz is, it is imperative that the bedrock principle of freedom of navigation is maintained and that no fee that would hinder trade and the economies it fuels be imposed.