Navigating geopolitical risks: shipping costs and policy implications

Abstract

This paper examines 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, and the latter can be used to measure the shipping costs related to container ships. The empirical results show that shipping costs measured by both BDI and HARPEX react positively to geopolitical risks, where these positive effects are statistically significant for BDI in the long run and for HARPEX in the short run. Additional results show that the volatilities 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 suggestions follow for policymakers and shipping companies regarding shipping routes, diversifying risk, infrastructure, security measures, and contingency plans.