Testing the Waters

It’s probably fair to say that two months ago, most people didn’t think or talk much about the Strait of Hormuz. (At least I didn’t.) But now that it’s effectively closed, with implications for people around the globe, it’s hard to avoid.

Iran’s statements that it will start charging for passage have called into question long-held assumptions about freedom of transit. That has already led to other countries flirting with similar plans. Today I write about how the mere idea of a toll could change the world — even if it’s never imposed.

Strait ahead

Call it the Hormuz contagion effect.

Far away from the standoff in the Middle East, Indonesia’s finance minister made a seemingly offhand remark this month. He mused about imposing tolls on ships passing through the Malacca Strait, which, like the Strait of Hormuz, is one of the world’s busiest waterways.

“If we split it three ways between Indonesia, Malaysia and Singapore, that could be quite something, right?” he said.

The idea was swiftly shot down by Malaysia’s foreign minister, Singapore’s foreign minister and Indonesia’s own foreign minister alike. And yet the seed had been planted. It has been the subject of much discussion since.

Few observers really expect a toll in the Malacca Strait. But Iran’s proposed fee — and the experience of a global choke point being closed from one day to the next, causing an almost instant economic crisis — is shifting how companies and countries think about a handful of vital straits around the world.

These waterways are hugely beneficial to those using them for trade. For the countries that border them, they also represent a source of geopolitical power that has long sat dormant. But now their potential leverage is plain for all to see. And that has raised a new question for strait countries: What’s in it for us?

It has been done before

For centuries, the answer was, “a lot.”

I spoke to Natalie Klein, a professor of international law at University of New South Wales, Sydney in Australia. She told me the Ottoman sultans had levied tolls on ships entering the Dardanelles toward the Black Sea. The Barbary pirates charged European and American vessels leaving the Mediterranean. And perhaps the most famous tolls in history are the Danish Sound dues.

In 1429, the King of Denmark introduced steep dues on the sound that separates Denmark and Sweden. At one point, Klein said, income from the dues made up two-thirds of Denmark’s revenue.

The Danes enforced their tolls at cannon point and defended them with arguments that feel familiar today. The strait was in Danish waters, they said, and those waters could not simply be declared toll-free just because other countries found that convenient.

The rise of industrial shipping in the 19th and 20th centuries changed the calculus. Even strait countries recognized the benefits of unimpeded global trade. That new consensus gradually gave rise to international norms that abolished strait tolls. In 1982 the United Nations Convention on the Law of the Sea codified free navigation of straits, which has largely held ever since.

“Our starting point for so long has been that ships need to be able to move freely through straits,” Klein said. “Iran’s idea to toll the Strait of Hormuz cuts against everything that the body of law has stood for.”

A toll order

But Iran is not a party to the U.N. Convention on the Law of the Sea. (Neither is the U.S., for that matter.) And the idea that all this might end with a toll on the Strait of Hormuz has gained traction. One analyst for the website Eurointelligence called it a “consensus view.”

Should that happen, the precedent would be a big deal. There are multiple straits around the globe that are critical for the movement of billions of dollars’ worth of goods every day, Klein said. Tolls would make shipping more expensive. Higher shipping costs would make goods more expensive. And that, she said, “has implications for all of our economies.”

Not everyone thinks that’s the most likely outcome. Alexander Lott, a professor at the Norwegian Centre for the Law of the Sea, noted that in its recent rhetoric, Iran itself has cited the Law of the Sea, which he takes as a sign that it won’t ultimately implement an explicit toll.

But that doesn’t mean Iran won’t try to get something else out of its control of the strait, he said. It is already using it as leverage in peace talks. And it still might find other ways to monetize it.

Japan has contributed to the maintenance of the Strait of Malacca for decades. Other Asian countries have entered into similar agreements more recently. (Maintenance can include paying for infrastructure like lighthouses and buoys.)

With the closure of the Strait of Hormuz as a backdrop, other countries might not even have to articulate a threat, said Dita Liliansa, a colleague of Klein’s at U.N.S.W. Sydney. “They could just say, ‘Look, we’re not going to impose a toll, but it would be really nice if you helped us financially.”

After all, what is a maintenance fee but a toll with a nicer name?

Whatever the outcome in Iran, something has shifted. Shipping is already likely to become more expensive. Insurers may demand higher premiums as they try to price in new levels of geopolitical risk.

In Southeast Asia, in the aftermath of the Indonesian minister’s comments, this is already happening. One market analyst this week put a name to the rising costs of insuring, shipping and moving fossil fuels through the world’s other crucial waterway. He called it “the Malacca Premium.”

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