South Asian Exporters Face the 2026 Freight Rate Spike

The proximate trigger sits in late February. On February 28, 2026, military strikes involving Israel and the United States hit Iranian targets, and Iran responded by effectively closing the Strait of Hormuz to commercial shipping. Suez Canal transits were suspended the same week, and airspace across several Gulf states shut down.

Freight analytics firm Alphaliner counted the immediate toll: within days, roughly 138 container ships were trapped in the Persian Gulf, holding close to 470,000 TEU of capacity. Maersk, MSC, CMA CGM, COSCO, Hapag-Lloyd and several other major carriers all had vessels caught inside.

A rapid sequence of operational and commercial decisions followed:

• March 2, 2026 — Alphaliner confirms the scale of the trapped fleet; MSC alone accounts for roughly 109,000 TEU of stranded capacity.
• March 4, 2026 — The container ship Safeen Prestige is struck inside the Strait of Hormuz, the first such attack on a container vessel since the conflict began.
• March 6, 2026 — A tug operating off Abu Dhabi is hit by a missile, with crew reported missing.
• Early-to-mid March 2026 — Carriers begin layering Emergency Conflict Surcharges of USD 2,000 to USD 4,000 per container onto Gulf-linked bookings, on top of standard freight-all-kinds rates.
• March 10, 2026 — Maersk and CMA CGM briefly resume limited Red Sea transits before pulling back again as the security picture stays unsettled.

Pakistan's civil aviation authority added a parallel disruption, closing sections of Karachi and Lahore airspace daily between 9:00 a.m. and 3:00 p.m. local time through the end of March — a reminder that the shock reached beyond ocean freight into regional air cargo corridors that Sri Lankan and Indian exporters also use for time-sensitive shipments.

Xeneta's chief analyst has described what followed as a wave pattern rather than a one-time jump. Rates rise sharply after an escalation, ease briefly, then climb again as fresh incidents reset expectations.

The numbers illustrate the shape. Average spot rates from China to Jeddah rose 85% between February 28 and March 22, as the port became a land-bridge gateway into Gulf markets cut off from direct sea access. Containerized imports into the wider Middle East region collapsed 64% year-on-year in March, with exports down 62%, according to data from Xeneta and Container Trades Statistics.

By mid-May, the pattern had spread into mainstream Asia-linked trades. The Freightos Baltic Index for the week of May 12 put Asia–US West Coast rates around USD 2,100–2,500 per FEU, roughly 50–60% above pre-conflict levels. Asia–US East Coast rates ran closer to USD 3,069–3,678 per FEU. Drewry's World Container Index jumped 12% week-on-week in mid-May to USD 2,553 per 40-foot container on its global composite measure.

Reefer cargo — relevant to Sri Lanka's smaller but growing seafood and fresh-produce export lines — carries its own premium. CMA CGM's Emergency Conflict Surcharge for refrigerated containers has run about USD 1,000 above the equivalent charge for dry containers, reflecting the added power and handling load those units require on longer, rerouted voyages.

Forwarder DHL has projected four to six months for freight conditions to normalize from the May reading, a timeline that would push any real relief into the final quarter of 2026 at the earliest.

Freight costs do not stay contained on a shipping line's income statement. They move through supply chains into producer prices first, then into the consumer prices economies watch when setting interest rates.

The mechanism is straightforward this cycle. Cape of Good Hope diversions add roughly 3,500 nautical miles and 10 to 14 days of transit time per voyage, alongside 30 to 40% more bunker fuel burn. That additional cost gets built into landed prices for everything moving on Asia–Europe and Asia–Gulf lanes, whether the cargo is finished apparel, industrial inputs, or intermediate goods bound for further assembly.

Energy markets add a second channel. The Strait of Hormuz carries an estimated 20 to 30% of global seaborne oil and roughly 25% of liquefied natural gas volumes, with the bulk of that flow destined for Asian buyers in China, Japan, South Korea and India. Brent crude moved above USD 80 a barrel in early March as the conflict escalated, and analysts flagged the possibility of a run toward USD 100 if disruption to Hormuz intensified again.

Even as the acute military phase eased somewhat after March, the structural rerouting has not reversed. War-risk insurance premiums on high-risk transits now run at five to ten times their pre-2023 baseline, a cost that gets absorbed into freight rates and, eventually, into the price of the goods those ships carry.

That combination — elevated shipping costs sitting on top of episodic energy price spikes — gives regional central banks a harder problem than a simple energy shock. Energy prices can fall back quickly once a ceasefire holds. Freight costs tend to be stickier, because rerouted capacity, longer transit times and new surcharge structures take months to unwind even after the underlying security risk fades.

While shipping lines were rerouting around Africa, a separate and largely unrelated policy process was reshaping the cost side of the ledger in Washington.

The sequence matters for anyone modeling landed costs into the United States:

• February 20, 2026 — The US Supreme Court rules that the administration's global tariffs under the International Emergency Economic Powers Act exceeded presidential authority, putting more than USD 90 billion in collected duties into potential refund status.
• February 24, 2026 — The administration invokes Section 122 of the Trade Act of 1974 for the first time, imposing a flat 10% global import surcharge. Section 122 carries statutory limits: a 15% rate cap and a 150-day duration, meaning it expires on July 24, 2026 unless renewed or replaced.
• March 11, 2026 — The US Trade Representative opens Section 301 investigations, one focused on forced-labor enforcement gaps and another on excess manufacturing capacity, naming dozens of economies including China, Japan, India, Bangladesh, Vietnam, Cambodia, Malaysia, Thailand, Indonesia, Taiwan, Singapore, Switzerland, Norway, South Korea and the European Union.
• June 2, 2026 — USTR publishes findings from the forced-labor investigation covering 59 countries and the EU, proposing a 10% tariff for 15 trading partners and a 12.5% tariff for 45 others, including Sri Lanka.
• July 6–7, 2026 — A public comment period closes and USTR holds a hearing at the US International Trade Commission, the last formal venue for affected exporters to argue for a lower rate before the rule is finalized.

Unlike the IEEPA tariffs the Supreme Court struck down, Section 301 actions rest on a legal foundation that has held up in court for decades. Trade policy analysts have described the emerging Section 301 rate as a new floor for US import duties rather than a temporary bridge measure — durable in a way the earlier emergency tariffs were not.

Sri Lanka's apparel and textile sector was, until this tariff proposal, showing real signs of a turnaround.

Export earnings reached USD 394.14 million in May 2026, a 7.96% year-on-year increase and the strongest single month of the year so far, according to Joint Apparel Association Forum data. Shipments to the United States, the country's largest single apparel market, rose 15.36% to USD 149.96 million. Sales to smaller, non-traditional markets climbed 14.61% to USD 70.67 million.

The recovery has not offset a difficult start to the year. Cumulative apparel and textile exports for the first five months of 2026 stood at USD 1.93 billion, still down 4.68% against the same period in 2025, with declines recorded across all three of Sri Lanka's core markets — the US, the EU and the UK.

The June 2 USTR proposal complicates that recovery. At a proposed 12.5% additional duty, Sri Lanka sits in the higher of the two tariff tiers, alongside 45 other economies, while 15 trading partners — a group that does not include Sri Lanka — would face only 10%. India and Vietnam share the 12.5% bracket with Sri Lanka, putting all three on comparable footing with each other but roughly 2.5 percentage points worse off than direct competitors in the lower tier.

A separate mechanism in the USTR notice could offer partial relief: a formula tying a country's allowance of apparel exports at the reduced rate to how much US-origin cotton and man-made fiber that country imports. Sri Lankan manufacturers who source more American yarn and fiber could theoretically claim a lower effective rate, but the mechanism remains unfinished, and industry groups including JAAF and the Export Development Board have treated the June 22 hearing-appearance deadline as the first real deadline that matters.

None of this happens against a stable tariff baseline. Separate reciprocal tariff schedules have shown Sri Lankan apparel facing rates as high as 44% under earlier IEEPA-era measures, against 37% for Bangladesh, 46% for Vietnam and 49% for Cambodia — figures largely superseded by the uniform 10% Section 122 surcharge now itself set to lapse on July 24. Whatever replaces Section 122 will reset the competitive map among South Asian and Southeast Asian apparel producers, and the Section 301 proposal is the clearest signal yet of where that replacement is heading.

Freight cost inflation and tariff exposure land very differently depending on where a company sits in the supply chain.

Global ocean carriers hold structural pricing power during a capacity crunch. When 10.7% of the global container fleet is directly affected by a conflict zone, as Alphaliner has estimated for the current Middle East disruption, the carriers still able to move boxes can charge emergency surcharges with limited pushback, because shippers have few alternative options on Gulf-linked routes. That leverage shows up in the numbers: Maersk and Hapag-Lloyd both published first-quarter 2026 results reflecting the early phase of the crisis, with Hapag-Lloyd posting a quarterly loss even as it raised surcharges — a reminder that pricing power does not guarantee profitability once fuel and rerouting costs are factored in, but it does mean carriers can adjust prices in near real time as conditions shift.

Apparel exporters sit in a much weaker position. Garment orders are typically priced months in advance under fixed free-on-board or landed-cost agreements with Western retailers, leaving manufacturers to absorb freight increases that occur between order placement and shipment. Sri Lanka's listed apparel bellwether illustrates the strain. Hela Apparel Holdings PLC, traded on the Colombo Stock Exchange, reported FY2025 revenue of Rs. 83.36 billion, up 18.6% year-on-year — a headline that looks healthy until set against an EBITDA margin of just 4.77% and a net loss of roughly Rs. 3.51 billion in its most recent quarter. That combination — rising revenue, thin operating margin, and a bottom-line loss — is close to the textbook signature of a company with volume but not pricing power: it can win orders, but freight and input cost inflation eats through the spread before it reaches shareholders.

The gap between these two positions is the central risk-management fact of this cycle. Companies that can reprice quickly — carriers, forwarders with index-linked contracts, and apparel manufacturers with enough scale or specialization to negotiate cost-sharing clauses — have a mechanism to keep freight inflation from eroding margin. Companies locked into fixed-price purchase orders, thinner balance sheets, or single-market customer concentration do not.

Index-linked freight contracts, where the rate a shipper pays tracks a published market benchmark rather than a fixed number agreed months earlier, have become more common through this cycle for exactly that reason. They do not insulate a shipper from rising costs, but they remove the risk of locking into a rate that turns out badly wrong in either direction, and they give finance teams a defensible number to explain when freight budgets move.

Three dates anchor the remainder of the year for anyone exposed to South Asian export flows.

July 24, 2026 is the statutory expiry of the Section 122 global 10% surcharge. Unless the administration extends it or a court challenge intervenes, importers face a gap between that expiry and whatever Section 301 rate structure is finalized from the June 2 proposal — a gap trade advisors have flagged as a period of genuine planning uncertainty rather than a smooth handoff.

The base case for freight markets, per DHL's own guidance, points toward gradual normalization over four to six months from the mid-May reading, meaning meaningful relief is unlikely before the fourth quarter of 2026 even if no new military escalation occurs. Container capacity absorbed by Cape of Good Hope routing does not return to the Suez Canal instantly once a ceasefire holds; carriers rebuild loop schedules cautiously, and Xeneta's own wave-pattern analysis suggests rates historically take longer to fall than they took to rise.

The main downside trigger is a resumption of direct attacks on shipping in the Strait of Hormuz or the Red Sea. Iran's conditional reopening of Hormuz has been tied explicitly to the status of a ceasefire with Israel and Lebanon; a breakdown in that arrangement would very likely reproduce the March pattern of trapped vessels, emergency surcharges and a fresh leg up in the wave. Houthi attacks resuming in the Red Sea carry a similar risk for Asia–Europe container flows, a corridor Sri Lankan exporters selling into the EU and UK depend on directly.

For South Asian exporters specifically, the outcome of the July 7 USTR hearing and the mechanics of the proposed cotton-purchase carve-out will matter more to margins over the next twelve months than any single freight rate print. A country that secures the lower 10% tariff tier, or negotiates meaningful access to the textile-purchase mechanism, changes its competitive position against Bangladesh, Vietnam and Cambodia independent of what happens in the Strait of Hormuz. A country that secures neither faces a compounding problem: elevated freight costs it cannot fully control, sitting on top of a tariff disadvantage it has limited leverage to negotiate away before July 24.