A tax or attacks: how the Houthis fund themselves

0:02The Economist

0:10Hello and welcome to The Intelligence from The Economist. I'm Jason Palmer. And I'm Rosie Bloor. Every weekday, we provide a fresh perspective on the event shaping your world.

0:24From what you tend to hear about artificial intelligence, it's easy to assume that all the serious innovation is happening in America, with China playing the role of distant runner-up. But that gap is closing fast and China is doing it very much on the cheap. And our correspondent heads into the rainforest of Ghana to visit a distillery. Booze has a long history in West Africa but now some entrepreneurs are trying to take it upmarket.

1:01First up though.

1:10The Bab al-Mandab Strait is the most important strait you've never heard of. It's a 25km wide gap that separates Djibouti and Yemen, Africa and Asia, the Red Sea and the Gulf of Aden, and in a very real sense trade between Asia and Europe. Ships have to pass through the strait when using the Suez Canal. That allows them to cut off thousands of miles of treacherous ocean around the Cape of Africa. About 12 % of world trade normally flows through it. But since October 7, 2023, attacks by a Yemeni militia called the Houthis have made the shipping route far more dangerous and expensive. The Houthi rebels have been attacking commercial ships in the Bab al-Mandab for more than a year.

2:00Corbyn Duncan is our global correspondent. But they are a peculiar outfit. They have an office and an email address. And if you ask them very nicely, they may offer you safe passage, sometimes for a price. so you can really email a group of hooties and actually get a pass to travel through this straight that's right uh and according to stephen askins a shipping lawyer who i spoke to for this piece it's quite an efficient process it's a really um incredibly user-friendly sort of consumer experience you write to them respectfully they write back respectfully you can write to the hocc and um they consider your request and if they agree then they give you you know a telephone number you can ring if there are any issues and they wish you a happy passage.

2:47Now, of course, this all makes a mockery of the idea of the freedom of the seas. But as far as the emailing experience goes, it's pretty benign. And say you forget to send that email, what happens? You run the risk of being attacked. The Houthis have Iranian weapons and Russian intelligence, and they've really succeeded in deterring Western shipping from entering the strait. Almost 200 vessels were attacked in 2024, and they damaged more than 40, sinking a couple. It's very dangerous and frightening for seafarers. But they're not attacking all kinds of ships, are they? The Houthis have been targeting American, British and Israeli ships, but many other Western shipping firms are simply not willing to take the risk.

3:30Earlier this week, following a ceasefire deal in Gaza, a Houthi spokesperson said that the group would continue attacking Israeli vessels and kept open the possibility of restarting attacks on other Western ships. So what's the effect been on travel through the strait? Since the Houthis began their attacks, the price of war risk insurance has spiked, and that has meant that shipping volumes through the Suez have collapsed by about 70%. That has diverted a lot of traffic around Africa, which burns time and fuel. And some ships are allegedly paying to be left alone by the Houthis. So that's basically a tax on shipping or making the strait into a toll road.

4:10Do you have any idea how much the Houthis are making from this? One source claims that the fees are worth about$180 million a month or$2.1 billion a year. And that is a lot. It in effect doubles the Houthis' ordinary income. Though others in the industry question these numbers. The costs of such protection, if paid for by every vessel that entered the strait in December, would amount to more than$200 ,000 for each boat. Now, that's a lot, and it in fact makes the trip unviable for some. So it seems unlikely that the figure is as high as that, although there's no real way of knowing because all of this money is channeled underground and through banks in various countries that are hard to reach.

4:52A Houthi official that I spoke to for this story admits to asking ship owners to apply for permits, but they say that claims that they're charging quote, illegal fees, are purely fabricated and have no basis in reality. So what impact is this having on consumers? Shipping prices between Asia and Europe have jumped up by as much as fivefold in 2024. And so ship owners are actually profiting as these longer transit times are soaking up spare capacity in the industry. Consumers, however, are ultimately paying the price for these higher costs. And freight costs account for just 3 % of an average finished products value.

5:30So that's actually not making a large dent on inflation. You might not notice it at the checkout, but it's definitely there. Some costs are more pointed. Egypt is losing about$7 billion a year in revenue, thanks to a reduction in the use of the Suez Canal. Downing Houthi missiles is a very expensive business for the navies of America, Britain and the EU that are patrolling the Red Sea. In all, America has spent almost$5 billion in trying to protect shipping in that part of the world. So it sounds like the combination of geopolitical interests and financial gain make this a really hard one to solve.

6:05That's exactly right. America is stretched. There are enough spot fires in the region keeping it busy. And in fact, very little American trade passes that way anyway. Egypt, Saudi Arabia and the UAE, for their part, have the most at stake. But actually, they've kept their navies on the sidelines because they don't want to be seen to be siding with Israel. Europe has set up its own naval operation, but it's pretty piecemeal. It lacks muscle. And in fact, NATO warships themselves avoid going down the strait. And officials in Beijing, for their part, have told American diplomats that they support freedom of navigation for all.

6:39But it appears that they have an understanding with the Houthis brokered via Iran to ensure that their ships are not attacked. So what you're saying, Corbyn, is people are going to need to keep honing their polite emails requesting passage to the Houthis for some time. It's likely that there will be fewer attacks if the ceasefire in Gaza holds, but the Houthi rebels have made it clear that they are not going anywhere and that disrupting global trade is their most powerful weapon. Corbyn, thank you so much. Thanks, Rosie.

7:25In the Roosevelt Room of the White House yesterday was a revealing briefing. There's President Trump flanked by three techie big shots, the bosses of Oracle, SoftBank, and OpenAI. The occasion was the unveiling of a collaboration on artificial intelligence with the requisite flashy name. Together, these world-leading technology giants are announcing the formation of Stargate. So put that name down in your books. Together, the three firms will invest as much as half a trillion dollars to build AI infrastructure in America.

8:03So what's revealing? Mr. Trump likes to hobnob with tech dudes, we know that. He likes to take credit for achievements he's had nothing to do with, we know that. The data centers are actually under construction. And the tech dudes, like OpenAI's boss Sam Altman, are increasingly happy to play along with such fictions. We know that. We wouldn't be able to do this without you, Mr. President, and I'm thrilled that we get to. What's not readily apparent, though, is how much work Stargate and other American ventures will have to do to maintain the country's once considerable lead in AI. In a span of months, Chinese companies have released a series of AI models that rival existing leaders like those from Anthropic and OpenAI.

8:45Alex Hearn writes about artificial intelligence for The Economist. Right now, these new models are bigger and they are much, much cheaper. That's left Western companies and their governments scrambling to ensure Chinese companies and their government don't take the lead in frontier AI. So what's changed in that span of months then? The big bang for Chinese AI was 2023, when Beijing changed its rules. China had actually been quite far ahead of basic research in machine learning, but the rise of LLMs, and particularly the release of ChatGPT, caught Chinese AI flat-footed. In a restrictive environment like the Chinese internet, it's not a good idea to just publicly launch generative text models without some assent from central government.

9:35April 2023 China said yeah actually we're okay with this by August it was more than okay it was saying this is a forefront research priority and so very shortly after that a bunch of Chinese labs released models Baidu Tencent and Alibaba they were thinly veiled reskins of American open source models they were doing things that surprised no one in ways that interested no one But over time, one of the big corporate labs stood out, Alibaba, which made the Quen chatbot. The first version of Quen was not much, but unlike the other labs, Alibaba iterated fast and iterated well. And by autumn 2024, Quen was one of the best chatbots full stop, not just in China.

10:25You hinted that this started out in China as a sort of reworking of American tech, but what you're talking about now is something fundamentally different or no? Fundamentally is a bit strong. These companies are still working in the domain of LLM's large language models. They've started to do more than just taking open source material, repurposing it and releasing something that matches what the American labs were releasing for free online a few months earlier. DeepSeek, the company released its V3 LLM on Christmas Day. It didn't share any explanation as to what it was, so people were left staring at an absolutely enormous file, 700 gigabytes posted to the public internet.

11:08If you had the hardware to run it, which most people don't, you could download it then and there, get it up and running, and start putting it through its paces. And what people realised as they did that is that it was a phenomenally capable model. up there with GPT-40. It was up there with Google's Gemini. It was better than Meta's Llama 3.1, which was previously the biggest and most capable model released for free on the internet. So what did they do? What they'd done was no individual's stroke of genius. It was just a dogged accumulation of marginal improvements. The outcome of that was that they trained this model better than Facebook's best.

11:50and they did it for a tenth of the cost of Facebook. They did it in the face of sanctions that prevented them buying the best chips, so they were using two-year-old NVIDIA chips. Alibaba's QN, meanwhile, moved even faster. In September, OpenAI released a reasoning model that used a new way of looking at complex questions in maths and coding and broke down its thinking step by step. Other labs raced to copy it. The first to get there was Alibaba. It released a version of its QN that could do reasoning called QWQ, QN with questions, in November. It took Google until December to copy this. When you say reasoning model, what's different there?

12:30What does that mean? It's the AI equivalent of the difference between type 1 and type 2 thinking. Type 1 thinking is when you give an answer off the top of your head. If I say what's the capital of France, you can say Paris. You don't have to do any structured thinking there. Type 2 is if I ask you what the fifth biggest city in France is. At that point, unless you're a savant, you're unlikely to be able to just answer like that. But you might be able to if you stop and think, well, what do I need to do? I need to think of a bunch of large cities in France, discount the ones that I know are in the top three or four, and then try and make an accurate guess as to what is at number five.

13:05Until September, AI only really did type one thinking. If you log on to ChatGPT and ask it anything, even very complex questions, it gives you the answer effectively off the top of its head. What these reasoning models are is they're taking something that seasoned LLM users have learned to do as a matter of practice, saying things like, think step by step, show you're working, don't give me an answer until you know you're right, and formalized it, and made it so that the model can apply it not in an ad hoc way, but in a very structured way that means that it's able to use a lot of computing power to get to answers that would never previously have been capable for a conventionally built large language model.

13:48And you keep referring to how comparatively on a shoestring a lot of these Chinese efforts are. Is that in terms of what it takes them to do it or in terms of what eventual users will see when they pay for products and services? Both. DeepSeek is the one that's been most open about pricing. It trained its model for a tenth of the cost that Facebook trained its own Lama system on, less than$6 million. And it says when it opens up API access in February, so letting you communicate with the DeepSeek LLM through other software, letting you effectively build your own AI company around the model that DeepSeek offers, it will again be undercutting the state of the art by an order of magnitude.

14:30that alone is incredibly important for where the ai industry goes there's not historically been huge price wars in ai if we now enter a world where people are having to choose between the american model at the frontier the best in the world and one two months behind one very slightly worse from a Chinese company that's 10 times less expensive to run, you might have to explain to your boss why you picked the American one, particularly if you aren't an American company. If you're building an e-commerce app in the Philippines, if you are building a social network in Indonesia, there's not really an obvious reason to buy American over buying Chinese.

15:16The competitive landscape of AI is shifting all the time, but currently the American lead in AI is a matter of months. And at the rate that companies like DeepSeek and Alibaba are catching up, it could shrink to weeks. Alex, thanks very much for your time. Thank you for having me.

15:48In November, I went to the Rain Rum Distillery in Ghana. Ore Ogunbiyi is our Africa correspondent. It's situated in the Arafal region on 2 ,000 acres of farmland and rainforest. It really is mostly just really dense forest with a handful of old colonial era houses, an abandoned pool and even a graveyard dotted around the plot. OK, so welcome to the Rainforest Distillery. I was shown around by Amma Mensah, the British Ghanaian founder and CEO of Rain, a new Ghanaian luxury rum. Our name is Rain and we're named that way because we're building a community where everyone feels royal. If you look at the bottle, there are symbols which are a nod to African royalty throughout.

16:38You've got here the war horns, you've got a shield in the middle, a crown. West Africans, royal and not, have drunk alcohol for thousands of years. But there aren't actually many African spirits in the global market, perhaps because the region has a bit of a complex history with this stuff. The world's first rums came from Africans who were enslaved in the Caribbean. Now, Amma is hoping to take rum back to its roots and redefine it for the world. And how did Amma end up making rum in the rainforest? So in 2015, Amma went to Ghana from the UK to be a business strategist for a loss-making farm and distillery.

17:19In a weird turn of events, she actually ended up buying it from its foreign owners. There's a lot of renovation that is needed because when I turned up here, in many ways things have been abandoned. There's still a lot of work to be done. The company was losing millions of dollars a year. In my first two years, that was one of my focuses. So I was able to reduce the losses by 50 % in the first two years, but also increase farmers' salaries by 50%. So what does it all look like after all that renovation then? Now, her company has a huge site with a distillery where sugarcane is processed and turned into rum.

18:02And I was taken to see how that process works by one of Amma's employees, Silvanus Ashan. Okay, welcome. This is where everything happens. It's where the magic happens. Yes, this is where the magic happens. And this is our sugarcane crusher. It only goes in through the hopper and then comes out through here. So when we collect the juice here, we pump it out. And you specifically said that Emma is making a luxury rum. Is there a big call for that in Ghana? There is definitely a drinking culture in Ghana. So alcohol is used in lots of festivals and celebrations. But Emma points out that it should be revered and not just drunk casually.

18:45She told me that she doesn't want to flood low-income communities with sachets of cheap booze. She wants her rum to exude luxury and to celebrate Ghana. I wanted to make something that I felt could honour and celebrate my culture and how alcohol is used in Ghanaian culture. and we have alcohol involved in every ceremony of great significance, births, deaths, marriages and so RAIN had to be a luxury because I do believe alcohol should be a luxury, an accessible luxury on some levels but it's a luxury product. And as you can imagine I'm going to ask, how's the rum? Well, I thought you might ask that.

19:31I'm obviously not much of a drinker but I did need to just give it a taste to see what all the fuss is about. So they have three types of rum. They've got a spiced one, which is seasoned with things like calabash nutmeg, cocoa, lots of local flavors. They've got a purple tinged firebub and hibiscus one. And then there's also an aged rum. So was it like strong stuff? I was struggling. I'm not gonna lie. I do think it was it was quite strong. But you know, I will let you be the judge. You're the connoisseur in our midst. In the studio with you, you should have some samples of this stuff. And I just thought listeners might prefer to hear what you, the professional, has to say about the roms.

20:11Which one are you starting with? I do have all three of them. And like you, I will start with the spiced. Also, I object to being called a professional. I think that has bad implications for me. Fair enough. Aficionado. I should also point out that it is afternoon, so this is both journalistically and morally defensible.

20:38Really nice, really delicate. Good caramelliness to it. The spice is really nicely balanced. Okay, and what did you try next? I had the biobab and hibiscus, the purple one. It is a lush purple color, I gotta say.

20:54Yeah, really nicely, noticeably floral without being overpoweringly so, which is often the case with stuff that goes for a floral vibe. Genuinely impressed. And last but not least, the age drum. So this one is the priciest of the three. This was the one that almost knocked me out. That is the one that's certainly strongest on the nose. Yeah, that's serious stuff. Yes, that has had a happy relationship with the wood it's been stored in. I like that a lot. So you started off by saying that there aren't many African spirits in the global market. Do you think this is the sort of thin end of the wedge, a change in that?

21:33I do think it could be. I mean, some caveats. It is quite pricey. The cheapest bottle is about£50. So it's not exactly a mass market product. There's also the challenge of dealing with alcohol as an industry. It's super highly regulated. And historically, African brands have struggled to compete in this space. but I do think that she's done something quite interesting with flavors with local ingredients and she really could create just enough intrigue in African spirits that this stuff could really take off and you never know further down the line we could be talking about botanical rums and Ghana the way we talk about tequila in Mexico Ori it's always a pleasure this time even more so thank you so much for having me as always

22:29That's all for this episode of The Intelligence. We'll see you back here tomorrow.

22:49Thank you.