In an interconnected world, war's costs spiral far beyond just borders

Conventional wisdom holds that economic interdependence leads to deterrence or cessation of militarised conflict. The long history of peace and prosperity in the European Union, the only regional bloc to have achieved the highest stage of economic integration, is a classic example.

 

The Schuman Plan presented in 1950 by the French Prime Minister was aimed at creating interdependence between the two erstwhile antagonistic great powers — France and Germany — by pooling their coal and steel production under a single supranational authority, thus making the prospect of war “not merely unthinkable but materially impossible”. The cooperative economic gains were considered a major preventative factor against future conflicts.

 

The Franco-West German alliance strengthened over time, backed by strong political partnership between successive leaders of both countries, eventually taking European economic integration to its highest stage — the European Union.

 

However, gains of economic interdependence are sometimes seen as important only at the margins, and strategic interests become dominant. This is especially true where bilateral relationships are characterised by asymmetry of power and opposing political regimes, or when the overwhelmingly stronger power underestimates the weaker power’s ability to leverage the wider web of global economic interdependence. In such situations of power imbalance, it may be tempting for the superior power to use either economic instruments or militarised action to force compliance by the weaker power.

 

Iran, the biggest adversary of the United States (US) in West Asia since the Islamic Revolution in 1979, has been subject to both primary and secondary sanctions  — economic, financial, scientific and military — by the US for decades now. Iran, though, has remained persistent in its defiant pursuit of developing its nuclear programme and technology. In the process, it has earned the ire of both the sole global superpower, the US, as well as the aspiring regional power, Israel.

 

US President Donald Trump’s recent military action against Iran reflects his characteristic shortsighted and expansionist foreign policy agenda. Calculations based on Iran’s economic capabilities in isolation have led the US into a deluded overestimation of expected strategic gains from this misadventure in the region.  Iran’s potential to block the strategic waterway — the Strait of Hormuz  — and, even more importantly, its ability to leverage its geographical proximity to the Gulf Cooperation Council (GCC) economies, even with its limited-range, low-cost Shahed-136 drones was patently underestimated.

 

Given the centrality of the GCC as a global logistics hub and the criticality of the Strait of Hormuz as a trade route, the consequences of the US-Israel attack on Iran are reverberating throughout the densely-networked global trade and production system. The costs may be particularly high for Asia, causing a serious dent in its ability to be the primary driver of global growth and trade in the medium term.

 

In 2024, about 84 per cent of crude oil and 83 per cent of LNG that passed through the Strait of Hormuz were Asia-bound. While all major regional oil importing nations, including China, India, Japan, Taiwan and South Korea, are feeling the pressure of supply chain disruptions and shortages, the smaller Asean (Association of Southeast Asian Nations) economies are particularly vulnerable. Emergency energy-saving measures like remote work, shorter work-day weeks, reduced electricity consumption in factories and offices have already been introduced in Vietnam, Thailand, and the Philippines. As the conflict continues unabated, persistent fuel supply disruptions and inflationary pressures will have a significant negative impact on manufacturing and economic activity in the region. 

 

Furthermore, extension of the conflict to GCC economies is a double whammy for the export-oriented Asean economies. The Gulf states had emerged as a major alternative in the market diversification strategy of Asean and India in the wake of reciprocal tariffs imposed by the US. While adding to shipping and insurance costs, the conflict has heightened the uncertainty for trade with the GCC economies.

 

Also, economic recovery for the Gulf states may not be immediate after the war ends, given the extent of retaliatory action by Iran on their energy and infrastructure facilities. In fact, the GCC nations may have to rethink their growth model, as the conflict, if prolonged, will impact global confidence in the region for both investment and tourism.

 

The prospects of heightened export market risks and depressed manufacturing activity come on top of the existing challenge of “premature de-industrialisation” in Asean economies. The low-cost import surge from China, given its excess industrial capacity and weak Western demand, has been particularly damaging for domestic manufacturing and industrial activity in most Asean economies. Factory closures have been common across Thailand and Indonesia over the last couple of years.

 

Interestingly, while the ongoing conflict has serious implications for the smaller oil-importing Asean economies, China may stand to benefit for several reasons. One, having stockpiled large strategic reserves of crude oil, continued overland import of natural pipeline gas from Russia, and being a major producer of electric vehicles (EVs) and solar panels, it is reasonably well buffered from the Hormuz impact.

 

Two, the war has created an urgent imperative for all large net oil-importing nations, such as China and India, to shift away from fossil fuels and invest further in renewable energy sources. As the world’s largest manufacturer of green technology and products such as solar panels, EVs, and wind turbines, China has a distinct advantage in the current context.

 

Three, the US’ prolonged engagement in the Iran war and the consequent depletion of military resources and diversion of attention away from East Asia, could have serious security implications for this region. For example, the war has highlighted Taiwan’s vulnerabilities as the world’s leading semiconductor and advanced-electronics exporter.

 

Semiconductor and electronics production are energy-intensive and significantly dependent on the smooth air and seaborne transportation of materials, parts and components. Taiwan has the smallest gas reserves among major electronic producers in the region. In addition, apprehensions regarding Iranian strikes have led to a halt in Qatar’s helium production facilities, which supply a third of the world’s helium requirement. Helium is a critical input in chipmaking and other high-tech industries. A prolonged conflict could imply serious costs for the Taiwanese economy, including the possibility of a Chinese intervention.

 

Hence, it is for good reason that post-World War II economic interdependence was seen as a means to peace. War, even a localised one, in a densely interconnected world is bound to have dangerous consequences spiralling across the global economy. Some of these can be long-lasting.

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The author is professor, School of International Studies, JNU. Her books India’s Trade Policy in the 21st Century and Regional Economic Integration in South Asia: Trapped in Conflict? were published by Routledge, London. The views are personal