Iran Conflict Expected to Affect Global Trade and Economies in Multiple Stages

Al Jazeera reported that the effects of the Iran conflict will continue even if a peace agreement is reached and the Strait of Hormuz reopens. The publication stated that wars produce long-term changes to prices, contracts, and political systems. The first wave involves direct energy market disruptions.

Crude oil and liquefied natural gas shipments face restrictions, leading to higher freight rates. These changes affect ammonia production costs, which in turn influence fertiliser prices within months.

Fertiliser price increases are expected to reach food prices within two planting seasons. Manufactured goods prices are projected to rise within 12 to 18 months of the initial energy shock. The report noted that these increases will appear in staple foods in cities including Cairo and Dhaka.

The second wave involves permanent adjustments to shipping patterns. After Houthi attacks began in late 2023, container traffic through the Red Sea declined and was rerouted around the Cape of Good Hope. Two years later, traffic volumes remain below pre-2023 levels.

The third wave concerns economic pressure on low-income countries. Food accounts for 44 percent of household spending in these nations compared with 16 percent in advanced economies. Currency depreciation and import reductions are listed as primary adjustment mechanisms.

The fourth wave involves political instability.

The report cited the Arab Spring, Sri Lanka's government collapse, and unrest in Pakistan as examples of prior supply shocks leading to political outcomes. Some governments facing similar conditions from the current conflict may not survive.

Three measures were outlined to address the distribution of costs. Regional food and fertiliser reserves under the Organisation of Islamic Cooperation or G77 frameworks could buffer 12 months of import disruptions. A Global South war-risk reinsurance pool was suggested to share exposure. Structural changes to International Monetary Fund treatment of war-induced shocks were also proposed.