As the U.S.-Israeli war against Iran intensifies, the specter of escalation presents major economic, political, and geopolitical threats not just in the Middle East, but across the most densely populated and dynamic region of the world: East, Southeast and South Asia.
The "Yuxi Circle", named for the Chinese city at its center, has a radius of roughly 2500 miles and contains about 55% of the world’s population within it – the Indian subcontinent, China, Japan, the Koreas, and all the members of the Association of Southeast Asian Nations, or ASEAN. For the last four decades, this region has benefited from GDP growth of about 5% each year, driven by the expansion of industrialization, trade, agricultural productivity, and urbanization. This has led to extraordinary increases in human welfare and a shift in the economic geography of the world away from the North Atlantic basin.
But these achievements could all be seriously jeopardized by ongoing events in the Persian Gulf.
According to the International Energy Agency, of the 20 million barrels of crude oil and oil products that go through Strait of Hormuz every day, 80% go to Asia. Among the major Asian economies, the dependence on oil flowing through Hormuz is high overall, but some states are even more vulnerable than others.
China and India both have a lot of domestic coal (and are increasing domestic renewable energy production), so oil and gas imports account for less than half of all energy production in the world’s two most populous nations. Even so, roughly 50% of those imports in both cases come from the Persian Gulf, most of which passes through the Hormuz Strait. Thailand also gets about half its oil from the region.
That fraction is much higher among Washington’s key allies in East Asia. Japan and South Korea both rely on the Gulf for close to all their energy needs, with the bulk of their fossil fuel imports coming through the Strait. The Philippines also imports more than 90% of all its oil from the region.
Oil price hikes will have a disproportionate impact on these countries. There has already been a big jump in the price of financial contracts based on oil, with benchmark Brent crude (sourced in the North Sea) trading at $109 per barrel as of this writing. But this is still far below the $155 per barrel price of a physical barrel of Dubai or Oman crude, which is a better reflection of what Asian buyers are actually paying.
Prices alone do not capture the extent of potential disruption across the region, which will spread through multiple channels at both the macroeconomic and human levels, threatening to roll back years, or perhaps even decades, of development if the crisis persists. At the most basic level, an inflationary shock via oil prices will hit households, shrink government budgets (through increased subsidies), and reduce the ability of central banks to cushion the blows through rate cuts.
But the human costs could be even more profound. For example, most Indian rural households had long relied on wood or dried dung as a cooking fuel in home kitchens, exacerbating both deforestation and respiratory ailments, the latter particularly among women and children. A successful effort to replace this fuel with liquid petroleum gas (LPG) has brought dividends, but this progress has now been threatened by the war. The Indian government has responded by diverting LPG from restaurants to households and prioritizing tankers carrying the fuel, a strategy helped by a deal with Iran to grant the ships safe passage.
The war’s impact on global fertilizer supply can also be hugely consequential. The energy intensity of nitrogen-based fertilizer production means that the Middle East is a key source, with roughly 30% of the world’s fertilizer transiting the Strait of Hormuz. Urea prices have risen by a third since the onset of the conflict, threatening both farmers’ incomes and the food supply.
Much of the world will be affected by this, but the UN’s Food and Agriculture Organization points out that Bangladesh is particularly vulnerable. It has one of the world’s highest rates of nitrogen-based fertilizer usage, of which roughly 55% is sourced from the Persian Gulf. The challenge will become severe if the disruption extends for several more weeks, at which point planting season begins in India, Thailand, and Vietnam, among others.
The potential hit to remittance incomes from the region is yet another channel of instability. India has roughly 9 million workers in the area who sent home about $50 billion last year, though this represents a relatively small fraction of India’s overall foreign exchange reserves of $725 billion. Pakistan, however, could be much more exposed, with remittances from the Gulf accounting for more than half of the country’s roughly $40 billion of remittances, a number that amounts to about twice its foreign exchange reserves of $21 billion. These numbers suggest the broader dangers to certain countries – the potential for balance of payments crises that spill over into domestic politics and geopolitics.
Economic crises by themselves may not lead to political fallouts if societies are resilient, pain is seen as shared, and governance is good. However, much of developing Asia suffers from persistent inequality and variable state capacity. In recent months, the region has also seen the reigniting of old conflicts, such as between India and Pakistan, and Thailand and Cambodia. A wave of protests by youth over the past two years toppled governments in Nepal and Bangladesh and challenged existing leaders in Indonesia and the Philippines. Under such politically fraught conditions, a major economic shock could well lead to new turbulence and political change.
But beyond domestic politics, a pyrrhic victory for the United States and Israel in the Middle East, as seems likely with Iran’s continuing resistance, also carries geopolitical implications for Asia. For one, the perception of Washington as a security guarantor has suffered a major blow. The attack on Iran brought enhanced risks for close U.S. partners in the Gulf (who were not consulted on the decision), leaving them exposed to major damage from Iranian counterstrikes.
This fact is not being missed in Asia. U.S. ally South Korea has already witnessed a direct impact on its security due to the transfer of crucial THAAD air defense capabilities to the Gulf. In the short run, given North Korea’s continuing belligerence, Seoul will be very careful to not rock the boat on its relations with Washington. But over the longer term, the Iran war incentivizes its popular center-left government to triangulate further between Washington and Beijing.
The Philippines and India are also watching the Iran war carefully. India is caught between its increasing bonhomie with Israel and the sharp lesson of the Gulf’s critical importance to its economic security. Even a battered Iran may succeed in emerging as a de facto gatekeeper of the Gulf’s energy supplies for an extended period. New Delhi will then be pushed to reformulate its Middle East policy, possibly, for example, by becoming more active within BRICS to oppose the U.S.-Israeli aggression in the Middle East.
Meanwhile, Manila is concerned that Washington’s casual decision to attack Iran (and Tehran’s returning the favor by attacking Gulf states) further damages the eroding norms of sovereignty and territorial integrity, which can invite more Chinese adventurism in the South China Sea. Despite the reality of a volatile United States, the Marcos Jr. administration will likely continue to deepen security ties with Washington and Tokyo, keenly aware, as it is, of the Philippines’ acute and growing weakness vis-a-vis China.
Across Asia then, the U.S war against Iran means that countries will face serious stresses and unenviable choices as they grapple with a combustible mix of economic vulnerabilities, domestic politics, and pressing security threats.