Benjamin Franklin is credited with saying that the only two certainties in life are death and taxes. With the backdrop of a third Gulf War, we might add the only other certainty: surging energy prices and restricted supplies of other commodities will curb global growth and world trade, possibly causing a recession, and exacerbate cost-of-living concerns. The longer the war persists and the greater the damage to energy installations, the bigger the stagflation impact. 

Asia and Europe will probably be worst affected, as energy price and quantity effects compound. Fuel rationing has already been introduced in Indonesia, for example, while refined products such as jet fuel and diesel are potentially in short supply. The hike in imported inflation will aggravate so-called ‘terms of trade effects’ and pull down growth for these regions. This applies to China, too, despite temporary respite because of high oil inventories, and its more developed electrification and green energy endowment. China, though, imports 70 per cent of its oil needs, a third of which comes from the Gulf, and so is at risk in a drawn out conflict. The United States, as an energy exporter, will get positive terms of trade effects, but still experience higher inflation. The tax of higher energy costs is as certain as Franklin insisted. 

Yet a whole range of other predictions relating to the geopolitical sphere, ranging from a potential Sino-US proxy war, to America facing a Suez or Vietnam moment leading to the final demise of the US dollar system, and Iran and or China ‘winning’, is either pure speculation or political prejudice. These views and other warnings are not without substance, and merit scrutiny. Nonetheless, the significance and consequences of the Iran war for Beijing and Washington might not always be what many commentators insist must be true.

At first glance, it seems as though the US-Iran war should be an unequivocal win for China, which, it is often argued, has already been ‘gifted’ by Donald Trump in several ways. These gifts include his diminished commitment to the rules-based order, treatment of allies, and use of tariffs as coercion. When Canada’s prime minister, Mark Carney, said in Beijing early this year that China was a new strategic partner, and subsequently spoke to the business and political elite in Davos about the need for ‘middle powers’ to stand up to the United States, the appreciation in China’s Communist Party headquarters must have been palpable. 

Now, with the United States facing unenviable choices between a humiliating withdrawal and escalation – or both – China could be forgiven for thinking that its confident belief in the inevitable decline of US hegemony is about to be realised. Some have argued this is a ‘Suez moment’, recalling the end of British and French pretensions to imperial power, and of Sterling as a reserve asset, after the failure to wrest control of the Suez Canal from a nationalist, militaristic Egypt. Cue the current crisis over the Straits of Hormuz. The parallel is a warning, but by no means similar or pre-ordained, even if a militarist Iran with Sino-Russian backing in command of a critical waterway would be a serious concern.

Whatever the next few weeks and months might look like, there are a few additional, enduring and indeed alternative ways to think about the longer-term consequences of the war, not the least of which, at least in the short term, is the unknowable way that it ends. 

China’s passivity in the conflict doesn’t mean that Beijing doesn’t have particular interests in Iran and the Gulf. What it does reflect is the fact that it cannot do much to affect or frame the conduct of the war. Nor can it bring about its end, even though it has recently published a rather bland proposal along with Pakistan. It is, though, quite likely to be anxious about both a more volatile and unpredictable American adversary that is prepared to use its daunting force, and chokepoints generally, including not only Hormuz but also those closer to home: for example, in the Malacca Straits and South China Sea. 

This passivity underscores something else that is important for China. It craves stability both at home and abroad as the essential backdrop against which to pursue its policies and political agendas. The current environment therefore is anathema to a China, whose economic statecraft and broad goals hinge around the smooth conduct of trade and investment. This requires some form of persistent globalisation, open sea lanes, functional supply chains, technological integration, economic interdependence it can control, and stable financial markets. Without these, China’s model simply doesn’t work. 

Last year, China chalked up a record $1.2 trillion trade surplus, or six per cent of GDP, and it could swell further this year. Net trade (exports minus imports) may have contributed up to a third of China’s growth last year. It can ill-afford to lose an important growth driver if global demand wilts in the wake of the war, or if the world economy were to slide into recession. Hence the shift in tone in the People’s Bank of China monetary policy committee’s most recent meeting, where geopolitical trade and conflict, and external shocks, replaced previous, more innocuous descriptions of the economic environment. 

The backdrop, moreover, isn’t helpful for China. Roughly a dozen important Global South countries, including Mexico, Argentina, Brazil, Chile, Turkey, Saudi Arabia, South Africa, India, Thailand, Vietnam, Malaysia and Indonesia, anxious about dumping and their own industrialisation programmes, have taken actions in the last one or two years to curb some or selected imports of Chinese goods, ranging from EVs and batteries to textiles. According to the German think tank, MERICS, 52 of the world’s largest 70 economies had anti-China restrictions in force last year. China therefore faces a double whammy of increasingly resistant global trading partners and a global demand shock.

It is also worth noting that China’s commercial vested interests with members of the Gulf Cooperation Council (GCC), notably Saudi Arabia and the UAE, are far larger than with Iran. Bilateral trade with the latter, officially, reported at about $10 billion, may be four times as much when the unreported bilateral oil trade is taken into account. Bilateral trade with GCC countries is over eight times higher than that. China’s foreign investment in GCC countries is also far in excess of that with Iran. China, therefore, faces the risk not only that its business with, and influence in, GCC countries could be compromised, but that Iran’s horizontal escalation of the war to include them has actually made them more reliant on the United States.

Last but not least, we should also remember that much as China emphasises advanced technology and science in industries that represent about a tenth or more of the Chinese economy, the rest of the economy features sluggish growth, low productivity, overproduction, weak prices and profits, high levels of unemployment and deep fiscal and financial weaknesses. Real estate and infrastructure, now in their sixth year of structural decline, may be only about half way through the long cycle of adjustment. China’s dichotomous economy is a major contradiction to which the government does not have an acceptable political solution.

As the world trading and commercial systems fracture, and form blocs, nations (including EU member states) will weigh up competing national interests. They will also recalibrate their positions on various issues relating to US-China competition. Despite the general rethinking about America now taking place, not all will see China as a desirable or trustworthy alternative model of global leadership, security and statecraft. In the wake of the end of overt hostilities, the major priorities for years to come in the Gulf, and elsewhere, will include defence spending, increasing access to and dependency on suppliers of key technologies, actions to bypass chokepoints, cementing energy security, and greater access to more vibrant global markets to sell goods and raise finance. China is bound to be considered as a potential partner for reconstruction, modernisation and green programmes, but it is hard to look past the broader role the United States is still likely to play.