Since the joint US-Israel military action against Iran began on February 28, 2026, hostilities have persisted for over twenty days with no signs of abatement. Instead, the conflict has deepened into a protracted war of attrition where neither side can afford to lose. Market signals—such as gold prices falling for eight consecutive days and long queues forming at gas stations late at night—indicate that geopolitical tensions are rapidly and forcefully impacting the global economy's vital arteries. Using the Russia-Ukraine conflict as a reference, this article examines the economic spillover effects of the Iran conflict, moving beyond battlefield narratives to systematically analyze how the situation is imposing three irreversible structural shocks on the world through energy channels, financial systems, and industrial realignments. As the author notes, "Certain explanatory frameworks that prevailed in recent decades are increasingly inadequate in addressing current realities." When tensions in the Strait of Hormuz send ripples through global oil prices, and energy anxieties reshape manufacturing landscapes, understanding the cost of war may be the first step toward maintaining developmental initiative.
The Middle East has been embroiled in intense conflict since the US and Israel launched a joint military operation against Iran on February 28, 2026. As of March 23, hostilities continue to escalate with no signs of de-escalation. Although the warring parties differ significantly in military strength, strategic resources, and international influence, the actual trajectory and spillover effects of the conflict have surpassed any single party's control. Reflecting on the Russia-Ukraine conflict that erupted in 2022 reveals that in a deeply interconnected world, the destructive power of modern warfare is not confined to the battlefield or a single region. Geopolitical confrontations resonate rapidly along the veins of globalization, interacting violently with energy supply chains, financial settlements, shipping networks, inflation expectations, and social psychology, ultimately fracturing into systemic shocks that are difficult to manage or reverse.
While the current Iran conflict also stems from historical grievances and contemporary geopolitical tensions, and has similarly triggered regional supply chain disruptions and energy crises, its impact on the foundational operations of the world economy is likely to exceed that of the Russia-Ukraine conflict and other regional wars. This is due to the Middle East's irreplaceable role as the "heart" of global energy networks, maritime arteries, and the Eurasian geopolitical hub.
The conflict is gradually evolving into a war of attrition where neither side can afford defeat. Since the outbreak of the Russia-Ukraine war, the international power structure has been reshaped by a new "war logic," characterized by easy initiation but difficult conclusion. Even the stronger party often struggles to achieve a decisive victory through military means, instead being drawn into broader, prolonged cycles of conflict, leading to accumulating strategic imbalances. The current Iran conflict exemplifies this "easy to start, hard to end" logic, as seen in recent US-Iran negotiations over ceasefire terms.
On March 21, the US reportedly presented Iran with an extremely stringent ceasefire proposal via multiple mediation channels. Its core demands included "zero uranium enrichment," "complete nuclear disarmament," "restrictions on missile programs," "acceptance of strict external supervision," and "cessation of support for regional proxy forces." From Iran's national security perspective, these conditions are tantamount to demanding the voluntary dismantling of strategic deterrence and abandonment of long-term security leverage. Iran responded on March 22 with a tit-for-tat proposal. According to Iranian media citing anonymous officials, Tehran put forward six conditions for a truce, including guarantees against future warfare, closure of US military bases in the Middle East, reparations paid by the "aggressor," resolution of conflicts on multiple regional fronts, establishment of a new legal framework for the Strait of Hormuz, and accountability for those involved in anti-Iran activities. From the perspective of the US and its allies, these conditions are equally unrealistic, as they challenge fundamental American interests in maintaining military presence and regional dominance in the Middle East.
The irreconcilable divergence in core interests and the complete erosion of strategic trust mean that the current "mutual maximalist demands" are not aimed at genuine negotiation but at shaping favorable narratives for the attrition war ahead and applying psychological pressure on the adversary. For Iran, this war is existential, involving regime security, national dignity, and strategic survival space. For the US, the conflict impacts regional deterrence credibility, ally confidence, domestic midterm elections, and the global strategic landscape. One side cannot afford to be significantly weakened or eliminated, while the other finds strategic concessions unacceptable. In this "neither can afford to lose" structure, neither party is likely to show weakness prematurely. More troublingly, once a conflict reaches such a high-intensity stalemate, parties often resort to more symbolic yet riskier actions to break the deadlock, including targeting core infrastructure, civilian energy facilities, or even testing the boundaries of nuclear deterrence. What cannot be gained on the battlefield is unlikely to be achieved at the negotiating table. The end of any high-intensity conflict typically requires at least one party—or both—to reach a breaking point in military, economic, or political endurance, forcing a revision of strategic objectives. Current indications suggest that neither the US nor Iran has yet reached the "critical pain threshold" necessitating substantive compromise. Thus, the conflict is not a crisis that can be easily concluded.
As the conflict progresses, its transmission pathways to the global macroeconomy have become clear. The remaining uncertainties lie in the duration and ultimate intensity of the shock. It is crucial to recognize that, following the COVID-19 pandemic and the Russia-Ukraine conflict, the global economic system has not fully recovered. Issues such as supply chain restructuring, persistent inflationary pressures, fiscal strains, and financial vulnerabilities continue to accumulate. Against this "unhealed" backdrop, the destructive impact and spillover effects of the Iran conflict are likely to be amplified.
The foremost risk to the global economy is the resurgence of inflation, potentially leading to stagflation. The most direct macroeconomic impact of the escalating Iran situation stems from the energy supply chain. With shipping disruptions in the Strait of Hormuz and frequent attacks or threats to surrounding oil and gas production facilities, risk premiums in international energy markets have surged. Brent crude prices have consistently breached the $100 per barrel mark, European benchmark gas prices have risen significantly, and Japan's domestic gasoline retail prices have hit record highs since 1974. This surge in energy prices is undoubtedly interrupting the previously moderating global inflation trend. However, the resulting policy dilemma is even more perilous than the price increases themselves. Signals from the recent "super central bank week" indicate that major central banks, including the Federal Reserve, are highly alert to the risks of imported inflation. This suggests that the widely anticipated pace of interest rate cuts may be delayed, forcing the global economy to endure the pressure of high interest rates for a longer period.
The problem is that traditional tight monetary policy tools primarily target demand-side overheating or excess money supply. They are less effective against energy-driven inflation fueled by geopolitical conflict, transport risks, and supply disruptions. Yet, shifting to looser policy too soon could rekindle inflation expectations and damage policy credibility. Consequently, the global economy risks falling into a worst-case scenario: inflation reignites due to the energy crisis, while real economic activity and investment cool rapidly under the pressure of sustained high interest rates. Recent data revisions show US economic growth for the fourth quarter of 2025 was significantly downgraded to 0.7%, indicating a sharper slowdown than expected. If this misalignment of rising inflation and slowing growth persists, the global economy could plunge back into a stagflationary abyss. In a sense, history is rhyming with the 1973 oil crisis. The key difference is that today's world economy is more highly financialized, and government debt levels in many countries are already unsustainable. Essentially, inflation is now in a "race" against global financial risks. A misstep in monetary policy could trigger not just an economic recession, but a larger crisis of global debt defaults and systemic financial risk.
Secondly, energy security concerns are accelerating a reshuffle in global manufacturing division of labor and production capacity. The Russia-Ukraine conflict demonstrated how a geopolitical crisis can rapidly alter industrial costs, thereby affecting a region's industrial destiny. The ongoing decline of manufacturing in Europe, particularly in Germany—the region's economic engine—serves as a prime example. Since cutting off cheap Russian natural gas, German manufacturing has suffered structural damage. Its Manufacturing PMI plummeted to a deeply contractionary 38.8 and has yet to recover above the 50-point threshold separating contraction from expansion. German industrial output remains more than 7% below pre-war levels, with energy-intensive sectors like chemicals, metals, and machinery manufacturing hit hard. Representative European manufacturers like BASF and Henkel have relocated some production lines to North America and East Asia, keeping the German economy teetering on the edge of recession in recent years.
If the Russia-Ukraine conflict was the first shockwave prompting "de-industrialization" in Europe, the current Iran conflict is set to trigger a broader global migration of production capacity. Beyond crude oil and natural gas, the blockade of the Strait of Hormuz directly threatens global supplies of key chemical feedstocks like methanol, urea, and sulfur, impacting export-oriented manufacturing economies such as Japan, South Korea, and Southeast Asia. Under this pressure, energy- and resource-intensive industries will more decisively "vote with their feet," seeking new locations characterized by political stability, diversified energy sources, robust infrastructure, and sizable domestic demand. In an increasingly fragile global supply chain, nations that can maintain stable energy supplies and competitive prices through strategic stability will possess the strongest "gravitational pull" in this industrial migration. While the physical relocation of industrial capacity is a slow process, once the trend is established, it gains significant inertia and becomes difficult to reverse. The grand narrative of "efficient division of labor" that underpinned global prosperity over the past four decades is being shattered by energy anxieties triggered by geopolitical threats.
Furthermore, successive geopolitical upheavals and energy crises are making countries acutely aware of the extreme vulnerability of traditional fossil fuels in an era of frequent geopolitical contestation. In contrast, the localized deployment characteristics of new energy sources—wind, solar, energy storage systems, and even new energy consumer goods—are becoming new levers for reducing external dependence. This will not only significantly stimulate investment in infrastructure like renewable power generation and storage equipment but also comprehensively accelerate the replacement of traditional fuel systems by end-consumer products like new energy vehicles. In this sense, the new energy industry is no longer merely a tool for "environmental protection and decarbonization" but has become an energy strategy and security industry hedging against geopolitical uncertainty.
The third layer of impact stems from a re-evaluation by international capital of what constitutes a "safe asset." In recent years, the Middle East had emerged as a significant new arena for global capital, particularly as regional nations actively promoted economic diversification. The region was once viewed as an "investment oasis" combining liquidity, policy incentives, and growth potential. For instance, Saudi Arabia's "Vision 2030" drove the expansion of sovereign wealth funds, large-scale infrastructure projects, and investments in tourism and technology, attracting substantial participation from international financial institutions and industrial capital. The UAE, leveraging its open business environment, low taxes, free zone policies, and international legal frameworks—especially in Dubai and Abu Dhabi—developed into a key capital hub connecting the Middle East, Africa, South Asia, and Europe.
However, following the outbreak of war, indices like the Saudi Tadawul and the Dubai Financial Market General Index fell by over 10%, and the Abu Dhabi Securities Exchange recorded its largest weekly decline since late last year. Market reactions indicate that once geopolitical conflict exceeds controllable boundaries, capital rapidly re-prices the risk associated with Middle Eastern assets. Signs of capital flowing from the Middle East to dollar-denominated assets and some Asian markets have become apparent.
In this capital flow, the US dollar's core status has been reinforced once again. Faced with escalating Middle East tensions, energy price volatility, and global market fluctuations, capital continues to flock first to US dollar cash, US Treasuries, and short-term bills. The problem, however, lies precisely here: the dollar's appeal is now supported not by absolute confidence, but by its unparalleled liquidity depth. When the US itself faces challenges like soaring debt, rising stagflation risks, and strategic retrenchment, the fact that global capital still rushes back to the dollar during crises underscores the scarcity of truly functional "safe assets" within the current international monetary system.
In contrast to the dollar, gold—theoretically a beneficiary of risk aversion—has behaved counterintuitively. Its price fell from around $5,380 per ounce in late February to approximately $4,100 by March 23. This reaffirms that gold primarily acts as a hedge against fiat currency credibility erosion rather than a direct protector against geopolitical risk. Especially under extreme conflict conditions, gold is constrained by practical issues related to transport, clearing, and reserve liquidity, making its safe-haven functionality far less secure than often assumed.
Against this backdrop, the relative stability of renminbi assets is garnering increased attention. Since the escalation of the Iran conflict, the renminbi exchange rate has demonstrated greater stability compared to most emerging market currencies. This stability is underpinned by China's relatively low inflation, restrained macroeconomic policy pacing, and complete industrial system. For certain sovereign funds, official institutions, and long-term allocators, the appeal of renminbi assets lies in offering a relatively stable allocation option outside the dollar system. Strictly speaking, the renminbi remains significantly distant from being a dominant global safe asset. However, its role as a "stability anchor" within the Asia-Pacific region and a complementary asset to dollar holdings is marginally increasing.
Additionally, during periods when gold and US equities faced pressure, Bitcoin, as a representative virtual asset, rebounded from around $63,000 to $75,000. This suggests that some investors, concerned about inflation, supply chains, and geopolitical risks, are tentatively exploring Bitcoin as a new asset class for strategic allocation—characterized as "non-sovereign, cross-border, and offering macro hedging capabilities," essentially a new narrative of a "neutral asset in an age of geopolitical confrontation." Overall, this redefinition of "safe assets" heralds the new order of a geo-financial era.
The Iran conflict essentially represents an inevitable outcome of the co-evolution of continued regional security volatility and deep adjustments in the global order following the Russia-Ukraine war. Facing this new era where geopolitical turbulence is becoming normalized, our social sciences and think tank research must deeply recognize that certain explanatory frameworks prevalent in recent decades are increasingly inadequate for responding to reality. Globalization has not eliminated power competition; instead, it has, to some extent, turned energy, technology, shipping lanes, financial infrastructure, and critical resources into more potent strategic tools. As these elements are reincorporated into the "national security" framework, economic operation is no longer merely a matter of prices and supply-demand dynamics but is increasingly embedded within geopolitical logic.
Those who grew up during the golden age of globalization are accustomed to understanding and explaining the world through concepts like efficiency priority, free trade, and division of labor. However, confronting today's increasingly complex external environment requires updating our knowledge systems with a stronger problem-oriented approach, shifting towards a geopolitical economy perspective with greater explanatory power. The following variables must be integrated into the analytical framework:
First, geography and control over choke points, such as the Strait of Hormuz, Red Sea shipping lanes, the Suez Canal, and the Strait of Malacca—the "main arteries" of the global economy. In an era of frequent geopolitical conflict, whoever can influence these nodes possesses the ability to alter global logistics costs. Passage security itself has become a crucial component of international competition.
Second, endowment of critical resources and energy security structures. The distribution of resources like oil, natural gas, food, rare earths, copper, and lithium is uneven. The price and supply stability of energy directly determine industrial competitiveness, fiscal stability, and societal resilience. The foundation of future interstate competition will involve not just technology but also the ability to secure and manage resources.
Third, institutional credibility and political stability. In an age of frequent geopolitical conflict, a country's ability to provide a stable policy environment, consistent industrial support systems, and sufficient societal resilience will increasingly directly affect its capacity to attract capital, retain industries, and withstand shocks.
Fourth, civilizational differences, social structures, and regional identities. Many external observers habitually analyze the Middle East through a singular modern state logic. However, religious sectarianism, historical memory, ethnic identity, and regional power structures often profoundly influence the evolution of conflicts. Ignoring these deep-seated variables makes it difficult to truly understand why situations repeatedly spiral into cycles of escalation that seem unexpected but are, in fact, almost inevitable.
In this sense, it is highly unlikely the world will return to a phase of low geopolitical friction, low security costs, and limited political risk premiums. A nation's development strategy must be increasingly based on judgments regarding long-term trends in the external environment. Only by promptly adjusting our cognitive frameworks can we more accurately understand the new logic of global political economy operation, and thus, navigate this era of great transformation more deftly, effectively balancing development and security to firmly grasp the strategic initiative for national development.