Analysis
When Wars Are Chosen: The Financial Ruin and Human Wreckage of the 2026 US-Iran Conflict
The US-Iran conflict of 2026 crashed oil markets, froze the Strait of Hormuz, and pushed developing nations from Pakistan to Egypt toward economic collapse. A deep analysis of the financial and social fallout.
The Day the World Paid for a War It Did Not Choose
On the morning of March 6, 2026, Ahmed Farouk had already been waiting three hours at a petrol station on the outskirts of Cairo when an attendant walked out and hung a hand-written sign on the pump: No Diesel. Ahmed drives a freight truck for a living. No diesel means no work. No work means no bread — not for him, and not for the forty families whose weekly produce deliveries he hauls from the Nile Delta to the capital. He sat back in his cab, pulled out his phone, and read about a war being fought 2,000 kilometres away — a war, he would tell a journalist later, “that no one asked us about.”
The US-Israel strikes on Iran — launched on February 28, 2026, under the codename Operation Epic Fury — represent one of the most consequential geopolitical decisions of the decade. The immediate military objectives: to degrade Iran’s nuclear facilities and missile infrastructure. The immediate economic consequences: a supply disruption the International Energy Agency described as “the greatest global energy security challenge in history”, the closure of the Strait of Hormuz — through which roughly 20 percent of global oil demand flows daily — and a cascade of financial shocks that have pushed developing nations from Pakistan to sub-Saharan Africa to the edge of economic collapse.
This is not merely a story about oil prices. It is a story about what happens when powerful states choose war and the world’s poorest nations pay the bill.
A Familiar Architecture of Catastrophe
History has seen this before, and its lessons are rarely learned in time.
When the United States invaded Iraq in March 2003, global oil prices climbed steadily from roughly $30 per barrel toward $60 within a year, feeding inflationary pressure across import-dependent economies that were entirely peripheral to the war’s stated purposes. The 1973 Arab oil embargo — itself a retaliatory geopolitical move — triggered a global recession, destroyed a generation of Western consumer confidence, and pushed countless low-income nations into debt spirals from which some never truly recovered. Russia’s invasion of Ukraine in February 2022 sent Brent crude surging to $139 per barrel and precipitated a global food crisis that, according to the World Food Programme, drove an estimated 70 million additional people toward acute hunger.
What distinguishes the 2026 US-Iran conflict from those episodes is not its severity alone — though its severity is historically unprecedented — but its structural architecture. As analysts at Al Jazeera and the World Economic Forum have documented, prior shocks were sanctions-driven or logistical in nature, allowing for rerouting, substitution, and policy intervention. The current crisis is a physical chokepoint crisis: Iran’s retaliatory closure of the Strait of Hormuz has taken offline not merely trade routes but the very capacity of producers to export, pushing markets beyond the reach of conventional adjustment mechanisms.
The logic of escalation that produced this outcome was, in retrospect, grimly predictable. Iran — its economy already battered by sanctions, with inflation exceeding 40 percent in 2025 and its rial in freefall — had little to lose strategically by weaponizing the Strait once strikes began. Unable to match the US and Israel militarily, Tehran chose to internationalize the costs of war, targeting energy infrastructure, shipping lanes, and civilian water supplies across the Gulf. The calculation, as the World Economic Forum’s analysis put it, was blunt: raise the price of escalation until pressure for de-escalation builds.
It worked. The question is who bears the cost of that arithmetic.
The Oil Shock: Numbers That Reshape Economies
By March 4, 2026 — six days after the opening strikes — Iran had effectively closed the Strait of Hormuz to commercial tanker traffic. Brent crude, which had surged 10–13 percent to around $80–82 per barrel in the conflict’s opening days, blew past $120 per barrel as markets began pricing in sustained disruption. QatarEnergy declared force majeure on all exports. The collective oil production of Kuwait, Iraq, Saudi Arabia, and the UAE dropped by a reported 6.7 million barrels per day by March 10, and reached at least 10 million barrels per day by March 12 — the largest supply disruption in the recorded history of global oil markets, according to the IEA.
For context: the 2022 Ukraine crisis, which shocked financial markets worldwide, was primarily a sanctions-driven disruption. Producers could still pump; buyers could still source alternatives. In 2026, the pumps are still running in some Gulf fields, but the oil has nowhere to go. Oilfields forced to shut in across the region as storage capacity fills could take “days or weeks or months” to return to pre-war output levels even after a ceasefire, according to Amir Zaman of Rystad Energy — a detail that markets have begun, belatedly, to price in.
The transmission from crude markets to consumer prices is faster and more brutal than most economic models predict in real time. As certified financial planner Stephen Kates told CNBC, “unlike last year’s higher tariffs, which took months to filter meaningfully into prices, increases in oil prices are quickly reflected” — in gasoline, airline tickets, shipping costs, and anything touched by oil-based inputs. In the United States, the national average gasoline price reached $3.41 per gallon within the first week of the conflict, up $0.43. US crude prices soared more than 35 percent, posting their biggest weekly gain since crude futures began trading in 1983.
For the eurozone, the arithmetic is worse. Capital Economics projected that inflation would peak above 4 percent year-on-year in the euro area, with the ECB likely forced to reverse its rate-cutting trajectory — a painful reversal for economies still navigating post-pandemic debt burdens. Japan, which imports virtually all of its crude, faces a structural dilemma between defending the yen’s purchasing power and supporting domestic growth. Even in the United States, despite record domestic production levels, supply-chain linkages to global markets mean that price insulation is largely illusory — a decade of building export infrastructure has effectively tied American pump prices to the same global benchmarks it once sought to escape.
Equity markets reflected the shock imperfectly but unmistakably. Asian and European indices fell more sharply than US benchmarks — a pattern Frederic Schneider of the Middle East Council on Global Affairs attributed to their greater exposure to the energy crisis and thinner cushion of corporate winners in defense and oil. Russian stocks trended upward, as any oil-price shock that bypasses Moscow’s export routes functions as a windfall for the Kremlin — a grim irony of the geoeconomic landscape.
The Federal Reserve’s Impossible Dilemma
Central banks have been here before, and they have rarely found a good answer.
A supply-side energy shock presents monetary policy with a structural trap. Raising interest rates to contain the inflationary impulse risks choking economic growth and employment. Cutting rates to support activity risks pouring fuel on price pressures. The Federal Reserve, according to Morgan Stanley analysts, is likely to favor a holding pattern — smaller adjustments or outright pauses — while it watches incoming data. But the political pressure to act is enormous: with US midterm elections on the horizon, voters are acutely sensitive to gasoline prices and grocery bills, and a Reuters/Ipsos poll found only about 27 percent approval for the initial strikes.
IMF Managing Director Kristalina Georgieva, speaking at a symposium hosted by Japan’s Ministry of Finance on March 9, warned that a prolonged conflict poses an inflationary risk to the global economy that policymakers must prepare for now. The IMF’s scenarios are not comforting. Capital Economics projected that if conflict is contained to three months, Brent crude could average $150 per barrel over the following six months — a figure that, if realized, would constitute the most prolonged and severe oil price shock since the 1970s Arab embargo.
What begins as a battlefield decision hardens, in the language of financial markets, into a geoeconomic constraint: not a temporary shock to be absorbed but a restructuring of the conditions under which global growth is possible at all.
The Invisible Casualties: Fertilizer, Food, and the Coming Agricultural Crisis
Beyond the oil price charts, a slower and more devastating crisis is taking shape — one that threatens food security for hundreds of millions of people who have never heard of Operation Epic Fury.
The Strait of Hormuz handles roughly 50 percent of global urea and sulfur exports, and 20 percent of global LNG trade — the latter a critical feedstock for nitrogen-based fertilizers. Since the strait’s effective closure, fertilizer exports from the Persian Gulf have dropped precipitously. According to Morningstar projections reported by Reuters, nitrogen fertilizer prices could roughly double from 2024 levels, while phosphate prices may rise by approximately 50 percent.
The timing is catastrophic. These disruptions are coinciding with the Northern Hemisphere’s spring planting season — the window in which farmers in South Asia, the Middle East, and sub-Saharan Africa must apply fertilizers to secure yields for the year. The World Food Programme’s deputy executive director Carl Skau has warned bluntly: “In the worst case, this means lower yields and crop failures next season. In the best case, higher input costs will be included in food prices next year.”
There is no cavalry coming. China, the world’s largest nitrogen and phosphate fertilizer producer, is prioritizing domestic supply and is unlikely to resume urea shipments before May. Russian plants are already running near full capacity. As Máximo Torero, the UN Food and Agriculture Organization’s chief economist, told NPR: “The loss of Gulf exports creates an immediate global shortfall with no quick substitutes.” Unlike oil, there are no strategic international fertilizer stockpiles to release.
Even short delays matter enormously at the farm level. Research from Zambia cited by agricultural analysts suggests that delayed fertilizer application can reduce maize yields by approximately 4 percent per season — a figure that may sound modest in aggregate but translates, at scale, into tens of millions of people facing inadequate caloric intake during the 2026–27 harvest cycle.
The Developing World at the Breaking Point
The architecture of the global economy is not neutral. It distributes the costs of distant decisions in ways that fall heaviest on those least responsible for them.
Pakistan: The Arithmetic of Austerity
In Lahore, motorcyclists queue for hours at filling stations. Pakistan — a country still recovering from the 2022 floods that ravaged a third of its national territory, and from an IMF bailout process that has demanded painful fiscal consolidation — is among the most acutely exposed economies in the world to this particular shock. The government has raised state-controlled energy prices by 20 percent, instituted a four-day work week for public offices, and closed educational institutions for two weeks to conserve fuel. As Khalid Waleed of the Sustainable Development Policy Institute told Al Jazeera, “diesel is the backbone of Pakistan’s freight and agricultural economy. Trucking costs have started climbing, and that will feed into everything from flour to fertiliser in the weeks ahead.”
Pakistan’s foreign exchange reserves were already thin before the conflict. The rupee — like most emerging market currencies — has come under renewed pressure as global investors flee to dollar-denominated safe assets. Pakistan may need to roll over around $1 billion in outstanding eurobonds in the coming year, a burden that becomes structurally harder as the dollar strengthens. Plants producing fertilizer domestically have, in some cases, been forced to halt production entirely as natural gas prices spike. A country already on the edge of balance-of-payments crisis is now absorbing a simultaneous fuel shock, food production threat, and capital outflow.
Bangladesh: Universities Dark, Queues at Every Pump
Bangladesh, which imports approximately 95 percent of its oil and receives roughly 25 percent of the natural gas that fuels its power plants from Qatar, is facing what analysts at Yale’s School of Management have termed an existential energy dependency crisis. The government has closed all universities to conserve electricity, anticipating power shortages as the country’s LNG supply from Qatar has been effectively interrupted. Petrol pumps in some districts have run dry despite fuel rationing measures. The Bangladesh Petroleum Corporation has imposed per-vehicle refueling limits.
These are not abstract economic statistics. They are the contours of daily life for 170 million people, many of whom were only recently climbing toward middle-income status — a fragile trajectory that this war is now threatening to reverse.
Egypt: Suez Losses, Currency Collapse, and the Emergency Declaration
Egypt occupies a uniquely painful position in this crisis. As one of the region’s largest energy importers and most indebted economies, the country was already navigating a grueling IMF stabilization program when the war began. Now it faces simultaneous pressure from multiple directions.
The Egyptian pound has depreciated more than 8 percent against the US dollar since the conflict’s opening days. Reduced traffic through the Suez Canal — caused by war-related shipping disruptions — is costing the country approximately $10 billion in losses according to World Bank estimates. Egypt provides extensive fossil fuel subsidies to its population; with global prices surging, those subsidies have become fiscally unsustainable, but unwinding them risks triggering street-level inflation and political instability. President el-Sisi has ordered malls and cafes to close by 9pm, cut back public lighting, and described his country’s economy as being in a “state of near-emergency.”
Egypt needs to roll over more than $4 billion in outstanding eurobonds within the next year. Against the backdrop of currency depreciation, energy price inflation, and capital outflow, the mathematics of that debt servicing are becoming precarious. The Centre for Global Development in Washington has placed Egypt explicitly on its watch list of countries at serious risk of fiscal crisis if the conflict continues.
Sub-Saharan Africa: Fiscal Buffers Already Gone
The countries least equipped to absorb this shock are those already operating without fiscal margin. Janes analysts have identified Burkina Faso, Burundi, the Central African Republic, the Democratic Republic of Congo, Liberia, and Mozambique as particularly vulnerable — countries that entered this crisis with depleted buffers, high petroleum import reliance, and deep pre-existing poverty.
For smallholder farmers in East Africa, the fertilizer crisis is already tangible. Stephen Muchiri, a Kenyan maize farmer and CEO of the Eastern African Farmers Federation — which represents 25 million smallholders — notes that early heavy rains have left a narrow planting window. Fertilizer shortages and price hikes are forcing farmers to apply less, with knock-on consequences for yields. The UN World Food Programme has explicitly warned that disruptions are driving long-term global food price increases that could replicate or exceed the severity of the 2022 food crisis.
The Remittance Rupture
One dimension of the developing-world impact has received insufficient attention: the collapse of Gulf remittances. Workers in Gulf countries — predominantly from South Asia, Southeast Asia, and sub-Saharan Africa — collectively send home $88 billion annually, according to Centre for Global Development analysis. Egypt, Pakistan, and Jordan each receive more than 4 percent of GDP from Gulf remittances. Nepal and the Philippines receive remittances equivalent to over 25 percent of GDP, with Qatar and the UAE among the largest sources.
As large infrastructure projects in the Gulf are paused or abandoned and the mass evacuation of foreign residents accelerates in the wake of strikes on civilian infrastructure, the construction and service workers who sustain these remittance flows are returning home to economies that cannot absorb them. The social implications — families losing their primary income source, children pulled from school, small businesses shuttered — unfold quietly and are rarely captured in GDP data.
Beyond Economics: The Social Fractures That Wars Ignite
The social implications of this US-Iran conflict 2026 economic impact extend well beyond macroeconomic metrics. They are written on the faces of children eating half-rations in Karachi, on the ledgers of microfinance institutions in Cairo watching loan repayment rates collapse, and in the decisions of families in Dhaka calculating whether to pull their daughters out of school to reduce household expenses.
Research consistently demonstrates that energy and food price shocks have non-linear social effects. The standard economic framing — inflation reduces real income, which reduces consumption — captures only the mechanical surface. What it misses is the deeper structural damage: the interruption of educational trajectories, particularly for girls in societies where female schooling is the first casualty of household fiscal stress; the acceleration of child labor; the erosion of community savings structures that took years to build; the triggering of migration decisions that become permanent.
A Centre for Global Development analysis has documented the risk explicitly: governments facing the double bind of depleted fiscal buffers and surging import costs will initially attempt to subsidize households. “However, with depleted fiscal buffers and shrinking revenues, this becomes unsustainable. The ensuing austerity, combined with hyperinflation, can trigger widespread social unrest and a full-blown fiscal crisis.”
History offers no reassurance here. The Arab Spring of 2010–2012 was preceded by a spike in global wheat prices — itself a product of drought and the Ukraine-Russia breadbasket disruption of that period. The bread riots that preceded Tunisia’s uprising began in the produce markets of provincial towns, not in ideological seminars. What is happening in Egypt, Pakistan, Jordan, and sub-Saharan Africa today is not categorically different in structure. The question is not whether social pressure will build, but how quickly, and whether governments have the legitimacy and institutional capacity to manage it.
The humanitarian crisis in the Gulf adds another layer of complexity. Iranian strikes on desalination plants — which provide 99 percent of drinking water in Kuwait and Qatar — have turned an economic crisis into an existential one for those societies. The mass evacuation of foreign residents from Gulf cities is not only a human tragedy; it is the collapse of the labor architecture that underpins the entire remittance economy stretching from Kathmandu to Nairobi.
Scenarios: The Fork in the Road
Scenario One: Short, Contained Conflict (Resolution within 4–6 Weeks)
If a ceasefire is reached and Iran reopens the Strait within the next month, Capital Economics projects that Brent crude would fall back sharply toward $65 per barrel by year-end. Inflation pressures would ease, emerging market currencies would stabilize, and the fertilizer supply shock — while severe — would be partially mitigated by late-season planting. The economic damage to developing nations would be significant but potentially recoverable with targeted international support. The political damage to the United States — domestically and globally — would be harder to quantify.
Scenario Two: Prolonged Conflict (3–6 Months or Longer)
The scenario that keeps economists awake. If oil prices average $150 per barrel over the next six months, the global inflationary impulse would be comparable to or exceed the 1973 oil shock. The IMF’s emergency financing mechanisms would be overwhelmed by simultaneous requests from multiple vulnerable economies. Fertilizer shortages would translate directly into crop failures across South Asia and sub-Saharan Africa during the 2026–27 harvest cycle. The WFP estimates that this could push tens of millions of people into acute food insecurity. In countries like Bangladesh, Pakistan, and Egypt, fiscal crises would likely materialize, triggering IMF programs that impose the kind of austerity that historically precedes political upheaval.
The IEA has assessed the current episode as the largest supply disruption in the history of the global oil market — larger than the 1973 embargo, larger than the post-Ukraine disruption. In Scenario Two, the tools used in 2022 — diversification, rerouting, strategic reserve releases — simply do not apply. The chokepoint is physical, not logistical.
Policy: What Needs to Happen, and Quickly
The Centre for Global Development’s prescriptions are clear and urgent. The IMF must deploy rapid financing facilities at scale — potentially including a revived Food Shock Window — for vulnerable economies unable to self-finance through this shock. The World Bank should mobilize IDA crisis response financing and consider frontloading IDA 21 disbursements. The G20, under the US presidency, should convene an emergency discussion of debt service relief for the most exposed countries.
For the longer term — a horizon that this crisis has brutally compressed — the lesson is energy system architecture. The 1979 Iranian Revolution drove Japan’s aggressive energy-efficiency transformation; the 2022 Ukraine crisis accelerated European renewable energy investment. The 2026 conflict has simultaneously exposed the dangerous physical concentration of global hydrocarbon flows in a single strait and the absence of any serious equivalent in fertilizer markets. Both vulnerabilities require structural remedies that no amount of military power can substitute for.
Djibouti’s finance minister Ilyas M. Dawaleh put it with unvarnished directness: the fighting will “bring severe economic consequences for developing countries” — nations that had no seat at the table when the decision for war was made, no vote on the calculus of Operation Epic Fury, and no mechanism to claim compensation for the losses now accruing in their petrol queues, their darkened universities, and their half-planted fields.
The Broader Lesson Wars Will Not Teach Themselves
Ahmed Farouk, the Cairo freight driver, eventually got diesel — three days later, from a black-market reseller at nearly double the official price. He passed the cost on in his next delivery, which passed it on to the market vendors, which passed it on to families who were already spending 60 percent of their income on food. By the time the price of a war 2,000 kilometres away reaches a household budget in a Cairo apartment building, it has traveled through oil futures, currency markets, shipping logistics, fertilizer supply chains, and grocery store shelves. It has been amplified, invisibly, at every step.
This is the hidden accounting of intentional and authoritative wars — the ledger that appears in no military briefing, no presidential authorization, no congressional resolution. The formal costs of war are denominated in strategic objectives, casualty counts, and defense budgets. The real costs are denominated in rupees and Egyptian pounds and Zambian kwacha, in missed harvests and interrupted schooling and remittances that no longer arrive.
The International Energy Agency’s description of this crisis as the “greatest global energy security challenge in history” is not hyperbole. It is a precise description of a structural reality: that the world has built an energy system so concentrated in a single 33-kilometre-wide strait that one country’s retaliation for a war it did not start can disrupt the livelihoods of hundreds of millions of people across three continents.
History will record what happened on February 28, 2026. Whether it will also record what was done to prevent the next time — whether the financial and social devastation now radiating outward through developing economies will catalyze the energy system reform, the multilateral financing architecture, and the diplomatic frameworks that might reduce the cost of the next crisis — remains an open and urgent question.
Wars, as the developing world knows better than anyone, rarely end when the shooting stops. Their economic afterlife can last a generation.
References
Al Jazeera. (2026, March 8). Iran war threatens prolonged impact on energy markets as oil prices rise. Al Jazeera. https://www.aljazeera.com/news/2026/3/8/iran-war-threatens-prolonged-impact-on-energy-markets-as-oil-prices-rise
Al Jazeera. (2026, March 16). The tell-tale signs: How bad has the Iran war hit the global economy? Al Jazeera. https://www.aljazeera.com/news/2026/3/16/the-tell-tale-signs-how-bad-has-the-iran-war-hit-the-global-economy
Al Jazeera. (2026, March 23). Why the oil and gas price shock from the Iran war won’t just fade away. Al Jazeera. https://www.aljazeera.com/opinions/2026/3/23/why-the-oil-and-gas-price-shock-from-the-iran-war-wont-just-fade-away
Al Jazeera. (2026, March 25). From Pakistan to Egypt: Iran war drives up fuel prices in the Global South. Al Jazeera. https://www.aljazeera.com/economy/2026/3/25/from-pakistan-to-egypt-iran-war-drives-up-fuel-prices-in-the-global-south
Center for American Progress. (2026). The war in Iran will raise fuel prices and costs throughout the economy. https://www.americanprogress.org/article/the-war-in-iran-will-raise-fuel-prices-and-costs-throughout-the-economy/
Centre for Global Development. (2026). Will the Iran war be the breaking point for vulnerable countries? https://www.cgdev.org/blog/will-iran-war-be-breaking-point-vulnerable-countries
CNBC. (2026, March 10). Iran war spikes oil prices — what consumers need to know. CNBC. https://www.cnbc.com/2026/03/10/iran-war-spikes-oil-prices-consumers.html
Deloitte Insights. (2026). Iran and Middle East conflict: Impacts on the global economy. Deloitte. https://www.deloitte.com/us/en/insights/topics/economy/iran-middle-east-conflict-impacts-global-economy.html
International Food Policy Research Institute. (2026). The Iran war: Potential food security impacts. IFPRI. https://www.ifpri.org/blog/the-iran-war-potential-food-security-impacts/
Janes Defence Intelligence. (2026). Iran conflict 2026: Disruption to Strait of Hormuz increases energy and food production risks. Janes. https://www.janes.com/osint-insights/defence-and-national-security-analysis/iran-conflict-2026-disruption-to-strait-of-hormuz-increases-energy-and-food-production-risks
Morgan Stanley. (2026). Iran war, oil prices, inflation, and the stock market. Morgan Stanley Wealth Management. https://www.morganstanley.com/insights/articles/iran-war-oil-inflation-stock-market-2026
NPR. (2026, March 20). How the Iran war threatens global food supply. NPR. https://www.npr.org/2026/03/20/nx-s1-5750812/how-the-iran-war-threatens-global-food-supply
U.S. News & World Report. (2026, March 26). The war in Iran sparks a global fertilizer shortage and threatens food prices. U.S. News. https://www.usnews.com/news/business/articles/2026-03-26/the-war-in-iran-sparks-a-global-fertilizer-shortage-and-threatens-food-prices
Washington Post. (2026, March 12). Iran, the economy, oil, gas, and inflation. The Washington Post. https://www.washingtonpost.com/business/2026/03/12/iran-economy-oil-gas-inflation/
Wikipedia. (2026). Economic impact of the 2026 Iran war. Wikimedia Foundation. https://en.wikipedia.org/wiki/Economic_impact_of_the_2026_Iran_war
World Economic Forum. (2026, March). The global price tag of war in the Middle East. WEF. https://www.weforum.org/stories/2026/03/the-global-price-tag-of-war-in-the-middle-east/
Yale School of Management. (2026). What are the consequences of the Iran war for the developing world? Yale Insights. https://insights.som.yale.edu/insights/what-are-the-consequences-of-the-iran-war-for-the-developing-world
Discover more from The Economy
Subscribe to get the latest posts sent to your email.
There was a moment, somewhere in the fog of mid-2025, when the prevailing consensus on Wall Street and in the marble corridors of multilateral institutions was something close to dread. U.S. tariffs had mushroomed into the most aggressive trade barriers since Smoot-Hawley. Shipping lanes were fractured. Geopolitical fault lines — in the Middle East, in the Taiwan Strait, across the ruins of eastern Ukraine — had not so much deepened as multiplied. The prophets of doom were well-provisioned with data. And yet, here we are. The global economy, battered and limping, is still standing — and in certain respects, walking rather faster than feared.
This is not a triumphalist story. The global economy more resilient than feared narrative deserves neither uncritical celebration nor smug vindication. What it demands is honest, clear-eyed examination. Why did the worst not happen? What forces absorbed the blows? And — most critically — does the resilience we are witnessing reflect structural strength, or is it a borrowed grace, a temporary reprieve before deeper reckonings arrive?
The numbers, for now, tell a story of surprising steadiness. The IMF’s January 2026 World Economic Outlook projects global growth at 3.3 percent for 2026 and 3.2 percent for 2027 — a small but meaningful upward revision from October 2025 estimates. IMF Managing Director Kristalina Georgieva, speaking at Davos in January 2026, called this outcome “the biggest surprise” — a remarkable concession from the head of the institution whose job it is, partly, to anticipate exactly this. Meanwhile, the UN Department of Economic and Social Affairs estimated 2025 global growth at 2.8 percent, better than expected given the tariff storm that rolled through international trade. The OECD, for its part, subtitled its December 2025 Economic Outlook “Resilient Growth but with Increasing Fragilities” — a formulation that is, in its cautious way, almost poetic.
The Four Pillars of an Unlikely Resilience
So what happened? Why didn’t it break?
1. The Private Sector Adapted Faster Than Governments Could Fragment
Perhaps the single most underappreciated force in the global economy’s durability is the sheer agility of the private sector. Georgieva at Davos was blunt about it: globally, governments have stepped back from running companies, and the private sector — “more adaptable, more agile” — has filled the void. When tariffs on certain trade corridors spiked, supply chains did not collapse so much as reroute. Manufacturers diversified sourcing from China to Vietnam, Mexico, and India. Companies front-loaded exports ahead of anticipated barriers, producing a short-term trade surge that buffered 2025 GDP figures across multiple economies. The OECD noted that global growth continued at a resilient pace, driven in part by the front-loading of trade in anticipation of higher tariffs earlier in the year, alongside strong AI investment and supportive macroeconomic policies.
This is, of course, a partial answer. Front-loading is not structural growth — it borrows demand from the future. But it bought time, and time, in economics, is often everything.
2. Technology Investment as the New Growth Engine
The second pillar is one that carries both the greatest promise and the most dangerous ambiguity: the relentless surge in artificial intelligence and broader information technology investment. The IMF’s analysis identified continued investment in the technology sector — especially AI — as a key driver of resilience, acting as “a very powerful driver of growth and potentially prosperity”. The OECD’s data underscores the geography of this boom: AI-related trade now accounts for roughly 15.5 percent of total world merchandise trade, with two-thirds of that originating in Asia. Tech exports from Korea and Chinese Taipei continued rising into late 2025. In the United States, the numbers are almost surreal: strip out AI-related investments, and U.S. GDP contracted slightly in the first half of 2025.
This tells you something important. The global economy’s resilience in 2025–26 is, in significant measure, a tech-sector story. It is a story concentrated in a handful of companies, a handful of geographies, and a single technological paradigm. That concentration is both the source of its power and the root of its fragility — a point we will return to.
3. Monetary and Fiscal Policy Did Not Drop the Ball
History will be reasonably kind to the monetary policymakers of this era — not because they were brilliant, but because they did not, on balance, panic. Central banks that had raised rates aggressively through 2022–23 began easing with measured care as inflation declined. Global headline inflation fell from 4.0 percent in 2024 to an estimated 3.4 percent in 2025, with further moderation projected toward 3.1 percent in 2026. This easing in price pressures gave central banks room to cut, which in turn supported financial conditions, credit availability, and investment flows. The IMF noted that “accommodative financial conditions” were among the key offsetting tailwinds to trade disruptions.
Fiscal policy, too, surprised — though not without cost. Governments spent. Defence budgets expanded. Industrial policy packages — from the remnants of U.S. clean energy subsidies to the EU’s Recovery and Resilience Facility — continued channelling public money into capital formation. The bill, of course, is accumulating. But in 2025 and into 2026, fiscal firepower helped absorb shocks that might otherwise have cascaded.
4. Emerging Market Resilience Held the Global Average
The fourth pillar is often underweighted in Western commentary: the developing world, especially in Asia, continued to grow. South Asia is forecast to expand 5.6 percent in 2026, led by India’s 6.6 percent expansion, driven by resilient consumption and substantial public investment. Africa is projected at 4.0 percent. These are not trivial numbers. When commentators in New York or London describe the global economy as “resilient,” they are describing an aggregate that is substantially upheld by hundreds of millions of consumers and workers in economies whose stories rarely make the front page of financial newspapers. The heterogeneity is stark: the OECD bloc muddles along; the emerging world, in many places, runs.
The Data Beneath the Headlines: A Comparative Snapshot
| Institution | 2025 Global Growth | 2026 Forecast | Key Drivers Cited |
|---|---|---|---|
| IMF (Jan 2026) | 3.3% | 3.3% | AI investment, fiscal/monetary support, private sector agility |
| OECD (Dec 2025) | 3.2% | 2.9% | Front-loading, AI trade, macroeconomic policy |
| UN DESA (Jan 2026) | 2.8% | 2.7% | Consumer spending, disinflation, EM domestic demand |
The discrepancies in headline figures reflect genuine methodological differences — purchasing power parity weighting, country coverage, base year choices. But the directional consensus is unmistakable: the world grew more in 2025 than it was expected to when tariff escalation peaked. That is a fact worth sitting with.
Why the Resilience Is Under-Appreciated (and Why That Matters)
Here is an inconvenient truth about economic discourse: bad news travels faster, and fear is more monetisable than optimism. The financial media ecosystem is structurally incentivised to amplify downside scenarios. The think tanks that warned loudest about a tariff-induced recession in 2025 are not, by and large, issuing prominent corrections.
This matters because misread resilience breeds misguided policy. If policymakers believe the economy is weaker than it actually is, they over-stimulate — running up debt, inflating asset prices, postponing necessary reforms. If investors believe fragility is the baseline, they underallocate capital to productive long-term investments in favour of short-term hedging. Getting the diagnosis right is not academic; it shapes behaviour, and behaviour shapes outcomes.
The IMF noted that the trade shock “has not derailed global growth” and that global economic growth “continues to show considerable resilience despite significant trade disruptions caused by the US and heightened uncertainty”. Georgieva’s “biggest surprise” framing is telling: even the IMF, with all its modelling resources, did not anticipate the degree of offset. That should prompt a certain epistemic humility about our collective ability to forecast economic shocks — and perhaps a corresponding caution about declaring the worst inevitable next time.
The Fragilities That Resilience Is Masking
And yet. Here is where intellectual honesty demands a sharp turn.
The IMF warned explicitly that the current resilience “masks underlying fragilities tied to the concentration of investment in the tech sector,” and that “the negative growth effects of trade disruptions are likely to build up over time.” The OECD’s subtitle — “Resilient Growth but with Increasing Fragilities” — deserves to be read in full, not just the first half. There are at least five structural vulnerabilities that the headline growth numbers obscure.
The AI Bubble Risk Is Real and Underpriced
The same technology boom that is holding up the global economy today could become its undoing if expectations are not met. The IMF cautioned explicitly about the risk of a correction in AI-related valuations, warning that if tech firms fail to “deliver earnings commensurate with their lofty valuations,” a correction could trigger lower-than-expected growth and productivity losses. The OECD echoes this: weaker-than-expected returns from net AI investment could trigger widespread risk repricing in financial markets, given stretched asset valuations and optimism about corporate earnings.
Strip out AI investment from U.S. GDP and the economy contracted in early 2025. That is a remarkable statement of concentration risk, and it deserves to be said plainly: a significant portion of what we are calling “global resilience” is a bet on AI productivity gains materialising at scale, on schedule. That bet may be correct. It may also be the largest speculative bubble since the dot-com era, dressed in more sophisticated clothes.
Public Debt Is a Ticking Clock
Governments spent their way through the pandemic, then through the inflation crisis, then through the tariff shock. The fiscal bills are accumulating. The OECD flagged that high public spending pressures from rising defence requirements and population ageing are increasing fiscal risks, while NATO countries plan to raise core military spending to at least 3.5% of GDP by 2035. The IMF maintains that governments still have “important work to do to reduce public debt to safeguard financial stability.” None of this is new, but the accumulation of deferred reckoning is reaching levels where the next shock — a pandemic, a financial crisis, a major military conflict — will find fiscal buffers meaningfully depleted.
Geopolitical Fragmentation Has Not Stabilised
The Strait of Hormuz, through which roughly a fifth of global oil supply normally flows, saw shipping traffic fall 90 percent during a fresh Middle East escalation. The IMF’s Georgieva warned that if the new conflict proves prolonged, it has “clear and obvious potential to affect market sentiment, growth, and inflation”. For Japan alone, close to 60 percent of oil imports transit through the strait. For Asia broadly, the exposure is existential in energy security terms. The tariff wars between the U.S. and China have eased somewhat from their 2025 peaks, but the WTO’s Director-General has warned that a full U.S.-China economic decoupling could reduce global output by 7 percent in the long run — a figure that dwarfs any AI productivity upside currently modelled.
Inequality Is Widening, Not Narrowing
The resilience of the global aggregate conceals a distributional disaster. The UN Secretary-General António Guterres noted that “many developing economies continue to struggle and, as a result, progress towards the Sustainable Development Goals remains distant for much of the world”. High prices continue to erode real incomes for low- and middle-income households across the globe, even as headline inflation falls. AI productivity gains, where they materialise, are accruing disproportionately to capital owners and highly skilled workers in a handful of advanced economies. The Davos consensus on AI-as-equaliser remains aspirational, not empirical.
Supply Chain Concentration Has Not Been Solved
The pandemic briefly sensitised policymakers to the fragility of hyper-concentrated global supply chains. Yet China still accounts for more than 50 percent of all rare earth mining and lithium globally, and more than 90 percent of all magnet manufacturing and graphite. These are not peripheral materials — they are the physical substrate of the AI economy, the clean energy transition, and modern defence systems. A single supply disruption event here would cascade through semiconductors, electric vehicles, wind turbines, and data centres simultaneously. The diversification rhetoric remains largely rhetoric.
What Genuine Resilience Would Actually Look Like
Reading the data carefully, one is struck by the difference between resilience as a condition and resilience as a strategy. What the global economy has demonstrated since 2022 is resilience of the first kind: absorption capacity, improvisational agility, the ability to muddle through. What it has not yet demonstrated is resilience of the second kind: the deliberate construction of buffers, the investment in systemic redundancy, the political willingness to accept short-term costs for long-term stability.
Georgieva’s injunction at Davos — “learn to think of the unthinkable, and then stay calm, adapt” — is good personal advice. As a framework for global economic governance, it is insufficient. Here, then, is what bold, prescription-level thinking demands:
1. A Multilateral AI Investment Framework. The AI boom cannot continue to be managed as a purely national or corporate phenomenon. A framework housed at the WEF or the OECD should establish shared standards for AI investment disclosure, productivity accounting, and systemic risk assessment. If AI is indeed driving 15 percent of world merchandise trade, it deserves the kind of multilateral oversight that financial instruments won — slowly, imperfectly — after 2008.
2. Coordinated Fiscal Consolidation Timelines. The IMF’s calls for debt reduction need to be backed by credible multilateral timelines, not just bilateral conditionality. A G20-level framework that sequences fiscal consolidation against growth indicators — rather than imposing austerity into downturns — would give markets clearer signals while protecting public investment in strategic sectors.
3. Strategic Supply Chain Diversification, Funded Publicly. The World Bank and regional development banks should establish dedicated financing windows for critical minerals diversification and processing capacity outside current concentration zones. This is not protectionism — it is systemic risk management, and it is overdue.
4. A Green and Digital Investment Compact for the Global South. The differential between 6.6 percent growth in India and negative growth in parts of sub-Saharan Africa is not inevitable — it reflects infrastructure deficits and financing gaps that multilateral institutions have the tools, if not always the will, to address. The UN DESA report is explicit: without stronger policy coordination, today’s pressures risk locking the world into a lower-growth path, with developing nations shouldering a disproportionate share of the pain.
5. Central Bank Independence as a Non-Negotiable. The IMF has stressed that central bank independence remains critical for both price stability and credibility. In an era when political leaders are increasingly tempted to subordinate monetary institutions to short-term electoral calculations — particularly around the inflation-tariff nexus — this point deserves repetition, loudly, without apology.
The Verdict: Resilient, But Not Invulnerable
Let us be precise about what the evidence shows. The global economy has absorbed, without breaking, a series of shocks that would have qualified as catastrophic by pre-pandemic standards. It has done so through a combination of technological investment, fiscal and monetary firepower, private sector adaptability, and the sheer demographic and economic weight of emerging economies continuing to grow. This is genuinely impressive. It should not be dismissed.
But resilience in a storm is not the same as being sea-worthy. The hull is holding — for now. The debt levels are high and rising. The geopolitical weather is worsening. The AI boom is either the most transformative force since the industrial revolution or the most dangerous speculative bubble since tulips, and the honest answer is that we do not yet know which. As the IMF’s own blog put it in January 2026, the challenge for policymakers and investors alike is “to balance optimism with prudence, ensuring that today’s tech surge translates into sustainable, inclusive growth rather than another boom-bust cycle.”
Georgieva’s injunction rings true: “We need to not only understand why it is resilient, but nurture this resilience for the future.” That is the work that has not yet been done. The economy has surprised us. The question is whether we are surprised enough to actually change course — or whether, as so often in history, relief becomes complacency, and complacency becomes the seed of the next crisis.
The global economy is more resilient than we feared. It is less resilient than we need it to be. That gap — between the relief of today and the demands of tomorrow — is the most important space in contemporary economic policy. Filling it requires not optimism alone, nor pessimism, but something rarer and more valuable: clarity.
📊 Key Growth Forecasts at a Glance (2025–2027)
| Economy | 2025 (Est.) | 2026 (Forecast) | 2027 (Forecast) |
|---|---|---|---|
| World (IMF) | 3.3% | 3.3% | 3.2% |
| World (UN DESA) | 2.8% | 2.7% | 2.9% |
| World (OECD) | 3.2% | 2.9% | 3.1% |
| United States | ~1.9–2.0% | 2.0–2.4% | 1.9–2.0% |
| China | 5.0% | 4.4–4.5% | 4.3% |
| Euro Area | 1.3% | 1.2–1.3% | 1.4% |
| India | ~6.3% | 6.3–6.6% | 6.5% |
| Japan | 1.1–1.3% | 0.7–0.9% | 0.6–0.9% |
Sources: IMF WEO January 2026; OECD Economic Outlook December 2025; UN DESA WESP 2026
Discover more from The Economy
Subscribe to get the latest posts sent to your email.
Nguyen Thi Lan still remembers the WhatsApp messages that flooded her factory floor in Bac Ninh on the morning of April 3, 2025. The production manager at a Foxconn supplier had stayed up watching the “Liberation Day” announcement from Washington—and by dawn, she was fielding panicked calls from buyers in Texas who wanted to know whether to rush their orders before new tariffs hit. Within seventy-two hours, her factory was running double shifts. Twelve months later, that same plant exported more electronics than ever before. Her story, repeated across thousands of workshops from Hanoi to Ho Chi Minh City, encapsulates the central paradox of one year of Trump tariffs on South-east Asia: a region initially earmarked for punishment has, in many respects, survived—and in some corners, even thrived.
But survival is not the same as security. Twelve months on from Liberation Day, the landscape for Trump tariffs in South-east Asia has been permanently altered by front-loaded shipments, bilateral deal-making, a landmark Supreme Court ruling, and now a fresh wave of legal uncertainty. The full reckoning is still unfolding—and what comes next may be more consequential than the original shock.
The Initial Shock: Liberation Day Hits ASEAN Where It Hurts
On April 2, 2025, President Donald Trump invoked the International Emergency Economic Powers Act (IEEPA) to impose a 10% baseline tariff on most US imports, layered with country-specific “reciprocal” duties tied to bilateral trade surpluses. South-east Asia bore a disproportionate share of the pain.
The headline rates were staggering:
- Cambodia: 49%
- Vietnam: 46%
- Thailand: 36%
- Indonesia: 32%
- Malaysia: 25%
- Philippines: 17%
- Singapore: 10%
For a region whose economic model is built on export-led growth and deep integration into US-bound supply chains, the numbers were existential. Vietnam’s exports to the United States had reached $136.6 billion in 2024, representing roughly 30% of its GDP. Cambodia’s garment sector, which ships nearly 40% of its textiles to American retailers, faced near-annihilation at a 49% rate. Thailand’s automotive and electronics exporters confronted the steepest competitive shock in a generation.
The CSIS Southeast Asia programme noted that Vietnam, Indonesia, Thailand, and Cambodia were among the first governments to reach out to Washington after the announcement, reflecting acute exposure rather than diplomatic formality. ASEAN’s collective response was muted—Malaysian Prime Minister Anwar Ibrahim urged a unified bloc response, but cohesion proved elusive when every nation was simultaneously scrambling for bilateral favours.
How South-east Asia Weathered the Storm
The region’s initial survival relied on four mechanisms that, taken together, blunted the sharpest edges of the tariff regime.
Front-loading and shipment surges were the first reflex. US importers, facing an April 9 implementation date on the reciprocal tariffs, accelerated orders en masse. Vietnam’s Hai Phong port logged record throughput in Q2 2025. According to PwC’s Vietnam economic update, total exports grew by approximately 16% in the first nine months of 2025, led by electronics, computers and components—up 46% year-on-year—with the US accounting for roughly 32% of total exports throughout. Some of this was inventory stuffing; buyers pulled forward months of orders to beat the tariff clock. It worked—temporarily.
The ninety-day pause bought critical breathing room. Within a week of Liberation Day, Trump suspended the reciprocal tariffs after claiming over 75 countries had sought negotiations. That window became the region’s dealmaking season.
Sector exemptions provided a structural lifeline, especially for technology. Under heavy lobbying from Apple, Nvidia, and other US tech giants, consumer electronics—including laptops, smartphones and components—were carved out of the reciprocal tariff regime. This was quietly transformative for Malaysia and Vietnam, where semiconductor and electronics exports constitute the bulk of trade flows. The Lowy Institute estimates that Malaysia’s effective US tariff rate in late 2025 was approximately 11%—far below its headline 19% rate—precisely because electronics, its dominant export, remained largely exempt.
Bilateral deals followed in rapid succession. By October 2025, the US had announced trade agreements with Cambodia and Malaysia and framework deals with Thailand and Vietnam at the ASEAN summit. These deals collectively covered approximately $323 billion in US-ASEAN trade—about 68% of the two-way total. The resulting tariff rates, 19% for most ASEAN exporters and 20% for Vietnam, were far higher than pre-Liberation Day levels, but dramatically lower than the initial shock rates—and, critically, lower than the 145% still applied to Chinese goods.
The deals had teeth beyond tariffs. Cambodia and Malaysia agreed to adopt US tariff schedules on third countries—a thinly veiled anti-China clause. Vietnam committed to cracking down on transshipment, accepting a punitive 40% levy on goods rerouted from China. Malaysia pledged a $70 billion capital investment fund in the US and commitments to purchase $150 billion in American semiconductors, aerospace components and data centre equipment over the life of the deal.
The Supreme Court Ruling: Game Changer or New Uncertainty?
The most dramatic chapter of this twelve-month arc arrived not in a trade negotiating room but in the marble halls of the US Supreme Court.
On February 20, 2026, the Court ruled 6-3 in Learning Resources, Inc. v. Trump that IEEPA does not authorise the President to impose tariffs. Chief Justice John Roberts, writing for the majority, held that IEEPA’s authority to “regulate importation” cannot be stretched to encompass the power to tax—a power that, under the Constitution, belongs to Congress alone. “Those words,” Roberts wrote of the two clauses invoked by the administration, “cannot bear such weight.” The ruling invalidated both the reciprocal tariffs and the fentanyl-related duties on China, Canada and Mexico—the entire IEEPA-based tariff architecture.
The Court’s decision was, technically, a victory for free trade. In practice, it was a pivot, not a retreat.
Within hours, Trump signed a proclamation invoking Section 122 of the Trade Act of 1974 to impose a replacement 10% global tariff, which he raised to the statutory maximum of 15% the following day. Section 122, rarely used before this administration, authorises a temporary import surcharge of up to 15% for up to 150 days to address balance-of-payments deficits. Treasury Secretary Scott Bessent stated publicly that combining Section 122, Section 232, and Section 301 tariffs “will result in virtually unchanged tariff revenue in 2026″—an extraordinary admission that the intent was to maintain the same aggregate tax burden through different legal wrappers. The Section 122 tariffs are set to expire on July 24, 2026, unless extended by Congress.
For South-east Asia, the ruling introduced a new problem: legal fragility. Trade deals struck under the IEEPA regime now occupy uncertain territory. If the underlying executive orders were unlawful, the bilateral concessions extracted from ASEAN governments—market access commitments, anti-transshipment pledges, investment promises—rest on a legally contested foundation. Importers who paid an estimated $160–$175 billion in IEEPA tariffs over the past year are now pursuing refunds through the Court of International Trade, though the administration has signalled it does not plan to issue refunds voluntarily.
As the Peterson Institute for International Economics warned, the central challenge for businesses in 2026 is not the level of tariffs—it is their chronic instability. “Rates changed with little notice, creating planning challenges for firms managing inventory, contracts, and payroll,” PIIE analysts noted. The US average effective tariff rate climbed to nearly 17% in 2025—the highest since the early 1930s.
What Has Changed: Supply Chain Reshaping, Winners and Losers
Vietnam: The Reluctant Champion
No country in South-east Asia embodies the tariff era’s contradictions more sharply than Vietnam. Despite facing a 46% headline rate—among the steepest globally—the country’s economy grew 8.02% in 2025, its second-best performance in fifteen years. Exports to the US leapt 28% year-on-year to $153.2 billion, and its trade surplus with Washington hit a record $134 billion—higher, not lower, than before Liberation Day.
The engine of this paradox was electronics. A Bloomberg analysis of customs data published in April 2026 found that Foxconn’s Fukang Technology factory in Bac Ninh alone exported $8.6 billion in electronics—more than double its 2024 value—with most shipments being MacBooks bound for the US. Laptop output in Bac Ninh province surged 130% in 2025; smartphone production rose 39%. Vietnam had quietly surpassed neighboring Southeast Asian competitors as one of the US’s leading chip and electronics suppliers.
The caveat is profound. The same Bloomberg analysis revealed that Fukang’s exports generated only 7.8% of their value in Vietnam—the rest was imported components, primarily from China. The China+1 story is, in many cases, a China+assembly story. As ING analysts noted, imports from China into Vietnam surged 24% year-on-year in the first half of 2025, raising the spectre of rampant transshipment. The 40% tariff on Vietnamese transshipped goods is designed to address exactly this structural problem—but enforcement is technically complex and politically fraught.
Malaysia: Tech’s Safe Harbour
Malaysia’s effective tariff arithmetic worked strongly in its favour. Its headline rate of 19% masked an effective rate of roughly 11% due to electronics exemptions—and the country’s deal with Washington, anchored by that landmark $70 billion investment pledge and semiconductor purchase agreement, secured considerable market access. FDI inflows into Malaysia’s semiconductor ecosystem, already boosted by TSMC’s and Intel’s regional expansions, accelerated through 2025. The East Asia Forum noted that Malaysia’s effective tariff advantage over China has widened substantially, reinforcing its role as a chip-packaging and testing hub.
Cambodia: The Casualty
The story of Cambodia is the story the tariff triumphalists do not tell. As a garment-dominated economy with limited capacity for deals or diversification, Phnom Penh was structurally exposed. Even after negotiations brought its rate from 49% down to 19%, Cambodian textiles—unlike Vietnamese electronics—enjoy no sector exemptions and limited productivity edge. The Lowy Institute found that Chinese consumer imports into Cambodia rose by 128% as deflected Chinese goods flooded the domestic market, squeezing local producers from both directions: losing US market access at the top while competing with surging Chinese imports at the bottom.
Indonesia and Thailand: Cautious Resilience
US goods trade data shows the deficit with Indonesia rose 11% and with Thailand 23% in 2025, with US imports actually rising even under 19-20% tariffs. Indonesia’s September 2025 effective tariff rate was 19.7%—the highest among ASEAN’s five largest trading partners—because its electronics sector, smaller than Malaysia’s or Vietnam’s, captures fewer exemptions. Thailand’s effective rate was around 10%, reflecting both sector exemptions and its July 2025 deal, but automotive and industrial exporters remain squeezed.
What’s Next: The 2026 Outlook
The 150-day Section 122 tariff clock is running. It expires on July 24, 2026—and Congress, which has passed bills disapproving of the IEEPA tariffs, is unlikely to extend them. What happens after July 24 will define South-east Asia’s trade environment for years.
The Section 301 Sword
The most alarming development for the region arrived on March 11, 2026, when the US Trade Representative launched sweeping Section 301 investigations targeting 16 economies for “structural excess manufacturing capacity”. The target list reads like an ASEAN who’s who: Vietnam, Thailand, Malaysia, Cambodia, Indonesia, Singapore. Unlike Section 122, Section 301 tariffs carry no time limit and no statutory cap. They are the administration’s mechanism of choice for permanent, targeted levies—and the March investigations are almost certainly the vehicle for reimposing tariffs equivalent to the now-unlawful IEEPA rates after July.
For governments that signed bilateral deals under the IEEPA regime, this creates a Kafkaesque dilemma: they made substantial concessions in exchange for tariff relief that the Supreme Court has since voided—and they may face equivalent tariffs again through a different legal channel, without the negotiating leverage that initial shock created.
The Diversification Imperative
The one structural positive to emerge from this tumultuous year is the acceleration of diversification. The EU has concluded FTAs with Indonesia and is exploring enhanced cooperation with Malaysia, the Philippines, and Thailand. The CPTPP has expanded its footprint; Indonesia and the Philippines have applied for membership. The China-ASEAN FTA has been upgraded. These initiatives will not replace US demand in the near term—the American market’s $1+ trillion appetite for manufactured goods remains without peer—but they create structural alternatives that previous generations of ASEAN policymakers never fully developed.
The China Tilt Risk
There is also a darker possibility that few in Washington appear to be taking seriously. Every punitive measure that the US imposes on ASEAN without commensurate market access has a mirror-image effect: it pushes the region’s economic centre of gravity toward Beijing. China is already Vietnam’s largest trading partner, Malaysia’s top import source, and the primary origin of investment capital flooding into Cambodia and Myanmar. If the Section 301 investigations result in tariff rates that undo the competitive advantages ASEAN countries have spent a decade cultivating, the incentive to deepen China linkages—on infrastructure financing, digital standards, and supply chain integration—grows commensurately.
Conclusion: The Long Game Has Only Just Begun
One year of Trump tariffs has produced a South-east Asia that is, by most headline metrics, more resilient than anyone predicted in April 2025. Vietnam grew 8%, Malaysia deepened its semiconductor edge, and even Cambodia negotiated its tariff rate down by 30 percentage points. The region demonstrated formidable diplomatic agility.
But the structural uncertainties compounding through 2026—the Section 301 sword hanging over every bilateral deal, the Section 122 expiry cliff, the unresolved refund litigation, and the administration’s demonstrated willingness to use trade as a geopolitical lever for any and all foreign policy goals—mean that celebration is premature. As the Brookings Institution noted, the challenge was never just the size of the tariffs; it was the instability surrounding them that forced businesses to make hiring, pricing and investment decisions in a fog.
For South-east Asia’s policymakers, three imperatives now dominate. First: lock in trade diversification with the EU and CPTPP partners before the next tariff wave hits, reducing the region’s structural vulnerability to a single bilateral relationship. Second: invest urgently in domestic value-add capacity—Vietnam’s 7.8% local content share in its flagship electronics exports is a long-term vulnerability that no trade deal can fix. Third: present a unified ASEAN voice in the next round of Section 301 negotiations; the fragmented, each-nation-for-itself approach of 2025 produced deals of widely varying quality and left smaller economies like Cambodia badly exposed.
The Liberation Day tariffs may have been struck down by the Supreme Court. But the forces that produced them—America’s $760 billion goods trade deficit with Asia, domestic manufacturing anxieties, bipartisan economic nationalism—remain entirely intact. What’s next for South-east Asia after Trump tariffs is, ultimately, what has always been true: the region’s best defence is not diplomatic dependence on any single patron, but structural self-sufficiency that no tariff schedule can easily undo.
Key Data at a Glance (April 2026)
| Country | Liberation Day Rate | Current Effective Rate | GDP Growth 2025 | Key Sector |
|---|---|---|---|---|
| Vietnam | 46% | ~12.7% (post-deal, 20% headline) | 8.02% | Electronics, semiconductors |
| Malaysia | 25% | ~11% (exemptions) | ~4.5% est. | Chips, manufacturing |
| Thailand | 36% | ~10% (exemptions) | ~3.2% est. | Automotive, electronics |
| Indonesia | 32% | ~19.7% | ~4.8% est. | Commodities, manufacturing |
| Cambodia | 49% | ~19% | ~5.1% est. | Textiles, garments |
| Singapore | 10% | ~2.6% (FTA buffer) | ~3.0% est. | Financial services, logistics |
Discover more from The Economy
Subscribe to get the latest posts sent to your email.
As foreign central banks dump $90 billion in US Treasuries and Brent crude convulses near $120, Islamabad’s unlikely role as peacebroker is paying an unexpected dividend on the trading floor.
There is a peculiar kind of optimism that only emerges in the eye of a hurricane. Wednesday morning at the Pakistan Stock Exchange felt exactly like that. At 12:05 p.m., the benchmark KSE-100 Index stood at 156,204.89 — having gained 7,461.58 points, or 5.02%, from the previous close — a move so violent that it triggered a mandatory market halt, suspending all equity-based trading under PSX circuit-breaker rules. ProPakistani The previous session had already closed higher. Tuesday’s KSE-100 session had ended at 148,743.32, up 1,900.34 points, as investors began pricing in whispers of a ceasefire from Washington. Profit by Pakistan Today By Wednesday noon, those whispers had become a roar.
This is not, however, a story only about Karachi. It is a story about a world economy convulsing under the weight of a war in the Persian Gulf, a $30 trillion US Treasury market being quietly liquidated by desperate central banks, and — most improbably — Pakistan sitting at the centre of the most consequential diplomatic negotiation of 2026. The KSE-100’s surge is at once a relief rally, a geopolitical signal, and a referendum on how tightly Pakistan’s financial fate is now knotted to its new role as peacebroker between Washington and Tehran.
Why Karachi Erupted: The Anatomy of a 5% Day
Buying momentum on Wednesday was broad-based, with strong activity across automobile assemblers, cement, commercial banks, fertiliser, oil and gas exploration, oil marketing companies, and power generation firms. Major index-heavyweights — HBL, MCB, MEBL, UBL, MARI, OGDC, PPL, POL, PSO, HUBCO, and ARL — all traded firmly in the green, reflecting renewed investor confidence amid easing geopolitical risk. ProPakistani
The rally follows emerging hopes of de-escalation in the Iran war after US President Donald Trump and Secretary of State Marco Rubio signalled that the conflict could end soon, with Washington indicating potential direct talks with Tehran’s leadership and a winding down of hostilities even without a formal deal. Profit by Pakistan Today Trump, speaking from the White House on Tuesday, said the US exit could come “within two weeks, maybe two or three.”
The market context matters enormously here. The rebound follows a brutal first-quarter correction, during which the Pakistan Stock Exchange benchmark declined around 15% amid geopolitical uncertainty and relentless selling pressure. Profit by Pakistan Today That selloff was not irrational. Pakistan’s economy is structurally exposed to Middle East energy prices — the country imports the overwhelming majority of its oil and LNG, and any sustained spike in Brent crude flows directly into inflation, the current account deficit, and State Bank of Pakistan reserves. When the war began on February 28, the PSX reacted the way a patient loses colour when told bad news: quickly, and all at once.
Wednesday’s reversal tells a different story. It tells you that the market had been pricing in far worse than what may now materialise. It tells you that institutional and retail buyers in Karachi, Lahore, and Islamabad are not just trading geopolitics abstractly — they are trading Pakistan’s specific role in ending this crisis.
The $90 Billion Treasury Liquidation: A Slow-Motion Earthquake Under Bond Markets
While traders in Karachi were celebrating, bond desks in New York, London, and Tokyo were navigating something far more structurally significant. New York Fed custody data shows that since the week before the conflict broke out — the week of February 25 — foreign monetary authorities have been net sellers of US Treasuries for five consecutive weeks, with the total sell-off exceeding $90 billion, and holdings falling to the lowest level since 2012. All-Weather Media
The Financial Times, citing Federal Reserve data, confirmed that the value of Treasuries held in custody at the New York Fed by official institutions — a group largely made up of central banks but also including governments and international institutions — has dropped by $82 billion since February 25 to $2.7 trillion. X
The mechanics driving this sell-off are not mysterious, even if their consequences are underappreciated. The direct cause of this round of selling is the urgent need for dollar liquidity among countries — from foreign exchange market intervention to paying energy import bills and financing defense spending, the surge in demand for dollars is forcing foreign central banks to liquidate their most liquid dollar assets: US Treasuries. Futu News
The single most striking data point in the disaggregated country-level picture is Turkey’s. Official figures show that since February 27 — the day before the US attacked Iran — Turkey’s central bank sold about $22 billion in foreign government bonds from its reserves, mainly US Treasuries. Turkey also sold or swapped about 58 tons of gold valued at over $8 billion. All-Weather Media
Brad Setser, Senior Fellow at the Council on Foreign Relations and arguably the world’s foremost tracker of sovereign reserve flows, has been clear about who else is in the queue. Setser stated that “many countries are unwilling to let their currencies depreciate further, as this would drive up oil prices denominated in local currencies — either implying more fiscal subsidies or increasing the burden on people’s daily lives. Therefore, many countries have generally decided to intervene in the foreign exchange market to try to limit the depreciation of their currencies.” Futu News India and Thailand, both large oil importers, have also seen foreign reserve drawdowns since the war began, though it remains unclear whether those represent outright Treasury sales or dollar deposit liquidations.
Bank of America US rates strategist Meghan Swiber has been unambiguous: the foreign official sector is selling US Treasuries, and the selling “confirms a more macro narrative — that foreign reserve managers and official accounts are diversifying away from US Treasuries.” All-Weather Media
The structural backdrop is equally sobering. A recent Morgan Stanley report shows the proportion of US Treasuries held by foreign investors has dropped to its lowest since 1997, with the share of coupon-bearing Treasuries held by foreign investors falling steadily since the 2008 peak of 64.4% and now near multi-decade lows. All-Weather Media The Iran war has not created this trend — but it has violently accelerated it. As the Financial Times reported on Tuesday, the bond market’s largest and most stable category of buyer is now, in a period of maximum global stress, a net seller.
This matters for Pakistan in a roundabout but real way. Higher US Treasury yields — the mathematical consequence of this selling pressure — tighten global dollar funding conditions, increase the cost of Pakistan’s external debt servicing, and strengthen the dollar in ways that amplify imported inflation. A faster resolution to the Iran conflict is, in this sense, not just a geopolitical good but a financial one for Islamabad.
The Strait, the Shock, and the Oil Market Nobody Saw Coming
The International Energy Agency has called it the biggest oil supply shock in history. Due to Iran’s selective blockade of the Strait of Hormuz, the world is losing as much as 20 million barrels of oil per day from Middle East producers. Since the war began five weeks ago, Brent crude has risen more than 50%. CNN
Brent crude was trading at just over $118 per barrel for May deliveries, while the more widely traded June delivery contract was around $103.50. The average price of gasoline in the United States crossed $4 per gallon for the first time since 2022. CBS News For emerging markets that import most of their energy, these numbers translate into something far more corrosive than headline inconvenience: they represent a structural transfer of wealth from oil-importing nations to a geopolitical standoff, mediated by a narrow chokepoint 21 miles wide at its narrowest point.
The Wall Street Journal, citing administration officials, reported that Trump and his aides had concluded that a military mission to reopen the Strait of Hormuz would extend beyond his four-to-six-week timeline, and he had decided to focus on targeting Iran’s missiles and navy before seeking to pressure Iran diplomatically to reopen it. Euronews
That shift — from military maximalism to diplomatic realism — is precisely what equity markets in Karachi, and indeed across emerging Asia, have been waiting for.
Pakistan’s Diplomatic Dividend: The Unlikely Peacebroker
The most remarkable subplot of this crisis is not the Treasury sell-off, nor the oil price spike. It is Islamabad’s transformation, over the past two weeks, from a country wracked by internal protests over the US strikes on Iran into a credible diplomatic interlocutor between Washington and Tehran.
Pakistan’s Foreign Minister Ishaq Dar confirmed that “US-Iran indirect talks are taking place through messages being relayed by Pakistan,” adding that Turkey and Egypt were also extending support to the initiative. US envoy Steve Witkoff confirmed presenting a 15-point action list as the framework for a peace deal, which mediator Pakistan gave to Iran. NPR President Trump then paused his deadline for the destruction of Iran’s energy plants by ten days to April 6, citing the ongoing talks. Special envoy Steve Witkoff confirmed at President Trump’s Cabinet meeting that the US has been negotiating with Iran through diplomatic channels with Pakistan as the conduit. CNN
Foreign Policy has described this as a role that makes more geopolitical sense than it initially appears. Pakistan is a rare country that has warm ties with both the United States and Iran and is engaged with the highest levels of both governments. Pakistan also represents Tehran’s diplomatic interests in Washington. Furthermore, Pakistan has dealt closely with the family of a key player on the US side — Middle East envoy Steve Witkoff. Foreign Policy
The domestic calculus is equally clear: Pakistan’s mediation push is driven by economic strain, security concerns, and strategic calculation. With energy markets volatile and the country reliant on Gulf oil and LNG imports, any sustained spike in global crude prices could deepen a crisis Pakistan can ill afford. Pakistan’s fragile economic recovery is under renewed stress, with constrained fiscal space and minimal strategic oil reserves. The Researchers
The PSX’s 7,500-point single-session surge is, in a narrow sense, investors pricing in the probability that Pakistan’s diplomatic gamble pays off. A ceasefire, even an imperfect one, would lower oil prices, ease imported inflation, reduce pressure on State Bank of Pakistan foreign reserves, and reopen the possibility of further monetary easing by the SBP — all of which are bullish for Pakistani equities.
Risks: The Rally Is Real, But the Ceasefire Isn’t — Yet
Markets have a well-documented habit of pricing in peace talks before those talks produce peace. The KSE-100’s gain on Wednesday is a bet, not a receipt.
Several credible risks remain. Iran has countered the US 15-point plan with its own five conditions, including recognition of Iran’s legitimate rights, payment of war reparations, and firm international guarantees against future aggression. Al Jazeera Those are not trivial demands from a country that has seen its Supreme Leader killed and its military infrastructure methodically dismantled. Ending the war with Iran retaining effective control of the Strait of Hormuz would be seen internationally as a strategic defeat for the United States — Iran would claim victory and might monetize its position by imposing tolls on transiting tankers, providing revenues to rebuild its military and nuclear programmes. CNN
Secretary of State Rubio has been clearer on the endgame than almost anyone. Rubio told Al Jazeera that “the Strait of Hormuz will be open when this operation is over — one way or another,” and rejected Iran’s demand to maintain sovereignty over the waterway as part of any agreement. Al Jazeera That language, while reassuring to oil markets in the abstract, leaves significant space for a breakdown in negotiations — and a resumption of exactly the kind of escalatory cycle that sent the KSE-100 down 15% in the first quarter.
Oil market participants appear to be processing this nuance already. Bond yields have been steadily rising throughout March as investors race to reprice the chances of rate hikes from central banks, with expectations of rate cuts at the Federal Reserve and the Bank of England having fallen sharply and in many cases being replaced by anticipations of hawkish monetary policy. CNBC That global repricing of central bank paths — driven directly by energy-led inflation — is a structural headwind for emerging market assets, Pakistan included, that does not disappear even if a ceasefire is signed.
Global Macro Implications: When the World’s Safe Asset Isn’t Safe Enough
Beneath the headline drama of the oil price spike and the stock market surge, the most consequential development of this crisis may be the one attracting the least retail attention: the systematic erosion of US Treasury demand at precisely the moment that Washington’s finances require it most.
Stephen Jones, Chief Investment Officer at Aegon Asset Management, described central banks’ actions as countries “raising war funds,” saying, “They are drawing on emergency reserves.” This round of selling is not an isolated event but a microcosm of a longer-term structural shift: global reserve management institutions are systematically reducing exposure to dollar assets. All-Weather Media
If the Iran conflict ends quickly, some of this pressure on the Treasury market will ease. Central banks in Turkey, India, and Thailand that have been intervening in FX markets to defend their currencies will face less pressure to continue liquidating reserves once oil prices fall. That normalisation would provide some relief to US bond yields. But the structural share of foreign holdings — already at a 27-year low — is not a tap that turns back on quickly. The trend that the war has accelerated was years in the making.
For Pakistan’s capital markets, the near-term playbook favours the bulls — as long as the diplomatic process holds. A ceasefire, lower Brent crude, a softer dollar, and resumed SBP rate cuts would be a nearly perfect cocktail for further PSX gains. The index, even after Wednesday’s surge, remains roughly 18% below its all-time high of approximately 189,556 points reached in January 2026. There is significant mean-reversion potential if geopolitical risk genuinely abates.
Outlook: Watch April 6 — and the Address to the Nation
The immediate calendar is unusually consequential. President Trump is scheduled to deliver a prime-time address to the nation on Wednesday evening providing what the White House described as “an important update on Iran.” The April 6 deadline for Iran to reopen the Strait of Hormuz — or face strikes on its energy infrastructure — creates a hard binary. Either the diplomatic track delivers a meaningful framework before that date, or markets face the prospect of a sharp escalatory spike.
Secretary of State Rubio, before departing for a G7 foreign ministers meeting in France, confirmed that “there are intermediary countries that are passing messages and progress has been made — some concrete progress has been made,” describing negotiations as “an ongoing and fluid process.” CNN
For investors in Karachi and beyond, the single most important watch item is not the KSE-100 level, nor the US Treasury yield, nor even Brent crude. It is whether Pakistan’s mediation — this extraordinary diplomatic intervention by a country whose consulate in its own largest city was attacked just a month ago — delivers enough of a framework before April 6 to allow both sides to step back from the precipice.
If it does, Wednesday’s 7,500-point surge will look, in hindsight, like the opening chapter of a recovery story rather than a false dawn in a prolonged storm. If it doesn’t, the circuit-breaker that paused trading on Wednesday could, in the weeks ahead, be pointing in the other direction.
Pakistan has been here before — not as a victim of great-power competition, but as its unexpected architect. It was Islamabad that facilitated Nixon’s 1971 opening to China. It may yet be Islamabad that writes the first line of a postwar order in the Persian Gulf. The KSE-100, for one day at least, has decided to believe it.
Discover more from The Economy
Subscribe to get the latest posts sent to your email.
-
Markets & Finance3 months agoTop 15 Stocks for Investment in 2026 in PSX: Your Complete Guide to Pakistan’s Best Investment Opportunities
-
Analysis2 months agoBrazil’s Rare Earth Race: US, EU, and China Compete for Critical Minerals as Tensions Rise
-
Banks2 months agoBest Investments in Pakistan 2026: Top 10 Low-Price Shares and Long-Term Picks for the PSX
-
Investment3 months agoTop 10 Mutual Fund Managers in Pakistan for Investment in 2026: A Comprehensive Guide for Optimal Returns
-
Analysis1 month agoTop 10 Stocks for Investment in PSX for Quick Returns in 2026
-
Asia3 months agoChina’s 50% Domestic Equipment Rule: The Semiconductor Mandate Reshaping Global Tech
-
Global Economy3 months agoPakistan’s Export Goldmine: 10 Game-Changing Markets Where Pakistani Businesses Are Winning Big in 2025
-
Global Economy3 months ago15 Most Lucrative Sectors for Investment in Pakistan: A 2025 Data-Driven Analysis